IP - Workbook (Master)

INVESTMENT PLANNING AND ASSET MANAGEMENT WORKBOOK



TABLE OF CONTENT 1 18 GLOBAL 28 39 Chapter – 1 : Asset Classes and Securities 45 Chapter – 2 : Pooled Investment Products 51 Chapter – 3 : Principles of Investment Risk 55 Chapter – 4 : Principles of Investment Risk 61 Chapter – 5 : Principles of Investment Risk 67 Chapter – 6 : Principles of Investment Risk Chapter – 7 : Principles of Investment Risk 73 Chapter – 8 : Principles of Investment Risk Chapter – 9 : Principles of Investment Risk INDIA Chapter – 1 & 2 : Asset Classes and Securities



Chapter-1 Asset Classes and Securities 1. Every investment option can be described in terms of which characteristics a) Risk b) Return c) Any of the above d) Both of the above (Ans - d)- Both of the above) 2. Which is the right answer? a) The returns on the equity shares of a company would depend upon the profits the b) Company makes and the business risks that the company faces. c) The returns from bonds of a company would depend on the ability to generate enough cash to pay interest, even if the company would make losses or a minimal profit. d) Both are right (Ans - c) Both are right) 3. Whether all the statements are true or false. a) Bonds provide fixed return in the form of coupon/interest income. b) Bonds have the scope for capital appreciation when interest rates fall, but may be subject to interest rate risk when interest rates rise. c) Corporate bonds are subject to credit risk of the issuer. d) Government securities are considered to be risk-free as it is believed that a Government will not default on its obligations towards its own citizens. e) Risk and return characteristics of bond are relatively lower than equity and hence, suitable for an investor seeking regular income flows with minimal risk. (Ans - All the statements are true) 4) Monitoring Volume of trading in a stock is an important aspect of technical analysis because _______. CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 1

a) it confirms the trend in price movement and the pattern formation b) it indicates the stock’s potential to scale new high c) it indicates delivery position in the stock d) it indicates value at risk in the stock (Ans - a) 5. Bond prices are less sensitive to changes in the interest rates when the bonds have_______. a) small coupons and long maturity b) small coupons and short maturity c) large coupons and long maturity d) large coupons and short maturity (Ans - d) 6. Choose the instrument from the following which does not have reinvestment risk: a) Short term bonds b) Corporate Bonds with Call option c) Zero coupon bonds d) Government securities (Ans - d) Zero Coupon Bonds as they do not pay any interest) 7. Mr. A invested in tradable bonds of a corporate paying annual coupon of 10.5%. The tenure of the bonds is 9 years and he desires to hold them till maturity. What would be the impact of declining interest rates on his cash flows during this tenure? a) The coupon rate would vary with the same margin as the originally contracted 10.5% is from the Repo rate b) He would stand to receive larger than contracted coupon payments proportionate to the appreciation in bond prices in secondary market c) He would receive lower than contracted coupon payments proportionate to the decline in interest rates d) No impact, as he has no intention to sell the bonds and coupon payments would not be impacted by declining interest rates (Ans - d) No impact as it is held till maturity) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 2

8. ______ protects the value of an asset or portfolio against price fluctuations. a) Hedging b) Arbitrage c) Contango d) None of the above (Ans - a) Hedging) 9. The Asset Allocation which seeks to take advantage of short term movements and opportunities in investment markets is a) Strategic asset allocation b) Tactical asset allocation c) Flexible asset allocation d) Balanced asset allocation (Ans - b) Tactical Asset Allocation) 10. What type of portfolio asset mix would you recommend to your 55 year old client who plans to retire at age 58? Choose a portfolio that is the closest match to the investor’s needs. a) 40% in Equity Schemes & 60% in Balanced funds b) 40% in Equity Schemes & 60% in Debt funds c) 20% in equity schemes, 20% in liquid funds & 60% in Debt funds. d) 100% in Monthly Income Schemes (Ans - b) is right if he is moderate risk taker or c) if he is conservative, your answer will depend in exam on the basis of type of investor) 11. If a bond is selling at a premium ____. a) It’s an attractive investment b) It’s current yield is lower than the coupon rate c) It’s realized compound yield will be less than the yields to maturity d) None of the above (Ans - b)- When market interest rates/yield come down, value of existing bonds increase) 12. Expected return of A = 20%, expected return of B = 10%, expected return of C = 12%, expected return of D = 9%. You invest 40,000/-. What more information is needed to find the expected return of the portfolio? CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 3

a) Proportion of investments b) Beta of the shares c) Market value of the investments d) None of the above ( Ans - a) Proportion of investments) 13. XYZ Ltd presently pays a dividend of ₹11 and dividends are not expected to grow. The discount rate is 12.5%. The present value of the share is a) 88 b) 92 c) 94 d) 98 (Ans- a) 88 –Zero Growth Model) 14. Based on scenarios below, what is the expected return for a portfolio with the following return profile? Probability BEARISH NORMAL BULLISH Rate of Return 0.2 0.3 0.5 -25% 10% 24% a) 12% b) 11% c) 10% d) 9% (Ans- c) 10% 15. A bond has a face value of ₹ 1000 & coupon rate of 8%. The required rate of return is 6%. What will be the value of bond if the bond is perpetual? a) ₹ 1,000 b) ₹ 750 c) ₹ 1,075 d) ₹ 1,333 (Ans- d) 80/.06 = 1333 CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 4

16. A ₹ 1000 par value bond with coupon of 10% p.a. payable semi-annually with tenure of 20 years is currently selling at ₹ 1100. The bond's current yield is: a) 8.91% b) 9.10% c) 10.00% d) 10.50% ( Ans - b) 9.10% 17. The interest rate on a 20-year Government bond with a face value of ₹1000 is 8%. The expected yield to maturity is 9%. If interest is received on a half yearly basis, the current market price of the bond is: a) ₹908 b) ₹918 c) ₹888 d) ₹798 (Ans- a) Rs. 908 18. Current market price of a share is ₹100. Right issue is declared in the ratio of 1 share for every 4 shares held at a right price of ₹50. The value of right is: a) ₹40 b) ₹50 c) ₹30 d) ₹60 (Ans- a) Rs.40) Value of 4 shares is Rs.400+ 1 share allotted at Rs.50, 5 Shares and the amount is Rs.450. Per share price is Rs.90. 90-50(paid)=40) 19. A 15-year, 9% corporate bond with Face Value ₹ 1,000 and interest payable semi-annually matures after 6 years. The bond is available at a yield to maturity of 7%. If the record date for the last coupon has just passed, at what value 50 bonds of the corporate are likely to be quoted in the market? a) ₹ 55,593 Page 5 b) ₹ 56,321 c) ₹ 54,767 d) ₹ 54,832 CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook

