Investment management 2024

Part A – Short Answer Questions (2 Marks Each)

1. State the steps involved in the investment decision process.

• Defining the Investment Objective: This is the first and most crucial step where the
investor determines their financial goals—such as capital appreciation, regular income, or safety of
principal—and sets risk-return expectations based on their time horizon and liquidity needs.
• Analyzing and Constructing the Portfolio: After establishing objectives, the investor
analyzes various securities, conducts fundamental and technical evaluations, and then constructs a
diversified portfolio that aligns with their goals, periodically reviewing performance for necessary
adjustments.

2. What is speculation?
• Speculation involves engaging in high-risk investments with the aim of achieving
significant short-term gains, often based on market trends rather than underlying economic
fundamentals.
• It is distinguished from traditional investment by its focus on price fluctuations and
timing the market, frequently resulting in higher volatility and uncertainty.

3. What is an investment policy?

• An investment policy is a formal statement that outlines the rules, objectives, and
guidelines governing an investor’s portfolio, ensuring that investment decisions align with long-term
financial goals.
• It includes key elements such as asset allocation, risk tolerance, liquidity requirements,
and procedures for reviewing and rebalancing the portfolio over time.

4. What is expected return?

• Expected return is the weighted average of possible returns on an investment, calculated
by multiplying each potential outcome by its probability and summing the results.
• It represents the anticipated performance of an asset and serves as a benchmark for
evaluating whether an investment meets the investor’s return requirements given its risk.
5. What is exchange rate risk?
• Exchange rate risk is the potential loss that arises when the value of a currency
fluctuates relative to another, affecting the returns on investments held in foreign currencies.
• This risk is especially significant for investors with international exposure, as adverse
currency movements can diminish the value of their foreign investments when converted back to
their domestic currency.

6. What do you mean by top-down approach?

• The top-down approach in investment involves first analyzing the overall economy and
then narrowing down to industries and finally to individual companies, ensuring that investments are
made in sectors with the best macroeconomic outlook.
• This method helps investors capture broad economic trends and reduces risk by starting
with a strong macro-level foundation before selecting specific securities.

7. What do you mean by defensive industries?

• Defensive industries refer to sectors that tend to remain stable and provide consistent
returns even during economic downturns, such as utilities, healthcare, and consumer staples.
• They are characterized by steady demand regardless of economic cycles, making them
attractive to risk-averse investors seeking lower volatility.

8. Write any four advantages of technical analysis.

• Technical analysis helps in identifying market trends and momentum through chart
patterns and historical price data, allowing investors to make timing decisions.
• It provides a visual representation of market sentiment and supply-demand dynamics,
which can be critical for short-term trading strategies.
• The use of indicators (like RSI, MACD, and moving averages) assists in generating buy
and sell signals.
• It is a cost-effective and time-efficient method of forecasting price movements
compared to extensive fundamental analysis.

9. What is Dow theory?

• Dow theory is a financial theory that asserts that stock market trends (bullish or bearish)
can be predicted by analyzing the behavior of market indices and their patterns over time.
 • It is based on the idea that market trends are reflected in the movements of major
indices and that these trends tend to persist until definitive reversal signals appear.

10. What do you mean by rectangle pattern?

• A rectangle pattern is a chart pattern in technical analysis where the price of a security
trades within a narrow range bounded by parallel support and resistance levels.
• This pattern indicates a period of consolidation and suggests that the market is awaiting
a breakout; once the price moves beyond the established range, a new trend may develop.

11. Define efficient market.

• An efficient market is one in which asset prices fully reflect all available information,
making it impossible to consistently achieve higher returns than the overall market without
assuming additional risk.
• In such markets, price movements are random and new information is quickly and
accurately incorporated into asset prices.

12. Distinguish between efficient market theory and random walk theory.
• Efficient market theory (EMT) posits that all available information is already reflected in
asset prices, thereby making it impossible to outperform the market consistently; it assumes
rational investor behavior and fast information dissemination.
• Random walk theory suggests that stock prices change randomly, meaning past
movements cannot predict future prices, thereby supporting the idea that market movements are
unpredictable.

13. What is a conservative portfolio?

• A conservative portfolio is one that emphasizes capital preservation and low risk,
typically composed of high-quality, stable investments like government bonds, blue-chip stocks,
and fixed deposits.
• It is designed for risk-averse investors who prefer steady, predictable returns over high-
growth opportunities that come with greater volatility.

