39. Exam Papers for Investments and Portfolio Management in BBA (With Answers), Exams of Investment Management and Portfolio Theory

Download 39. Exam Papers for Investments and Portfolio Management in BBA (With Answers) and more Exams Investment Management and Portfolio Theory in PDF only on Docsity! ACE YOUR INVESTMENTS AND PORTFOLIO MANAGEMENT EXAM 2 Exam Papers for Investments and Portfolio Management in BBA (With Answers) PAPER # 1 **Instructions:** 1. This exam consists of two sections: Section A (Multiple Choice Questions) and Section B (Short Answer Questions). 2. For Section A, select the correct answer by circling the corresponding letter (A, B, C, D) on your answer sheet. 3. For Section B, provide detailed answers in the spaces provided. **Section A: Multiple Choice Questions (1 mark each)** 1. Which of the following is a key characteristic of a stock market index? A. It represents the performance of a single stock. B. It includes all stocks in the market. C. It is used to track the performance of a specific sector. D. It is a measure of inflation. **Answer: B** 2. What does the Capital Asset Pricing Model (CAPM) help investors calculate? A. Expected return on an investment B. Market risk premium C. Inflation rate D. Total portfolio risk **Answer: A** 3. Diversification in a portfolio can help reduce which type of risk? A. Market risk B. Inflation risk C. Systematic risk 5 In summary, fundamental analysis is concerned with the underlying value of a company, while technical analysis is concerned with price patterns and market sentiment. Investors may use a combination of both approaches, depending on their investment goals and strategies. 8. Explain the concept of Modern Portfolio Theory (MPT) and its key components. **Answer:** Modern Portfolio Theory (MPT) is an investment framework developed by Harry Markowitz in the 1950s. It is based on the idea that investors can construct a diversified portfolio that maximizes returns for a given level of risk or minimizes risk for a given level of returns. The key components of MPT include: - **Expected Return:** This represents the average return an investor can anticipate from an investment. It is calculated by weighing the potential returns of different assets in a portfolio. - **Risk:** In MPT, risk is measured by the standard deviation of returns. It indicates the degree of volatility or fluctuation in an asset's returns. Lower risk is preferred, but it's important to balance risk with return. - **Correlation:** MPT emphasizes the importance of considering the correlation between assets in a portfolio. Negative correlation or low correlation between assets can reduce overall portfolio risk. A diversified portfolio combines assets with low or negative correlations. - **Efficient Frontier:** The efficient frontier is a key concept in MPT. It represents a set of portfolios that offer the highest possible expected return for a given level of risk, or the lowest possible risk for a given level of expected return. - **Optimal Portfolio:** Investors should select a portfolio along the efficient frontier that aligns with their risk tolerance and return objectives. This is known as the optimal portfolio. MPT is a foundational concept in portfolio management, emphasizing the importance of diversification and the trade-off between risk and return. It helps investors make informed decisions about constructing portfolios that align with their financial goals and risk tolerance. 6 PAPER # 2 Section A: Multiple Choice Questions (10 questions x 1 mark each) 1. Which of the following is NOT an investment objective? o A. Capital appreciation o B. Income generation o C. Liquidity o D. Speculation 2. Which of the following is NOT a type of risk associated with investments? o A. Market risk o B. Interest rate risk o C. Inflation risk o D. Business risk 3. Which of the following is a type of fundamental analysis? o A. Technical analysis o B. Ratio analysis o C. Discounted cash flow analysis o D. All of the above 4. Which of the following is a type of portfolio management strategy? o A. Active management o B. Passive management o C. Asset allocation o D. All of the above 5. Which of the following is a benefit of investing in mutual funds? o A. Diversification o B. Professional management o C. Low cost 7 o D. All of the above Answers: 1. D 2. D 3. D 4. D 5. D Section B: Short Answer Questions (5 questions x 5 marks each) 1. Explain the difference between fundamental and technical analysis. 2. What are the different types of investment risks? 3. Discuss the factors to consider when choosing an investment strategy. 4. What are the different types of mutual funds? 5. Explain the concept of portfolio diversification. Answers: 1. Fundamental analysis is a method of evaluating the intrinsic value of a security by examining the company's financial statements and other qualitative factors. Technical analysis, on the other hand, is a method of evaluating a security based on its past price and volume movements. 2. The different types of investment risks include: o Market risk: The risk that the value of a security will decrease due to a decline in the overall market. o Interest rate risk: The risk that the value of a security will decrease due to an increase in interest rates. o Inflation risk: The risk that the value of a security will decrease due to an increase in the cost of living. o Business risk: The risk that the company issuing a security will not be able to meet its financial obligations. 3. The factors to consider when choosing an investment strategy include: 10 Question 3 Discuss the different types of investment vehicles available to investors. Answers: There are many different types of investment vehicles available to investors, including:  Stocks: Stocks are shares of ownership in a company.  Bonds: Bonds are loans that investors make to companies or governments.  Mutual funds: Mutual funds are baskets of securities that are managed by professional investment managers.  