(Ans- d) Rs.54832- Calculate price of the bond and multiply with 50) 20. Bond A has 6% annual coupon rate and face value is ₹1000 and is due in 2 years. Its value today in the market is ₹900. Calculate yield to maturity. a) 9.90% b) 10.40% c) 11.70% d) 11.90% (Ans- d) - 11.90%) 21. Rohan wishes to purchase a property to give it on rent. He expects to receive ₹60000 in net receipts at the end of every year for 5 years and to sell the property for ₹900000 at the end of 5 years. If the expected return is 15% what would be the value of the property?(Ignore taxation and gearing). a) ₹6,48,588 b) ₹6,57,432 c) ₹7,00,890 d) ₹6,48,900 (Ans - a) Rs.6,48,588) 22. The average inflation over the last three years is 8.5 % p.a. You invested ₹ 1 lakh in a security 3 years ago which you have redeemed for ₹ 1.3 lakh. What real return have you obtained from investment? a) 1.50% p.a. b) 1.38% p.a. c) 0.59% p.a. d) 2.27% p.a. (Ans - c) 0.59% First calculate CAGR and then Real rate) 23. A₹5000 bond having a coupon rate of 9.75% (payable annually) matures after 6 years. Currently the bond is available at ₹4750. If the re-investment rate is 8.25% the Realized YTM on the bond is a) 9.4% b) 8.4% CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 6

c) 10.4% d) 11.4% (Ans - c) 10.4%. Solution: -4750 Coupon 1 Coupon 2 Coupon 3 Coupon 4 Coupon 5 Coupon 6 Invested amt 487.50 487.50 487.50 487.50 8.25% 8.25% 8.25% 487.50 487.50 Reinvested at 8.25% 4 3 2 8.25% 8.25% Number of 669.40 618.38 571.25 years 5 10 Future Value Total amount 724.63 527.72 487.50+5000 at the end of 6 8589.88 years (total of all FV) PV=-4750, FV=8589.88, N=6 Solve i= 10.4% 24. Dividend one year hence on a stock is expected to be ₹12. Thereafter the dividend is expected to grow @ 12% for 2 years, @ 10% for another 2 years and @ 5% thereafter. If the investor expects a return of 15% the current price of the security will be? a) ₹142.15 b) ₹140.10 c) ₹147.15 d) ₹144.10 (Ans - d) Rs.144.10) 25. Which is the Act in the Indian Constitution under which trading in futures contracts of various commodities on Indian commodity exchanges are governed and regulated? a) Security Contracts (Regulation) Act b) Forward Contracts (Regulation) Act c) SEBI Act d) Companies Act (Ans - b) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 7

26. ‘Book Building’ means a process undertaken by which: a) Demand for the securities proposed to be issued is elicited b) Price for the securities is assessed c) Both of the above d) Either (A) or (B) above (Ans - b) 27. Red Herring Prospectus is a prospectus, which does not have details of which of the following: a) Price of Issue b) Number of shares being offered c) Amount of issue. d) All of the above (Ans - a) 28. Who regulates the Money Market & Forex Market in India? a) RBI b) SEBI c) LIC d) FMC (Ans - a) 29. The following entities assist in the initial sale of securities in the primary market: a) Brokerages b) Stock exchanges c) Issue Underwriters d) Merchant Bankers (Ans - d) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 8

30. Securities have been defined in the Securities Contract (Regulation) Act and it includes Derivative also. a) True b) False (Ans - a) 31. Green Shoe Option means______. a) An option to offer their shares by the existing shareholders of a company which comes out with public issue of shares. b) Allotment on a firm basis a certain quota of shares in a public issue by an issuing company to Qualified Institutional Buyers (QIBs). c) Allotment on a firm basis a certain quota of shares in a public issue by an issuing company to Indian and Multilateral Development Financial Institutions and MFs d) An option reserved with the issuing company to allocate shares in excess of the shares included in the public issue. (Ans - d) 32. You are running a Dividend Yield Fund for a leading Mutual Fund House. The most recent dividend of ‘All Is Fine Business Services’ common stock was ₹ 2.35. The dividends are expected to grow at 4 per cent indefinitely. If you are looking at a 12 per cent return, how much will you be willing to pay for one share of ‘All Is Fine Business Services’? a) ₹24.79 b) ₹29.38 c) ₹29.38 d) ₹30.55 (Ans - d) M.V of stock = Dividend*(1+g)/(r-g) = 2.35(1.04)/(.12-.04) = 30.55 33. Stop loss orders are released into the market when the last traded price for that security in the normal market reaches or surpasses the ……… . a) Market price b) Trigger price c) Limit price d) Exchange price CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 9

(Ans - b) Trigger Price 34. Tata Power is raising funds through a bond issuance to fund a new power plant at Noida, UP. They are issuing Two Year maturity, Zero-coupon bond with face value of Rs 1000 and yield of 4%. What price would you pay for this Tata Power Zero-coupon bond today? a) ₹920.00. b) ₹924.56. c) ₹925.95. d) ₹960.00. (Ans - b) 35. The equity stock of Carvy Limited is currently selling for ₹30 per share. The dividend expected next year is ₹2.00. The investors’ required rate of return on this stock is 15 per cent. If the constant growth model applies to Carvy Limited, what is the expected growth rate? (Ans. According to the constant growth model, P0 = D1/(r-g) This means, g = r — D1 / P0 Hence, the expected growth rate (g) for Carvy Limited is: g = 0.15 – 2/30 = 0.83 or 8.3% 36. If a bond is selling at a premium: a) It is an attractive investment b) Its coupon rate is below market rate c) Its current yields is lower than the coupon rate d) Its realized compound yield will be less than the yields to maturity (Ans - c) Its current yields is lower than the coupon rate) 37. A 10-year, 9% corporate bond with Face Value ₹1,000 and interest payable semi-annually matures after 6 years. The bond is available at a yield to maturity of 8%. If the record date for CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 10

the last coupon has just passed, at what value 75 bonds of the corporate are likely to be quoted in the market? a) 78519 b) 94658 c) 76966 d) 110194 (Ans - PV(Solve)=1046.93.PV of 75 bonds = 75*1046.93 = 78519.40) 38. A bond with par value of ₹1000 and coupon rate of 11% (payable semi-annually, next coupon due immediately and maturing after 5 years is available at ₹942.50 in the market. If the coupon received can be reinvested till maturity at average rate of 8.5% pa. What could be realized rate of return from such investment if the bond is held till maturity? a) 13.33% b) 13.15% c) 13.90% d) 13.60% (Ans - b) Realized rate of return 13.15%) 39. Which of the following statements is true about the buyer (holder) of the call option? a) The buyer of the call option has an obligation to sell the underlying security and is paid a premium for taking on the risk associated with the obligation. b) The buyer has the right to buy an agreed quantity of a financial instrument and pays the premium for this right. c) The holder has the right to sell a stock at a fixed price and pays the premium for this right. d) The holder has the right to buy a stock at a fixed price and receives the premium. (Ans - b) The buyer has the right to buy an agreed quantity of a financial instrument and pays the premium for this right. 40. A put option gives the buyer a right to sell how much of the underlying to the writer of the option? a) Any quantity b) Only the specified quantity (lot size of the option contract) c) The specified quantity or less than the specified quantity CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 11