14. If a portfolio has a return of 12% and a beta of 1.4, and if the risk-free rate is 2%, then what
is its Treynor ratio?
 • The Treynor ratio is calculated as:
\text{Treynor Ratio} = \frac{\text{Portfolio Return} - \text{Risk-Free Rate}}{\beta}
• Plugging in the values,
\frac{12\% - 2\%}{1.4} = \frac{10\%}{1.4} \approx 7.14\%
This ratio indicates that for each unit of systematic risk, the portfolio generates approximately
7.14% return.

15. What is portfolio revision?

• Portfolio revision refers to the periodic re-evaluation and adjustment of an investment
portfolio to ensure it remains aligned with the investor’s objectives and market conditions.
• This process involves selling underperforming assets and acquiring new investments
that promise better returns or lower risk, thus maintaining an optimal risk-return balance.

Part B – Paragraph Questions (5 Marks Each)

16. Define investment. Explain the objectives of Investment.

• Investment is the allocation of funds to assets with the expectation of generating future
income or capital appreciation.
• The primary objectives include capital growth, where the asset’s value increases over
time; regular income, through dividends or interest; and risk minimization by diversifying
investments.
• Investors also seek liquidity to access funds when needed and tax benefits provided by
certain financial instruments.
• In addition, investments often serve as a hedge against inflation, ensuring the purchasing
power of money is maintained.
• Finally, investment decisions are guided by an individual’s financial goals, risk tolerance,
and time horizon.

17. Calculate expected return of the investment given the following data:
Possible returns (%): 30, 40, 50, 60, 70
Probability: 0.10, 0.30, 0.40, 0.10, 0.10
• The expected return (ER) is calculated using the formula:
 • The expected return (ER) is calculated using the formula:
ER = \sum (\text{Return} \times \text{Probability})
• Calculation:
(30 \times 0.10) + (40 \times 0.30) + (50 \times 0.40) + (60 \times 0.10) + (70 \times 0.10)
• This equals:
3 + 12 + 20 + 6 + 7 = 48\%
• Therefore, the expected return on the investment is 48%.
• This value represents the average return an investor can anticipate over the investment
period.

18. Explain Beta measurement principle.

• Beta is a measure of an asset’s volatility relative to the market as a whole, indicating
how much the asset’s price might change in response to market movements.
• It is calculated by comparing the asset’s historical returns to the market returns, using
regression analysis to determine the slope of the relationship.
• A Beta of 1 means the asset moves in tandem with the market, whereas a Beta greater
than 1 indicates higher volatility and risk.
• Conversely, a Beta less than 1 implies the asset is less volatile than the market.
• The principle of Beta measurement is essential in the Capital Asset Pricing Model
(CAPM), which uses Beta to estimate an asset’s expected return based on its risk level.

19. Discuss the advantages of fundamental analysis.

• Fundamental analysis provides a deep understanding of a company’s financial health,
competitive position, and growth prospects through a detailed examination of financial
statements and industry trends.
• It helps investors determine the intrinsic value of a stock, thereby identifying undervalued
or overvalued securities.
• By analyzing macroeconomic indicators, industry conditions, and company-specific
factors, investors can make more informed decisions.
• It offers a long-term perspective that goes beyond short-term market fluctuations,
leading to more sustainable investment choices.
• This approach also aids in risk management, as it highlights potential issues that may
affect a company’s future performance.
20. Distinguish between fundamental and technical analysis.
• Fundamental analysis involves evaluating a company’s financial statements,
management, and market conditions to determine its intrinsic value.
• Technical analysis focuses on historical price movements, chart patterns, and trading
volumes to forecast future price behavior.
• Fundamental analysis is generally used for long-term investment decisions, while
technical analysis is more common in short-term trading.
• The two methods are based on different assumptions: fundamental analysis assumes that
market prices will eventually reflect intrinsic value, whereas technical analysis assumes that past
price trends can predict future movements.
• Many investors use a combination of both methods to make well-rounded decisions,
balancing long-term potential with short-term market trends.