Exchange-traded funds (ETFs): ETFs are baskets of securities that are traded on an exchange like stocks.  Real estate: Real estate is another type of investment vehicle that can generate income and capital appreciation. Question 4 Explain the concept of portfolio diversification and its benefits. Answers: Portfolio diversification is the process of spreading your investment portfolio across different asset classes and securities. This helps to reduce your overall risk, as losses in one asset class or security may be offset by gains in others. Benefits of portfolio diversification include:  Reduced risk: Diversification helps to reduce your overall risk by spreading your investments across different asset classes and securities.  Increased returns: Diversification can also help to increase your returns over the long term by giving you exposure to a variety of different investment opportunities.  Liquidity: Diversification can make your portfolio more liquid, as you may be able to sell some of your investments to meet your cash needs without having to liquidate your entire portfolio. Question 5 Discuss the different portfolio rebalancing strategies. Answers: 11 Portfolio rebalancing is the process of adjusting the weights of the different asset classes in your portfolio to ensure that it remains aligned with your investment goals and risk tolerance. There are two main types of portfolio rebalancing strategies:  Periodic rebalancing: Periodic rebalancing involves rebalancing your portfolio at regular intervals, such as once a year or once a quarter.  Calendar-based rebalancing: Calendar-based rebalancing involves rebalancing your portfolio on specific dates, such as January 1st or July 1st. The best portfolio rebalancing strategy for you will depend on your individual circumstances and investment goals. Additional Questions  Explain the different types of investment costs.  Discuss the factors to consider when choosing an investment advisor.  What is the Capital Asset Pricing Model (CAPM)?  How do you calculate the Sharpe ratio?  What is the Efficient Market Hypothesis (EMH)? 12 PAPER # 4 Section A: Multiple Choice Questions 1. Which of the following is NOT a type of investment? (a) Stocks (b) Bonds (c) Real estate (d) Cash 2. Which of the following is a risk-free investment? (a) Treasury bills (b) Corporate bonds (c) Stocks (d) Real estate 3. Which of the following is a measure of the riskiness of an investment? (a) Standard deviation (b) Beta (c) Sharpe ratio (d) All of the above 4. Which of the following is a goal of portfolio management? (a) To maximize returns (b) To minimize risk (c) To achieve a balance between returns and risk (d) All of the above 5. Which of the following is a type of portfolio diversification? (a) Asset allocation (b) Industry diversification (c) Geographic diversification (d) All of the above Answers: 1. (d) 2. (a) 3. (d) 4. (d) 5. (d) Section B: Short Answer Questions 1. Explain the difference between fundamental and technical analysis. 2. List and describe the different types of investment risks. 3. Explain the Capital Asset Pricing Model (CAPM). 4. Discuss the different factors that investors should consider when choosing an investment portfolio. 5. What are the different types of portfolio rebalancing strategies? Answers: 15 PAPER # 5 **Section A - Multiple Choice (40 Marks)** Choose the best answer for each of the following questions: 1. Which of the following is not a primary financial market security? a. Common stock b. Treasury bills c. Corporate bonds d. Preferred stock 2. What is the primary goal of portfolio diversification? a. Maximizing returns b. Minimizing risk c. Reducing taxes d. Increasing leverage 3. Beta measures a stock's: a. Total risk b. Systematic risk c. Unsystematic risk d. Dividend yield 4. The Capital Asset Pricing Model (CAPM) is used to: a. Calculate the standard deviation of a portfolio b. Determine the required rate of return for a security c. Estimate the earnings per share for a company d. Assess the liquidity of a stock 5. A limit order to buy is placed below the current market price. What is it called? a. Stop order 16 b. Market order c. Limit sell order d. Limit buy order **Section B - Short Answer (60 Marks)** 6. Define and explain the concept of risk and return in investments. Provide examples. **Answer:** Risk and return are two fundamental concepts in investments. Risk refers to the uncertainty or variability of investment outcomes, while return represents the gain or loss on an investment. Generally, investors expect to be compensated for taking on higher levels of risk. For example, stocks are typically considered riskier than bonds because their prices can fluctuate significantly over time. The potential return on stocks is often higher than on bonds to compensate for this increased risk. 7. Discuss the benefits of diversification in a portfolio. Provide an example to illustrate your point. **Answer:** Diversification is a risk management strategy that involves spreading investments across different assets or asset classes to reduce the overall risk in a portfolio. The benefits of diversification include: - Risk Reduction: Diversifying a portfolio reduces the impact of the poor performance of any single investment, as losses in one asset may be offset by gains in others. - Smoother Returns: Diversification can lead to a more stable and predictable investment return over time. - Improved Risk-Return Trade-off: By combining assets with different risk-return profiles, investors can achieve a better balance between risk and return. 17 For example, if an investor holds a portfolio of both stocks and bonds, a decline in the stock market may be partially offset by gains in the bond market, resulting in a more stable overall return. 