d) The specifies quantity or more than the specified quantity (Ans - b) Only the specified quantity (lot size of the option contract) 41. XYZ company paid dividend 2, recently of common stock; dividend expected to grow by 20% for next 3 years, after which expect to stabilize at 10% growth. If required rate of return is 15%. How much maximum price would you pay today to buy stock? (Ans--- D0 D1 (Next D2 (2nd D3 (3rd year) D4 (4th Year onwards) (current) year) year) 2 paid 2*(1.20) 2*(1.20)^(2) 2*(1.20)^(3) 2*(1.20)^(3)*(1.10) (1.15) (1.15)^(2) (1.15)^(3) (0.15 – 0.10) = =2.1776937( =2.2723760 = 76.032, this dividend value represent as on beginning of 4th 2.08696(A) B) 99(C) year which is nothing but end of 3rd year too. This dividend will be further discounted by 3 year to bring towards current value i.e.do 76.032/ (1.15) ^ (3) = 49.99227418 (D) Value of stock as on today’s date (Do) = 2.08696+2.1776937+2.272376099+49.99227418 = ₹56.5293 42. Mr. X buys 50 R Ltd October Rs. 350 call options for Rs. 15. The current share price is Rs. 345. The break-even share price, ignoring transaction costs is Rs.________ a) 350 b) 360 c) 365 d) None of the above (Ans - c) Breakeven level= Call option price + premium.) 43. Public Issue through the book building process is better than I.P.O at fixed price because__________ a) High fixed price will result in under subscription leading to loss to the investor. b) It helps the issuer to ascertain the exact price at which the investor is willing to CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 12

c) subscribe. d) Low fixed price will result in over subscription leading to loss to the issuer. e) All of the above (Ans - b) It helps the issuer to ascertain the exact price at which the investor is willing to subscribe. 44. A call warrant with a strike price of 2.30 is currently trading at 2.00. The underlying stock price is quoted at 4.40. What is the time value of the warrant? a) 0.00 b) 0.30 c) 2.10 d) 2.40 (Ans - a) 0.00 HINT: - Call Value = Time Value + Intrinsic Value Intrinsic Value (IV) = Stock Price – Strike Price IV = 4.40 – 2.30 = 2.10 (deep in-the-money warrant) The deep in the money warrant has zero Time Value 45. For an asking price of a property at Rs 9,50,000 with an estimated net income of Rs 1,25,000 at a market yield of 12%, calculate the value of the property on capitalization approach. a) 10,42,000 b) 12,56,000 c) 9,88,888 d) 8,98,850 (Ans - a) 10,42,000 125000/12% 46. Which of the following statements is true. a) Price of an option is called as premium. b) A short call is buying a call possibly with the hope of selling it back later at lower price. c) A short call is selling a call possibly with the hope of buying it back at higher price. d) A short call is selling a call possibly with the hope of buying it back later at lower price. Both (a) and (d) (Ans - e) Both (a) and (d) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 13

47. A put option gives the ------------ the right to but not the obligation to --------------the underlying asset at a specified price. a) Seller, buy b) Seller, sell c) Owner, buy d) Owner, sell (Ans - d) Owner, sell 48. Which of the following are characteristics of Money Market Securities? a) They are issued by the Government, municipalities and large corporations that have high – quality ratings. b) All have terms to maturity that are 270 days or less c) All lend to have large amounts of purchasing power risk d) Both (a) and (b) Both (b) and (c) (Ans - a) They are issued by the Government, municipalities and large corporations that have high –quality ratings. 49. One bond with an AA-grade rating might pay a higher yield- to-maturity than another AA-grade bond issued at a different time by the same corporation because of which of the following reasons? a) Bonds with longer maturities always pay higher rates of interest than similar bonds that have shorter maturities b) The bond market is sometimes irrational and evaluates the riskiness of some bond issues erroneously c) One bond issue is a secured one whereas other issue is unsecured d) All of the above (Ans - c) One bond issue is a secured one whereas other issue is unsecured.) 50. Hindustan Ltd. has issued a preferred stock that pays a dividend of Rs. 20 per share. The dividend is fixed and share has no expiration date. What is the intrinsic value of Hindustan Ltd. preference share at a discount rate of 12%. a) 166.67 CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 14

b) 160.67 c) 116.67 d) None of the above. (Ans - a) value = Dividend / Rate of Interest 20/.12 = 166.67 51. XYZ Ltd. currently earns Rs. 5 per share. Its return on equity is 20% and it retains 50% of its earnings. (Both of the figures are expected to be maintained indefinitely). Stocks of similar risk are priced to return 12%. What is the intrinsic value of the share? a) 130.55 b) 137.50 c) 148.25 d) 155.75 (Ans - b) Growth = Return on Equity x Retained Earnings = .20 x .50 = .10 or 10% In case of constant growth = – 52. Which of the following is true? a) A proxy is a written power of attorney authorizing someone to vote on behalf of, and on the instructions of, a shareholder. b) This would be used when the shareholders will not be attending an annual meeting. c) Companies usually send proxy forms to shareholders prior to a given meeting and shareholders use them for voting during that meeting. d) All of the above (Ans - d) All of the above) 53. What is Primary Market? a) In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. b) Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. c) The primary market performs the crucial function of facilitating capital formation in the economy. d) All the above are true CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 15