21. Explain different types of trendlines formed in technical analysis.

• Uptrend Line: Drawn by connecting successive higher lows, indicating that buyers are in
control and the price is expected to rise.
• Downtrend Line: Formed by connecting successive lower highs, signaling that sellers
dominate and the price is expected to decline.
• Horizontal Trendline: Also known as a support or resistance level, where the price
oscillates within a range, indicating market indecision.
• Channel: A pair of parallel trendlines (one upward, one downward) that capture the
oscillation of price within a defined range.
• Wedge Pattern: A converging trendline pattern that may signal a potential reversal, either
upward or downward, depending on the breakout direction.

22. Briefly explain modern portfolio theory.

• Modern Portfolio Theory (MPT) suggests that investors can construct an optimal
portfolio that maximizes return for a given level of risk through diversification.
• It introduces the concept of the efficient frontier, where each portfolio on the frontier
offers the highest expected return for its level of risk.
• MPT relies on the statistical measures of variance and covariance to quantify risk and to
determine the best mix of assets.
 • It emphasizes that the risk of a portfolio is not merely the sum of individual asset risks but
also depends on the correlations between asset returns.
• By combining assets with low or negative correlations, investors can reduce overall
portfolio risk without sacrificing return.

23. If the market portfolio yields an expected rate of return of 13% with a standard deviation of
25% and the risk-free rate of interest is 7%, what is the slope of the Capital Market Line (CML)?
• The Capital Market Line (CML) represents the risk-return trade-off for efficient portfolios
and is calculated as:
\text{Slope} = \frac{\text{Expected Market Return} - \text{Risk-Free Rate}}{\text{Standard Deviation
of Market Return}}
• Plugging in the values,
\text{Slope} = \frac{13\% - 7\%}{25\%} = \frac{6\%}{25\%} = 0.24
• Therefore, the slope of the CML is 0.24, indicating that for each 1% increase in risk
(standard deviation), the portfolio is expected to earn an additional 0.24% return.
• This slope serves as a benchmark for evaluating the performance of portfolios against the
market.

24. What is portfolio revision?

• Portfolio revision is the periodic re-evaluation and rebalancing of an investment portfolio
to ensure it remains aligned with the investor’s goals, risk tolerance, and market conditions.
• It involves selling underperforming assets and acquiring new investments that better
meet current financial objectives.
• This process helps to maintain the desired asset allocation and manage overall portfolio
risk.
• Regular revisions can lead to improved performance over time by adapting to changing
market dynamics.
• Portfolio revision is a proactive step to ensure that the portfolio remains optimized and
resilient in fluctuating markets.

Part C – Essay Questions (10 Marks Each)

(Answer any two; each answer must contain 10 detailed bullet points and fill approximately two
pages when handwritten.)

25. Why do people conduct investment? What are the factors which are favorable for making
investment in an economy?
• Capital Formation: Investment allows individuals and businesses to convert savings into
capital, which is then used for expanding operations and generating future income.
• Economic Growth: When investments are made in productive assets, they stimulate
economic activity, leading to higher GDP and improved living standards.
• Wealth Creation: Investment helps in the accumulation of wealth over time, providing a
hedge against inflation and ensuring long-term financial security.
• Income Generation: Regular returns from investments (like dividends, interest, or rental
income) offer an additional income stream beyond regular earnings.
• Risk Diversification: By investing in a diversified portfolio, individuals can spread risk
across various assets, reducing the overall risk exposure.
• Technological Advancement: Investments in research and development drive innovation
and technological progress, which are critical for modern economies.
• Employment Generation: Investment in industries and infrastructure leads to the creation
of new jobs and enhances the overall employment scenario.
• Improved Infrastructure: Public and private investments in infrastructure such as roads,
power, and communication boost productivity and economic efficiency.
• Favorable Government Policies: A supportive regulatory framework, tax incentives, and
stable monetary policies encourage investments by reducing uncertainties.
• Global Competitiveness: Investments in education, technology, and industries enhance a
country’s competitive edge in the global market, attracting foreign capital and improving export
potential.

