IP- Work book Chapter 4

Investment Planning and Asset Management Workbook CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 1

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 A 20 25 1.3 B 12 16 0.9 C 15 19 1.1 10 15 1.0 Market CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 2

Risk free rate = 6% a) BAC b) CBA c) ACB 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) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 3

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 (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 CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 4

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) 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) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 5

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) 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) CFP Level 1 - Module 2 - Investment Planning and Asset Management - Workbook Page 6

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) 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 7