(Ans - d) 54. What is dividend payout ratio? a) The dividend payout ratio is the amount of dividends paid to the shareholders in relation to the amount of net income from the company. b) To support continued growth, the company will retain some of the net income and can pay out the remainder as a dividend. c) The sum the company holds is called retained earnings. d) All the above are true (Ans - d) 55. What is Bond Ladder? a) A bond ladder is a strategy that tries to minimize the risks associated with fixed-income securities while managing cash flows for the individual investor. b) It attempts to match cash flows with the demand for cash—is a multi-maturity investment strategy that diversifies bond holdings within a portfolio. c) It reduces the reinvestment risk associated with rolling over maturing bonds into similar fixed income products all at once. d) It also helps manage the flow of money, helping to ensure a steady stream of cash flows throughout the year. e) All are true (Ans - d) All are true) 56. What is a Bullet Bond? a) A bullet is a one-time lump-sum repayment of an outstanding loan, typically made by the borrower. b) This term can also refer to a loan that requires a disproportionately substantial portion, or all of the loan to be repaid at maturity. c) A bullet is also the name of an investment strategy for corporations and governments to issue bonds in a variety of maturities. d) A bullet bond is a debt instrument whose entire principal value is paid all at once on the maturity date, as opposed to amortizing the bond over its lifetime. e) Bullet bonds cannot be redeemed early by an issuer, which means they are non-callable. f) Because of this, bullet bonds may pay a relatively low rate of interest due to the issuer's interest rate exposure. CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 16

g) .A bullet bond is considered riskier than an amortizing bond because it gives the issuer a large repayment obligation on a single date rather than a series of smaller repayment obligations. h) All the above are true (Ans - h) 57. What is Barbell? a) The barbell is an investment strategy applicable primarily to a fixed-income portfolio. b) Following a barbell method, half the portfolio contains long-term bonds, and the other half holds short-term bonds. c) The “barbell” gets its name because the investment strategy looks like a barbell with bonds heavily weighted at both ends of the maturity timeline. 58. When should a person invest in Debt? a) When the time horizon is short term b) When the risk appetite is low c) When there is need of regular income d) A and b are right e) A, b and c are right (Ans - e) 59. Undervalued stock is the stock when Intrinsic value is higher than the market price of share a) True b) False (Ans - True) 60. Asset Allocation is the key to creation of wealth: a) True b) False (Ans- True) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 17

Chapter-2 Pooled Investment Products 1. Mutual Funds are formed as? a) AMC b) Company under Companies Act, 1956 c) Trusts d) None of the above 2. Unit Capital will keep changing on purchase or redemption in which of the following type of funds: a) Open Ended scheme b) Closed Ended scheme c) Interval scheme d) All of the above 3. Which Debt fund has portfolio maturity as closely aligned with maturity of scheme? a) Monthly Income Plan b) Fixed Maturity Plan c) Diversified Debt Fund d) High Yield Debt Fund 4. After reopening of the NFO units are issued at: a) Issue Price b) Face Value c) NAV d) Market Price 5. Do Mutual Funds help in employment generation in the economy? a) Not at all b) May Be c) True d) False 6. The corpus collected by the mutual fund under a scheme is known as: Page 18 a) AUM CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook

b) NAV c) Unit Capital d) Deposits 7. Thematic Funds are: a) Sector Funds b) More concentrated than Sector Funds c) More broad based than Sector Funds d) None of the above 8. Money Market Funds are best for the investor who is looking for? a) Long term capital appreciation. b) Regular income. c) Liquidity and safety of capital. d) Tax Exemption 9. Which of the following about Real Estate Investment Trust (REIT) is false? a) REITs are registered with SEBI b) The Units will be listed on Stock Exchange c) REITs will not invest in commercial real estate assets 10. Funds mobilized from the public, under a mutual fund scheme are invested in market. They are called: a) AUM (Assets under Management) b) NFO (New Fund Offer) c) Unit Capital d) NAV (Net Asset Value) 11. Are Mutual funds formed to generate profits? a) Yes b) No c) May be 12. Which of the following funds invests solely in debt securities of very short maturities? a) Money Market Fund b) Closed-end Fund c) Investment Fund d) Bond Fund e) Open-ended Fund CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 19

13. Sector Funds invest in a diverse range of sectors: a) True b) False 14. Which of the following is not a benefit of investing in mutual funds? a) Diversification b) Transaction costs c) Increasing an economy’s capital supply d) Professional Management 15. Units of close-ended funds often trade: a) At a discount to the net asset value b) On an exchange such as the NYSE c) Exactly at the net asset value d) At a price premium to the net asset value e) At a discount or premium to the net asset value, depending on investor’s sentiment 16. A mutual fund is owned by a) The Govt. of India b) SEBI c) All its investors d) AMFI 17. Within ------ days of dividend declaration, warrants will have to be sent to investors a) 7 b) 10 c) A d) 15 e) 30 18. Focused funds hold portfolios concentrated in a limited number of stocks. a) True b) False 19. Which of the following is true in case of ELSS? a) These are diversified equity funds b) These offer tax benefit to investors c) There is lock in period of 3 years CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 20

d) Only b and c are true e) All are true 20. Ultra short term plans are also known as treasury management funds a) True b) False 21. When interest rates are likely to go up, you should invest in: a) Fixed rate instruments b) Floating rate instruments c) It does not make any difference 22 High yield bond funds invest in junk bonds: a) True b) False 23. Open ended schemes generally give exit option to investors through a stock exchange: a) True b) False 24. Trustee/Board of Trustee are considered to be the first level regulators of Mutual Funds: a) Partly True b) False c) True d) SEBI is regulator for Mutual Funds 25. The AMC needs to have a minimum net worth of a) 25 crore b) 100 crore c) 50 crore d) 10 crore 26. The custodian is appointed by the a) Trustees b) AMC c) Sponsors d) Any of the above CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 21

27. Fund accounting activity of a Mutual Fund is to be compulsorily outsourced a) True b) False 28. What is the full form of ACE in Mutual Fund a) Annual cost and expenses b) Appropriation of cost of entry c) AMFI code of ethics d) None of the above 29. Mutual Funds will buy securities only on Delivery basis a) True b) False c) Partly True 30. The scheme shall not invest more than ------% of its NAV in investment grade debt instruments issued by a single issuer a) 5% b) 15% c) 20% d) 10% 31. The ELSS notification requires that at least-------% of the ELSS funds should be invested in Equity and Equity Linked Securities. a) 70% b) 80% c) 85% d) 75% 32. Schemes other than ELSS can remain open for subscription for a maximum of -------days a) 10 days b) 15 days c) 20 days 33. Redemption /repurchase cheques would need to be dispatched to investors within ------ working days from the date of receipt of transaction request. a) 10 b) 15 c) 5 CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 22

d) 7 34. If the investor claims unclaimed money after 3 years, the payment is based on -------- a) NAV as on date b) NAV at the end of 3 years c) Face Value 35. Trail commission is linked to ------- of portfolio in the market a) Valuation b) Face Value c) Amount invested by investor 36. Institutional distributors of mutual funds build reach through a) Employees b) Agents c) Sub-brokers d) Any of the above 37. Cut- off timings guidelines are not applicable for a) NFO’s b) International Funds c) Both of the above d) None of the above 38. Investors’ KYC details are stored in the server of a) AMC b) AMFI c) SEBI d) KRA 39. In a top down approach, sector allocation precedes stock selection a) True b) False 40. The most appropriate measure of returns for a mutual fund scheme in existence for several years is a) Simple return b) Dividend Returns CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 23