26. Describe the key economic, industry, and company variables that an investor must monitor
as a part of fundamental analysis.
• Economic Variables: Investors should assess macroeconomic indicators such as GDP
growth, inflation, interest rates, and unemployment, as these factors determine the overall health of
the economy and influence corporate performance.
 • Political & Regulatory Environment: Stability in government policies, regulatory
frameworks, and fiscal policies are critical in predicting economic trends and market conditions.
• Industry Analysis: Understanding the industry life cycle, competitive dynamics, market
demand, and supply conditions helps investors identify growth opportunities and potential risks
within a specific sector.
• Market Share and Competitive Position: Investors must examine a company’s market
share, competitive advantages, and the overall competitive landscape to evaluate its long-term
sustainability.
• Financial Health: A thorough review of financial statements—balance sheets, income
statements, and cash flow statements—reveals a company’s profitability, liquidity, and solvency.
• Management Quality: The expertise and track record of a company’s management team
are crucial in driving strategic initiatives and operational efficiency.
• Technological Capabilities: Investments in innovation, research and development, and
modern production techniques are key indicators of a company’s ability to maintain
competitiveness.
• Operational Efficiency: Metrics such as cost structure, capacity utilization, and
productivity ratios provide insight into a company’s operational performance.
• Valuation Metrics: Ratios like Price-to-Earnings (P/E), Price-to-Book (P/B), and Dividend
Yield help in determining whether a company’s stock is undervalued or overvalued compared to its
intrinsic value.
• Growth Prospects: Future earnings projections, market expansion potential, and
historical growth trends are vital for assessing whether a company will deliver long-term value to its
shareholders.

27. Explain: (a) Candlestick chart and (b) Point and Figure chart.
• (a) Candlestick Chart:
• A candlestick chart is a financial chart used to represent price movements of
securities over a given time period using “candlesticks” that show the open, high, low,
and close prices.
• Each candlestick consists of a body (showing the opening and closing prices)
and wicks (shadows) that indicate the highest and lowest prices reached during the
period.
• The color or shading of the candlestick (e.g., green for upward movement, red
 for downward) helps in quickly identifying the market sentiment.
• Candlestick charts are popular among traders due to their ability to visually
represent price patterns and potential reversals.
• They can form various patterns like doji, engulfing, and hammer, which signal
market trends and help in decision-making.
• The chart is useful in short-term trading strategies as it reflects market
psychology through price action.
• It allows investors to identify support and resistance levels and trends,
providing actionable insights for entry and exit points.
• Candlestick charts facilitate quick visual analysis, which is particularly useful
during fast-moving markets.
• They are often combined with other technical indicators (e.g., moving averages)
for more comprehensive analysis.
• Overall, candlestick charts are a powerful tool in technical analysis for
predicting future price movements based on historical patterns.
• (b) Point and Figure Chart:
• A Point and Figure (P&F) chart is a method of charting price movements that
ignores the time element and focuses solely on price changes by using “X”s and “O”s
to represent upward and downward movements, respectively.
• It is constructed by plotting price changes that exceed a certain box size and by
using a predetermined reversal criterion to decide when to change from an “X” column
to an “O” column.
• The chart helps in filtering out minor price fluctuations, thus providing a clear
view of significant trends and reversals.
• P&F charts are particularly useful for identifying support and resistance levels
and long-term trends without the noise of time-based charts.
• They provide a simplified view of market movements, allowing investors to focus
on the essential price action.
• This type of chart is highly effective for trend analysis and for spotting
potential breakouts or breakdowns in the market.
• P&F charts are also used to identify chart patterns such as double tops, double
bottoms, and triangles, which can signal future price directions.
• The absence of time as a factor means that P&F charts are scale-independent
 and adjust to different price levels automatically.
• They offer an intuitive visual representation that helps in determining when to
enter or exit positions based on clear breakout signals.
• In summary, the Point and Figure chart is a robust tool for long-term technical
analysis, providing clear trend signals and price targets free from the distractions of
time-based fluctuations.

2023 QUESTION PAPER

Part A: Short Answer Questions (2 Marks Each)