8. What is the Efficient Market Hypothesis (EMH)? Explain the three forms of EMH. **Answer:** The Efficient Market Hypothesis (EMH) is a theory that states that financial markets efficiently incorporate all available information into stock prices. EMH suggests that it is impossible to consistently achieve above-average returns by using information that is already reflected in stock prices. There are three forms of EMH: - Weak Form: In this form, stock prices already reflect all past trading information, such as price and volume data. Therefore, technical analysis, which relies on historical price data, should not be able to consistently predict future stock price movements. - Semi-Strong Form: In this form, stock prices reflect all publicly available information, including both historical data and all public news and information. Fundamental analysis, which examines a company's financial statements and public news, should not consistently provide an advantage. - Strong Form: In this form, stock prices reflect all public and private information, including insider information. This form implies that no investor, even with insider information, can consistently outperform the market. 9. Explain the concept of the risk-free rate. How is it used in investment analysis? **Answer:** The risk-free rate is the theoretical return on an investment with no risk of financial loss. It serves as a baseline for evaluating the potential returns of other investments. The risk-free rate is typically associated with the yield on government bonds, such as U.S. Treasury bonds. 20 **Section B: Short Answer Questions (20 points)** 4. Explain the concept of "risk-return trade-off" in the context of investing. Provide an example. **Answer: The risk-return trade-off refers to the relationship between the level of risk and the potential return associated with an investment. Generally, higher-risk investments have the potential for higher returns, but they also come with a greater chance of loss. For example, investing in a startup company is riskier but may offer substantial returns, while investing in government bonds is less risky but offers lower returns. Investors must balance their risk tolerance with their return expectations when making investment decisions.** 5. Describe the difference between systematic risk and unsystematic risk in a portfolio. **Answer: Systematic risk, also known as market risk, is the risk that cannot be eliminated through diversification. It is associated with factors that affect the entire market, such as economic conditions, interest rates, and political events. Unsystematic risk, on the other hand, is specific to individual assets or industries and can be reduced or eliminated through diversification. For example, if you hold a portfolio of technology stocks, a technology sector-specific issue is unsystematic risk, while general market fluctuations are systematic risk.** **Section C: Essay Question (15 points)** 6. Discuss the Modern Portfolio Theory (MPT) and its key concepts. How does it guide investment decisions in portfolio management? **Answer: Modern Portfolio Theory (MPT) is a framework developed by Harry Markowitz that emphasizes the importance of diversification in portfolio management. The key concepts of MPT include asset allocation and the efficient frontier. MPT suggests that by selecting a mix of assets with different risk and return profiles, investors can create portfolios that maximize returns for a given level of risk or minimize risk for a given level of return. It quantifies risk and return through the use of standard deviation and correlation coefficients. MPT guides investment decisions by encouraging diversification and the optimization of portfolios to achieve the best risk-return trade-off. 21 Investors aim to build portfolios on the efficient frontier to achieve their specific risk and return objectives.** PAPER # 7 **Section A: Multiple Choice (2 points each)** 1. Which of the following is not a primary objective of portfolio management? a. Maximizing returns b. Minimizing risk c. Ensuring liquidity d. Tax avoidance 2. What is the term for an investment strategy that involves buying and holding a diversified portfolio without actively trading? a. Passive investing b. Active investing c. Value investing d. Day trading 3. The Capital Asset Pricing Model (CAPM) helps investors: a. Calculate the beta of a stock. b. Estimate the expected return on an investment. c. Determine the intrinsic value of a stock. d. Choose the best technical indicators for trading. 4. Portfolio diversification aims to: a. Increase total risk. b. Reduce systematic risk. c. Maximize returns. d. Eliminate all risk. 22 5. Which of the following types of risk can be mitigated through diversification? a. Systematic risk b. Unsystematic risk c. Market risk d. Inflation risk **Section B: Short Answer (4 points each)** 6. Explain the concept of risk-return trade-off in the context of investments. 7. Describe two common methods for analyzing the risk associated with an investment or a portfolio. **Section C: Essay Questions (10 points each)** 8. Discuss the Efficient Market Hypothesis (EMH). What are the three forms of EMH, and how does each form relate to the availability of information in the market? **Answer:** The Efficient Market Hypothesis (EMH) is a theory that suggests that financial markets are highly efficient in reflecting available information in stock prices. There are three forms of EMH: - Weak Form EMH: This form posits that all past trading information, such as historical stock prices and trading volume, is already reflected in stock prices. In other words, it assumes that technical analysis is not effective in predicting future price movements. - Semi-Strong Form EMH: In this form, it is believed that all publicly available information, including not only historical trading data but also all public information, is already incorporated into stock prices. It implies that neither technical analysis nor fundamental analysis can consistently yield abnormal returns because the information is already reflected in the stock's price.