c) Absolute Returns d) CAGR 41. You invest Rs. 35,000 in a Debt Fund of Mutual Fund. After 2 years you redeem your units at Rs. 42,000. Ignoring indexation and surcharges, what is the capital gain tax on this transaction? a) Rs. 7000/- b) Rs. 700/- c) Rs. 1400/- d) Depends on the marginal rate of taxation 42. If a 8% bond with face value of Rs. 1,000 is selling for Rs. 1,200, what is the current yield? a) 8% b) 6.67% c) 6.87% d) 6,47% 43. SEBI mandates that at least ___% of real estate mutual fund’s corpus should be invested in real estate or related securities. a) 35 b) 50 c) 75 d) 100 44. Criticism of rupee-cost averaging is…….. ? a) Investment is for the same amount at regular intervals b) Over a period of time, the average purchase price will work out lower than if one tries to guess the market highs and lows c) It does not tell you when to buy, sell or switch from one scheme to another d) Rupee cost averaging has no serious shortcomings 45. Which of the following statement is wrong? a) Diversification reduces risk but increases cost of transaction. b) Investor bears recurring cost while investing through mutual fund but only one time cost while investing directly. c) Mutual funds enable investors to hold a diversified investment portfolio only with a large amount of investment. d) The investment management, ensure a much better return than what an investor can manage on own. CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 24

46. SEBI issues the guidelines for which of the following? a) Mutual funds b) Companies c) Primary market players d) Secondary market players e) All of the above 47. The amount required buying 100 units of a scheme having an exit load of 1.5% and NAV of Rs.20 is a) Rs.2000 b) Rs.2015 c) Rs.1985 d) Rs.2030 48. You invest Rs. 50,000 in an Equity Fund of Mutual Fund. After 2 years you redeem your units at Rs. 82,000. Ignoring indexation and surcharges, what is the capital gain tax on this transaction? a) Rs. 32000/- b) Rs. 82000/- c) Rs. 50000/- d) Nil, as LTCG up to Rs.1,00,000 is exempt 49. Mr. Y purchased 1000 units of an Equity Scheme at NAV of Rs.25. He opted for Dividend pay- out option. He got dividend of Rs.1500 in year 1, Rs.1000 in year 2 and Rs. 1250 in year 3. At the end of 3 years, he sold his investment at Rs.35 per unit. What is his annual return? a) 55% b) 50% c) 15.73% d) 18% 50. SEBI mandates that at least ___% of real estate mutual fund’s corpus should be invested in real estate or related securities. a) 35 b) 50 c) 75 d) 100 CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 25

51. Structured products are usually created to meet specific needs that cannot be met from the standardized financial instruments available in the markets. They can be used as: a) An alternative to a direct investment b) A part of the overall asset allocation c) A risk-reduction strategy in a portfolio d) All of the above 52. Which of the following is true about Market Linked notes? a) Market-linked notes offer a return of principal if held to maturity, subject to the issuer’s ability to repay. b) The promise to return principal at maturity is only as good as the financial strength of the company that makes the promise. c) In the event the issuer goes bankrupt, investors who hold these notes are generally considered unsecured creditors and might recover little, if anything, of their original investment. d) All the above are true 53. What is true about Venture Capital and Private Equity? a) Venture capital is a type of private equity transaction that targets new, smaller start-up companies. These transactions also tend to center around the technology and biomedical sectors specifically. b) Private equity buyouts typically involve larger, more established companies that are not performing well for a variety of reasons. c) The primary objective of many private equity buyouts is to acquire a struggling company, get it back on its feet and performing well, and then sell the company. d) All the above are true 54. What do you know about Hedge Funds? a) Hedge funds are a form of pooled investment structure, but are subject to much less regulation and oversight, and can employ many different strategies. b) Unlike traditional pooled funds like mutual funds or exchange-traded funds that only take a buy-and-hold approach, hedge funds can establish long and short positions within their holdings, as well as employing the use of options, margin, or other derivative securities. c) Both are true CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 26

55. Assume XYZ Company has net income of Rs.100,000 and pays Rs.30,000 dividends to shareholders. What is the dividend pay-out ratio? a) 3% b) 10% c) 30% d) None of the above CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 27

Chapter-3 Principles of Investment Risk 1. Which of the below mentioned can be reduced after appropriate diversification? a) Market risk b) Company specific risk c) Political Risk d) Inflation (Ans - b)- Company Specific Risk 2. The standard deviation of the returns of a portfolio of securities will be __________ the weighted average of the standard deviation of returns of the individual component securities. a) Equal to b) Less than c) Greater than d) Less than or equal to (depending on the correlation between securities) (Ans - d)- Depending on the correlation between securities 3. Choose the instrument from the following which does not have reinvestment risk: a) Short term bonds b) Corporate Bonds with Call option c) Zero coupon bonds d) Government securities (Ans - c)- Zero coupon bonds 4. Risk of a portfolio gets reduced when securities are negatively correlated. a) True b) False (Ans - a)- True CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 28

5. Other things equal, diversification is most effective when classes of securities included in portfolio have ______. a) negatively correlated returns b) positively correlated returns c) high returns d) uncorrelated returns (Ans - a)- negatively correlated returns 6. Calculate Holding period return for following investment - Initial Investment 150000/- Dividend for 1st Year 20000/- Dividend for 2nd Year 25000/- Sold after 2 year at 170000/- a) 45.89% b) 43.33% c) 42.34% d) None of the above (Ans - b)- 43.33% 7. The following information is available Expected Return Stock A Stock B Standard Deviation 15% 14% Co-efficient of Correlation 15% 8% 0.60 What is the covariance between Stocks A and B? a) 72 b) 65 c) 70 d) None of these. Ans - a)- 72 CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 29

8. An investor buys a mutual fund at ₹24.65. During the year when the NAV is at ₹27.825, dividend is declared @ 13.25% which he reinvests in the fund. At the end of the year the NAV is ₹25.75. His ROI will be? (Ignore DDT). a) 8.1468% b) 11.6856% c) 10.1468% d) 9.6856% (Ans - d)- Dividend = 10 * 13.25% = 1.325. Additional units on re-investment = 1.325 / (27.825 – 1.325) = 0.05. After 1 year: Re-purchase = 1.05 * 25.75 = 27.0375. Profit = 27.0375 – 24.65 = 2.3875. Profit% = (2.3875 / 24.65) * 100 = 9.6856% 9. Arun owns 3 stocks and has estimated the following joint probability distribution of returns: Outcome Stock X (%) Stock Y (%) Stock Z (%) Probability 1 0 5 0 .20 2 -10 10 5 .10 3 20 10 10 .50 4 10 -20 15 .20 Calculate the portfolio’s expected return and standard deviation if Arun invests 20% in stock X, 50% in stock Y and 30% in stock Z Assuming that each security is completely uncorrelated with the return of other securities. a) 6.25%, 6.37% b) 6.25%, 2.55% c) 8.45%, 3.75% d) 4.25%, 6.54% (Ans - b)- Using the Statistic function of FC 200V first calculate the Expected Return & Risk of individual stocks. ER(X) = 11%, ER(Y) = 3%, ER(Z) = 8.5%. SD(X) = 10.44%, SD(Y) = 11.661%, SD(Z) = 5.0249.Expected Return of Portfolio = (0.2*11) + (0.5*3) + (0.3*8.5) = 6.25%. Expected Risk of the Portfolio = √(0.2*10.44)^(2) + (0.5*11.661)^(2)+ (0.3*5.0249)^(2)= √(9.42597) = 6.37% 10. 6.5% ₹100000 T-bill with 40 days to go has a yield of 5% p.a. The CMP of the instrument is: a) ₹1,05,422 b) ₹1,05,920 CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 30