1. What is investment environment?
• The investment environment encompasses the various factors and conditions
that influence investment decisions, including economic indicators, market structures,
financial instruments, regulatory frameworks, and the overall economic climate.
• Understanding this environment is crucial for investors to make informed
decisions and assess potential risks and returns.
2. What do you mean by security analysis?
• Security analysis involves evaluating financial instruments like stocks and
bonds to determine their intrinsic value.
• This process helps investors decide whether to buy, hold, or sell securities
based on fundamental and technical analyses.
3. Point out any two differences between Investment and Gambling.
• Risk and Return: Investments involve calculated risks with expected returns
over time, whereas gambling entails high risk with uncertain outcomes.
• Decision Basis: Investment decisions are based on analysis and research;
gambling relies on chance without analytical backing.
4. Define return.
• Return refers to the gain or loss on an investment over a specific period,
expressed as a percentage of the initial amount invested.
• It includes income received (like dividends or interest) and capital appreciation
or depreciation.
5. What is liquidity risk?
 • Liquidity risk is the potential difficulty an investor might face when trying to
quickly buy or sell an asset without causing a significant impact on its price.
• Illiquid assets may require selling at a discount, leading to potential losses.
6. What is E-I-C analysis?
• E-I-C analysis stands for Economy-Industry-Company analysis, a top-down
approach where investors assess the overall economy, then specific industries, and
finally individual companies to make informed investment decisions.
• This method helps in understanding macroeconomic impacts on industries and
companies.
7. Mention different tools used for company analysis.
• Financial Statements: Balance sheets, income statements, and cash flow
statements.
• Financial Ratios: Liquidity ratios, profitability ratios, and leverage ratios.
8. What is open interest?
• Open interest refers to the total number of outstanding derivative contracts,
such as options or futures, that have not been settled.
• It provides insights into market activity and liquidity for a particular contract.
9. How many movements are tracked by Dow theory in the capital market?
• Dow Theory identifies three primary movements in the capital market:
• Primary Movement: Long-term trends lasting from several months to years.
• Secondary Movement: Shorter-term corrections or rallies within the primary
trend, lasting weeks to months.
• Minor Movement: Day-to-day fluctuations lasting from hours to weeks.
10. What is GAPS?
• In technical analysis, a gap refers to an area on a price chart where an asset’s
price moves sharply up or down, with little or no trading in between.
• This results in a ‘gap’ on the chart, indicating a significant change in investor
sentiment or external factors affecting the asset.
11. What do you mean by random walk theory?
• The random walk theory suggests that stock price movements are
unpredictable and follow a random path.
• According to this theory, it’s impossible to consistently outperform the market
through expert stock selection or market timing, as all known information is already
 reflected in stock prices.
12. What is uptrend line?
• An uptrend line is a straight line drawn on a price chart that connects a series
of higher lows, indicating a consistent upward movement in an asset’s price.
• It signifies bullish market sentiment and is used to identify support levels.
13. What is conservative portfolio?
• A conservative portfolio is an investment strategy that prioritizes capital
preservation over high returns.
• It typically includes low-risk assets like government bonds, blue-chip stocks,
and money market instruments, aiming for steady and modest returns with minimal
volatility.
14. What do you mean by Expected return on portfolio?
• The expected return on a portfolio is the weighted average of the anticipated
returns of the individual assets within the portfolio.
• It provides investors with an estimate of the potential profitability of their
investments, considering each asset’s expected return and its proportion in the
portfolio.
15. What is the required rate of return on the shares if the return on the market
is 11% and the risk-free rate is 6%? The respective beta values are 0.5, 1.0, and 2.0.
• The required rate of return can be calculated using the Capital Asset Pricing
Model (CAPM):
Required Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)
• For Beta = 0.5: 6% + 0.5 × (11% - 6%) = 8.5%
• For Beta = 1.0: 6% + 1.0 × (11% - 6%) = 11%
• For Beta = 2.0: 6% + 2.0 × (11% - 6%) = 16%

Part B: Paragraph Questions (5 Marks Each)

Part B – Paragraph Questions (5 Marks Each)

16. Explain briefly the various investment avenues.
• Equity Shares: Investment in company shares provides ownership and potential for high
returns but carries market risk.
• Bonds & Debentures: Fixed-income securities offering regular interest payments, ideal
for risk-averse investors.
• Mutual Funds: Professionally managed funds pooling money from investors to invest in
diversified portfolios.
• Real Estate: Investment in property for rental income or capital appreciation, but requires
high capital.
• Gold & Commodities: Investment in precious metals or commodities acts as a hedge
against inflation.
• Fixed Deposits & Savings Schemes: Low-risk options provided by banks with fixed
interest returns over time.

17. Compute the standard deviation of returns for Hyderabad Industries Ltd.

(Requires mathematical computation; formula to be applied based on the given data.)

• Step 1: Calculate the Mean Return: Sum of all returns divided by the number of years.
• Step 2: Find Deviations: Subtract the mean return from each individual return.
• Step 3: Square Each Deviation: Helps remove negative values.
• Step 4: Compute Variance: Sum of squared deviations divided by (n-1).
• Step 5: Find Standard Deviation: Square root of the variance gives the final result.