c) ₹99,467 d) ₹99,969 (Ans - b)- Use CMPD: Set: End, N =1, I% = 5/365*40, PMT = 6500, FV = 100000, PV = (?) = 105919.62 11. The return of Index over five consecutive months was found to be1.8%, 7.1%, -0.5%, 0.1% and 0.1%. The return on a security over the same period was found to be 6.1%, 4.7%, -3.3%, 6.8% and -2%. The Systematic Risk of the security is: a) 3.278 b) 3.862 c) 4.097 d) 3.278 (Ans - c)- Using the STAT function calculate the Beta of the security and SD of the market and use the formula: Systematic Risk = (Beta of the Security * SD of Market)^(2) = (0.6472 * 3.1276)^(2) = 4.097 12. Which of the following is the major benefit of SIP: a) High Return b) Low risk c) Rupee cost averaging d) All of the above (Ans - c)- Rupee Cost averaging 13. The Value investing strategy is _____. a) Investing in stocks that are below their intrinsic value b) Investing in stocks that trade at very high Price Earning multiple c) Investing in stocks that trade significantly above their Price Book Value ratio d) Investing in stocks that are trading at below their peer companies in the sector (Ans - a)- Investing in stocks that are below their intrinsic value 14. If the portfolio manager expects interest rates to rise, then the portfolio is switched towards a higher proportion of__________ instruments or fixed rate instruments of __________. a) Fixed rate, short tenor b) Floating rate, long tenor CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 31

c) Floating rate, short tenor d) Fixed rate, long tenor (Ans - c)- Floating rate, short tenor 15. You have suggested an investment strategy which aims to invest more when the share price or NAV falls and less when the share price or NAV rises. It is done by achieving the total targeted value of the investment by making appropriated amounts at each predetermined interval. You are indicating a technique known as: a) Value Averaging b) Rupee Cost Averaging c) Economic Cost Averaging d) Weighted Averaging (Ans - a) Value Averaging 16. During the previous financial year, Mr. Tarun was comparing the returns generated by his index ETF v/s Index and he found that his investment in index ETF has not exactly given the same return as given by Index. This is because of a) Alpha generated by fund manager b) Tracking Error c) Index Error d) Beta of the index fund (Ans - b)- Tracking error 17. Equal amount of investment is made in portfolio consisting of securities X and Y. Standard deviation of X is 12.43%. Standard deviation of Y is 16.54%. ; Correlation coefficient is 0.82. ; The interactive risk of the portfolio, measured by covariance is _____________. a) 145.64 b) 156.22 c) 168.59 d) 172.56 (Ans - c)- 168.59 CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 32

18. Priyanka’s portfolio consists of two stocks X and Y in which she has invested ₹57,000 and ₹85,000, respectively. Stock X has beta of .70 and stock Y has beta of 1.50. The return expected from the market in current scenario is 12% while the return on Treasury bonds is 7%. What is the expected return from the portfolio? a) 12.58% b) 12.89% c) 10.5% d) 14.5% (Ans - b)- Weight of stock X in portfolio = 57/85+57 = 40.14% Weight of stock Y in portfolio = 85/85+57 = 59.86% E(R) of stock X = 7+.70(12-7) = 10.5% E(R) of stock Y = 7+1.50 (12-7) = 14.50% E(R) of portfolio = 10.50*.4017 + 14.50*.5986 = 12.89% 19. During the recent period you feel that the stock market has shown a strong bullish run. The Super Industry Ltd’s Shares, which Prabhat bought for ₹900 per share about nine months back, are now at ₹1,760 per share. He does not want to sell his shares since he is bullish in the long term. He wants to protect the appreciation on the stock price from the downside which market may face in the short term. He approaches you to guide him what strategy he should use. CALL Option of ₹1,740 is available @₹60, PUT Option of 1740 is available © ₹50 a) Buy PUT option b) Sell PUT Option c) Buy CALL Option d) Sell CALL Option (Ans - a)- Buy PUT option 20. Your client had invested in Index ETF on recommendation of her Certified Financial Planner. Which of the following is not true about index ETF? a) An index ETF is a basket of stocks. b) ETF can be traded anytime during the market hours on a real time basis.. c) An ETF is a hybrid product having features of both an open-ended mutual fund and an exchange listed security CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 33

d) The ETF’s trading value is not based on the net asset value of the underlying security that it rep resents. (Ans- d)- The ETF’s trading value is not based on the net asset value of the underlying security that it rep resents.) 21. An investor purchased 5000 units of an equity oriented MF scheme under dividend reinvestment scheme on 1st June 2018 at NAV of ₹18.46 along with systematic investment plan of ₹5000, each for 6 months. The SIP dates are 1st of every month beginning 1st July 2018. The NAV at which additional unit were bought through SIP were ₹19.06, ₹18.51, ₹17.23, ₹18.97, ₹16.75 and ₹17.95 on 15 October 2018. The scheme declared a dividend of 25% on face value of ₹10 per unit which record date being 21st October 2018. The NAV on 22nd October 2018 was ₹16.50. The investor redeemed all units on 28 January 2019 at a price of ₹19.10. What holding period return was obtained by investor? a) 27.83% b) 23.58% c) 15.89% d) 18.46% (Ans- (d) 18.46% Date Total No. of Units NAV Amount Invested 1-Jun-18 92300 5000 18.46 19.06 1-Jul-18 5000 262.3294858 18.51 17.23 1-Aug-18 5000 270.1242572 18.97 1-Sep-18 5000 290.1915264 2.5 1-Oct-18 5000 263.5740643 Total Units Invested till 15215.54833 (6086.219334*2.5) 1st Oct 2012 6086.219334 22-Oct- Dividend 922.1544445 16.5 18 Re-invested (15215.54833/16.5) 16.75 17.95 1-Nov-18 5000 298.5074627 1-Dec-18 5000 278.551532 CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 34