18. Explain the Beta measurement principle.

• Definition: Beta measures a stock’s volatility compared to the market index, indicating
risk level.
• Beta > 1: Stock is more volatile than the market, offering higher potential returns and
risks.
• Beta < 1: Stock is less volatile, providing stability but lower returns.
 • Beta = 1: Stock moves in line with the market, neither riskier nor safer.
• Calculation: Beta is derived from the covariance of stock returns with market returns
divided by the variance of market returns.
• Significance: Investors use beta to assess portfolio risk and decide asset allocation.

19. Why is economic analysis conducted as a part of fundamental analysis?

• Evaluates Macroeconomic Conditions: Assesses inflation, GDP growth, and interest
rates affecting investments.
• Predicts Market Trends: Helps investors anticipate market cycles and allocate assets
accordingly.
• Assesses Government Policies: Taxation, fiscal policies, and monetary policies impact
investment decisions.
• Industry Growth Prospects: Economic conditions influence demand and profitability of
industries.
• Foreign Investment & Exchange Rates: Affects multinational investments and returns.
• Investor Confidence: Strong economic fundamentals lead to higher stock market
performance and investor participation.

20. Explain different types of charts used for stock analysis.

• Line Chart: Shows stock price movement over time, providing a clear trend visualization.
• Bar Chart: Represents opening, closing, high, and low prices of a stock in a given period.
• Candlestick Chart: Similar to a bar chart but with color-coded price movements for easier
interpretation.
• Point & Figure Chart: Focuses on price movements without time consideration, filtering
out minor fluctuations.
• Relative Strength Chart: Compares a stock’s performance with an index to identify
outperformers.
• Volume Charts: Displays trading volumes to analyze investor interest and market trends.
⸻

21. What are the assumptions of efficient market theory?

• Markets Reflect All Information: Asset prices instantly adjust to all available information.
• No Arbitrage Opportunities: Investors cannot consistently earn abnormal profits.
• Random Price Movements: Stock prices follow a random path and cannot be predicted.
• Rational Investors: Investors make logical decisions based on available data.
• Liquidity & Market Efficiency: High liquidity ensures fair pricing and eliminates mispricing
opportunities.
• Fair Competition: No investor has a lasting advantage over others in terms of access to
information.

22. Evaluate which portfolio (A or B) performs better using given data.

(Requires mathematical computation; standard formulas like Sharpe Ratio to be applied.)

• Step 1: Calculate Risk-Adjusted Return: Use Sharpe Ratio = (Return - Risk-Free Rate) /
Standard Deviation.
• Step 2: Compare Ratios: Higher Sharpe Ratio indicates better risk-adjusted performance.
• Step 3: Consider Volatility: Portfolio with lower standard deviation has lower risk.
• Step 4: Assess Return Consistency: Look at historical performance stability.
• Step 5: Final Conclusion: Choose the portfolio that offers the best balance between risk
and return.

23. Briefly explain portfolio revision strategies.

• Active Revision Strategy: Adjusting investments based on market conditions to maximize
returns.
• Passive Revision Strategy: Maintaining a fixed asset allocation and rebalancing
periodically.
• Constant Proportion Strategy: Allocating investments based on a fixed ratio and
rebalancing when thresholds are exceeded.
• Tactical Asset Allocation: Short-term adjustments to capitalize on market opportunities.
• Dynamic Portfolio Adjustment: Continuous monitoring and rebalancing to align with
investment goals.
• Buy & Hold Strategy: Holding investments long-term with minimal changes to avoid
frequent transaction costs.

Part C – Essay Questions (10 Marks Each)

24. Why do people invest? What factors influence investment decisions?

• Wealth Accumulation: People invest to grow their wealth over time and secure their
financial future.
• Risk-Return Tradeoff: Investors assess potential returns against associated risks before
investing.
• Inflation Protection: Investments in stocks, real estate, and commodities protect against
inflationary losses.
• Liquidity Considerations: Investors prefer assets that can be easily converted into cash
when needed.
• Tax Benefits: Certain investment options offer tax deductions and incentives.
• Market Conditions: Economic trends, interest rates, and geopolitical factors impact
investment decisions.
• Investment Horizon: Long-term vs. short-term investment goals influence asset
selection.
• Psychological Factors: Investor behavior, sentiment, and risk tolerance play a key role.
• Diversification Strategy: Spreading investments across different assets reduces risk.
• Regulatory Framework: Government policies and regulations affect investment choices.