28-Jan-19 7585.432773(6086.219334+ 144881.766 922.1544445+ (7585.432773*19.1) 298.5074627+ 278.551532) 19.1 122300 (92300 + Total Amount Invested 5000*6) Total Amount Accumulated 144881.766 Holding Period Return (End Value-Beg Value)/(Beg Value) 18.4642% 22. Beta is a measure of: {(144881.766 - a) Geometric average return 122300)/ 122300} b) Holding period return c) Systematic risk d) Unsystematic risk (Ans - c)- Systematic Risk) 23. Om prakash is planning to invest in two companies ABC and XYZ. The coefficient of correlation between the two stocks ABC and XYZ is 0.7. The standard deviation of returns for ABC is 18% and the standard deviation of returns for XYZ is 22%. The expected return for XYZ is 18% and the expected return for ABC is 15%. Calculate the expected returns and standard deviation of Om prakash’s portfolio for which he plans to invest ₹4 lakh in XYZ Company and ₹2 lakh in ABC Company. a) 16.33% and 18.83 b) 17.00% and 19.34 c) 19.01% and 20.77 d) 16.95% and 19.38 (Ans - b)- Weight in XYZ company = 4 Lakh/6 Lakh = 67%, Weight in ABC company = 2 Lakh /6 Lakh = 33% e) E(R) of the portfolio = 67*.18+33*.15 = 17.01% f) S.D. of portfolio = [(.67)^2*(22)^2+ (.33)^2*18^2+2*22*18*.67*.33*0.7]1/2 = [375.13]1/2 =19.34 CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 35

24. Based on following information: Probability Year Total Return (X) (%) 0.10 1 19 0.15 2 14 0.23 3 22 0.16 4 -12 0.36 55 Calculate Standard Deviation: (Ans- Ans. 11.355% Steps Properties 1 Press “Set Up” (Next to “On” button) 2 Go to “STAT” function in set up & “On” the same & then press “Esc” 3 Press “STAT” mode 4 1-VAR : EXE 5 X Frequency 1 19 0.10 2 14 0.15 3 22 0.23 4 -12 0.16 5 5 0.36 6 Press “Shift Stat” 7 Press “5.Var” 8 Press “3.xar” 9 You’ll automatically be taken to the main screen with “x ” being displayed 10 Press “EXE”, the answer “11.355” will be displayed CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 36

25. With the following data shown in the table below compute the risk on the portfolio Security Std Deviation Proportion A 14.5 60% B 18.5 40% Corr. Co-eff (A,B) 0.91 (Ans - SD of Portfolio = 15.736% 26. Portfolio A had a return of 12% in the previous year, while the market had an average return of 10%. The standard deviation of the portfolio was calculated to be 20%, while the standard deviation of the market was 15% over the same time period. If the correlation between the portfolio and the market is 0.8, what is the Beta of the portfolio A? a) 0.94 b) 1.07 c) 1.31 d) 1.91 (Ans - b)- 1.07 [(S.D of security / S.D of Market) *Coefficient of correlation]) 27. A basis point is which one of the following? a) One Rupee, Re.1 b) One percentage point, 1percent c) One paisa, Re.0.01 d) One one-hundredth of one percentage point, 0.01 of 1percent (Ans - d)- One one-hundredth of one percentage point, 0.01 of 1percent 28. A company has current earnings per share of Rs.7.Assume a dividend payout of 60%.Earnings grow at a rate of 8% per year If the required rate of return is 15 percent, what is the current share value? CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 37

a) 64.80 b) 65.20 c) 63.56 d) 68.35 (Ans - a)- 64.80 (Hint : 1.Dividend Payment = EPS* Dividend payout ratio) 2.Po= D1 / r-g 29 Hindustan Ltd. has issued a preferred stock that pays a dividend of Rs. 20 per share. The dividend is fixed and share has no expiration date. What is the intrinsic value of Hindustan Ltd. preference share at a discount rate of 12%. a) 166.67 b) 160.67 c) 116.67 d) None of the above. (Ans - a)- value = Dividend / Rate of Interest 20/.12 = 166.67 30. You are evaluating the rankings based on Treynor Ratio of three funds A, B and C. The average returns obtained from funds A, B and C have been 16%, 19% and 14%, respectively against the market return of 13%. The standard deviations of fund returns have been 17%, 22% and 16%, respectively versus the market return standard deviation of 15%. If the beta reported of these funds is 1.2, 1.4 and 1.1, respectively and the risk-free rate of return is 5.5%, what are your rankings in the order of best to worst? a) B,A,C b) A,B,C c) C,B,A d) A,C,B (Ans - a)- Use Treynor Ratio formula = (Return of Fund – Rf) / Beta. A: (16 – 5.5) / 1.2 = 8.75. B: (19 – 5.5) / 1.4 = 9.64. C: (14 – 5.5) / 1.1 = 7.73. Ranking should be BAC CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 38

Chapter - 4 Investment Performance Management 1. ___________ measures the level of wealth rather than the change in level of wealth. a) Geometric mean b) Arithmetic mean c) Cumulative wealth index d) Holding period return (Ans - c) Cumulative Wealth Index) 2. Ms. Jaspreet Malani purchased a flat worth ₹20,00,000, financing 80% of the purchase price at an interest rate of 10% p.a. One year later she sold the property at ₹24,75,000. Her annualized rate of return on her investment is approximately: a) 15.75% b) 78.75% c) 118.75% d) None of the Above (Ans - b) 78.75% Gain= 4,75,000, Interest on loan= 1,60,000, net gain= 315000, Amt of his own investment= 4,00,000. 315000/400000*100= 78.75%) 3. 3 Rank the funds based on Sharpe Ratio best to market. Fund Average return (%) Standard deviation (%) Beta 1.3 A 20 25 0.9 B 12 16 1.1 1.0 C 15 19 Market 10 15 Risk free rate = 6% a) BAC b) CBA c) ACB CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 39

d) ABC (Ans - c) ACB) 4. X invested a sum of ₹72000 at 5% p.a. After 7 years the rate of interest was changed to 5% p.a. compounded quarterly. After a further period of 3 years the rate was changed to 6% p.a. compounded quarterly. What would Mr. X get at the end of 15 years? a) Rs.1,01,311 b) Rs. 1,36,160 c) Rs. 1,58,387 d) Rs. 1,17,597 (Ans - c) Rs.158387) 5. Calculate the risk free rate given a beta of 0.8, a market risk premium of 6%, and an expected return of 9.8%? a) 3.20% b) 5.00% c) 5.20% d) None of the Above (Ans - b) Rp= (Rf+ Bp(Rm-Rf)= 9.8= Rf+ 0.8(6) 6. A portfolio has a beta of 1.25. What will be the expected return of the portfolio if the risk free return is 3.5% and the return of the market is 17%? a) 23.00% b) 20.375% c) 16.875% d) None of the above (Ans - c) 7. What would be the beta of a stock to justify a return of 19%, given the risk free return is 4% and the return of the market is 20%? a) 1 b) 1.9375 c) 0.9375 d) None of the above CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 40

(Ans - c) 8. Read the following data and answer the following questions: Risk free rate of return: 7% Expected Return on Market Portfolio: 15% Beta of security X: 0.7 Beta of security Y: 1.5 (i) Calculate Expected Return on Security X (ii) Calculate Expected Return on Security Y a) 19.00%; 12.00% b) 5.60%; 12.00% c) 12.60%; 19.00% d) 12.60%; 5.60% (Ans - c) 9. An investment analyst has told Prabhat to invest in a portfolio after evaluating on the following parameters – 1. The performance of portfolio adjusted by the return of risk free assets over the risk of portfolio 2. Measure of the volatility in a portfolio as compared to the entire market (index) as a whole 3. measure of how much individual elements tend to deviate from the average 4. measure excess return on an investment over the benchmark with same degree of risk 5. The proportion of variability in a portfolio compare to benchmark The analyst also used a lot of terminology which confused Prabhat. He wants to know how the terminology used fits into these evaluation parameters. You advise the terminology, respectively, as_______ a) Sharpe Ratio, Beta, Alpha, R2, Standard Deviation. b) Sharpe Ratio, Beta, Standard Deviation, Alpha, R2. c) Alpha, Standard Deviation, R2, Sharpe Ratio, Beta. d) R2, Sharpe Ratio, Standard Deviation, Alpha, Beta. (Ans - b) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 41

10. The risk free return of Security A is 8%. In addition to it, you expect that the return on market would be 14%. The expected return of Security A with beta of 0.70 is ________. a) 12.2%. b) 5.4%. c) 17.8%. d) 18.2%. (Ans - a) 11. Who will get more money assuming that Rs.5,00,000 is invested for 5 years at a rate of return of 8% p.a.? a) A, who get a return of 8% p.a. b) B, who gets a return of 8% p.a. compounded half yearly c) C, who also gets a return of 8% p.a. compounded quarterly d) D, who gets a return of 8% p.a. compounded monthly (Ans - d) More the number of compounding, the larger will be the size of corpus accumulated) 12. Real rate of return is: a) Nominal rate-Tax rate b) Nominal rate adjusted for compounding c) Nominal rate adjusted for inflation d) Nominal rate and real rate are same (Ans - c) 13. What is internal rate of return (IRR)? a) IRR is a rate of return used in capital budgeting to measure and compare the profitability of investments. b) It is also called the discounted cash flow rate of return (DCFROR). c) The internal rate of return on an investment or project is the \"annualized effective compounded return rate\" or rate of return that makes the net present value (NPV as NET*1/(1+IRR)^year) of all cash flows (both positive and negative) from a particular investment equal to zero. d) All the above are true (Ans - d) All are true) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 42

14. Which of the following is closely true regarding Benchmark? a) A benchmark conveys indirectly the fund manager's performance. b) The index should be composed of the same type and size securities as (along with having a high degree of correlation to) the investment(s) being evaluated c) Benchmark also helps in comparing two different types of securities. (Ans - b) a) is not right as it directly conveys the fund manager’s performance) 15. Fundamental analysis involves the examination of a) Sales, b) Earnings, c) Net income d) It attempts to predict the future performance of a company. e) All of the above 16. What is Top-Down Analysis? a) In the top down approach, investor looks at the top performing companies b) In the top-down method, an investor tries to identify broad economic trends and then selects industries and companies that should prosper from a given trend. c) In the top down approach, top management of the company is analyzed by the investor (Ans - b) 17. What is bottom up analysis? a) Bottom-up investing takes a micro approach. b) A bottom-up analyst concentrates on the company’s fundamentals and gives secondary or little attention to analyzing the industry or economy. c) The idea is that stock pickers can find companies that will do well over time on their own merits, unaffected by market or industry trends. d) The goal of a bottom-up analysis is to gain a detailed understanding of the company itself, including its products, services and management approach. e) All the above are correct (Ans - e) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 43

18. What are various assumptions of Technical Analysis? a) The current value of any product or service (including common stock) is a product of supply and demand b) Both rational and irrational behaviour contribute to supply and demand (i.e., behavioral finance concepts) c) The price of securities tends to move in sustained trends and short-term disruptions can be ignored d) History tends to repeat itself—primarily with respect to movements in price e) All of the above (Ans - e) 19. Technicalanalysis focuses on a top-down rather than a bottom-up approach. a) True b) False (Ans - True) 20. Investors who identify themselves as contrarians believe that most investors are incorrect in their investment decisions, and will therefore take investment action that is opposite of what the majority is doing. a) True b) False (Ans - a) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 44

Chapter - 5 Investment Theory 1. Human mind frequently makes random judgmental errors. This trait may be dealt with by programming individual decision process. This Characteristic is used in ____. a) averaging b) arbitraging c) Systematic Investment Plan d) Hedging (Ans - c) 2. Rational investors will form portfolios to eliminate systematic risk. a) True b) False (And - b) 3. Calculate the expected rate of return of the portfolio given the following information: Risk-free rate of interest: 8% Expected return of market portfolio: 18% Standard Deviation of asset: 2.8% Market Standard Deviation: 2.4% Correlation co-efficient of portfolio with market 0.8 a) 17.7% b) 17.33% c) 18.7% d) 16.33% ( Ans – b) Beta = [r * SD (stock)] / SD (market) = (0.8 * 2.8) / 2.4 = 0.933. Use CAPM: ERp = 8% + [(18% - 8%) * 0.933] = 17.33%) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 45

4. If expected return of a security, as per the Capital Asset Pricing Model, is greater than the actual return of the security then in terms of performance the security would be treated as: a) Outperforming b) Underperforming c) Performing at par with the Market d) None of the Above (Ans - b) 5. The Capital Asset Pricing Model (CAPM) predicts the required rate of return on a stock as: a) The difference between the risk-free rate and the market risk premium b) The sum of the risk-free rate and the market risk premium c) The sum of the risk-free rate and the beta of the stock d) The sum of the risk free rate and the product of beta of the stock and market risk premium (Ans - d) 6. The efficient market hypothesis which contradicts the market timing approach says that ______. a) It is impossible to time the market as historical data is hard to get b) It is impossible to time the market due to trends that is shows c) It is impossible to time the market as market behavior is random d) It is impossible to time the market as there is efficiency in settlement (Ans - c) 7. Calculate return of the portfolio with a 15% risk given that the risk free rate is 7%, return of the market is 15% and risk of the market is 7%. a) 16.80% b) 15.33% c) 17.95% d) 23.00% (Ans - d) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 46