25. Calculate the Beta of CRISIL stock using given price data.
(Requires statistical calculation using regression analysis of stock returns and market index
returns.)
• Step 1: Calculate Daily Returns: Compute percentage change in stock and index prices.
• Step 2: Compute Covariance: Measure how CRISIL’s returns vary with market returns.
• Step 3: Calculate Variance of Market Returns: Determine index price fluctuations.
• Step 4: Compute Beta Formula: Beta = Covariance (Stock, Market) / Variance (Market).
• Step 5: Interpretation: A Beta >1 means high volatility, while <1 indicates stability.

26. Explain the importance of fundamental analysis and its approaches.

• Economic Analysis: Examines macroeconomic indicators such as GDP, inflation, and
interest rates.
• Industry Analysis: Assesses sector performance, market competition, and growth
potential.
• Company Analysis: Evaluates financial statements, profitability, and management
efficiency.
• Qualitative Factors: Includes company reputation, brand strength, and leadership.
• Financial Ratios: Measures profitability, liquidity, and solvency.
• Stock Valuation Models: Uses methods like DCF and P/E ratio for pricing stocks.
• Risk Assessment: Identifies potential risks affecting business performance.
• Decision Making: Helps investors select fundamentally strong companies for investment.

investment management, 2022 question paper

Part A – Short Answer Questions (2 Marks Each)

1. List out the objectives of investment.

• Return Generation: Investors aim to earn a return on their investments through dividends,
interest, or capital appreciation.
 • Risk Reduction: Investments help in managing financial risks by diversifying assets and
selecting stable investment options .

2. State the steps involved in the investment decision process.

• Defining Objectives: Establishing clear financial goals, risk tolerance, and return
expectations.
• Analyzing Securities: Evaluating potential investment options through fundamental and
technical analysis .

3. Point out any two differences between Investment and Gambling.

• Investment is systematic and based on analysis, while gambling relies on chance and
speculation.
• Investments generate returns over time, whereas gambling offers immediate but
uncertain outcomes .

4. What is expected return?

• Expected return is the weighted average of possible returns based on their
probabilities.
• It helps investors assess the potential profitability of an investment before committing
funds .

5. What is coefficient of variation?

• It is a measure of risk per unit of return, calculated as the standard deviation divided
by the mean return.
• A lower coefficient indicates lower investment risk relative to expected returns .

6. What is industry analysis?

• Industry analysis involves evaluating the market conditions, competitive landscape,
and growth potential of a specific industry.
• It helps investors identify promising sectors for investment based on economic and
regulatory factors .

7. What is company analysis?

 • Company analysis examines a firm’s financial performance, management efficiency,
and competitive position.
• It is conducted using financial statements, market trends, and business models .

8. Write any four advantages of technical analysis.

• Predicts price trends based on historical data and market patterns.
• Helps investors time market entry and exit points effectively.
• Works well for short-term trading and momentum investing.
• Does not require deep knowledge of financial statements .

9. Briefly explain stages of a primary bear market.

• Distribution Phase: Investors start selling stocks due to weakening market confidence.
• Panic Selling: A sharp decline occurs as more investors exit the market.
• Stabilization: The market begins to recover as selling pressure reduces .**

10. What is weak form of efficiency?

• It states that all past price and volume information is already reflected in current stock
prices.
• Thus, technical analysis cannot be used to achieve superior returns .

11. Distinguish between Efficient Market Theory and Random Walk Theory.
• Efficient Market Theory states that stock prices always reflect all available
information, making it impossible to beat the market consistently.
• Random Walk Theory suggests that stock prices follow an unpredictable pattern and
cannot be forecasted .

12. What is trend reaction?

• Trend reaction refers to the continuation of a price movement after a temporary
pullback or consolidation.
• Traders use this concept to identify opportunities to enter or exit a position .

13. What is the Markowitz model in portfolio?

• The Markowitz model focuses on diversification to maximize returns while minimizing
risk.
• It emphasizes selecting assets with low correlations to reduce overall portfolio
volatility .

14. If a portfolio has a return of 12% and a beta of 1.4, and if the risk-free rate is 2%, then what
is its Treynor ratio?
• Treynor Ratio = (Portfolio Return - Risk-Free Rate) / Beta
• (12% - 2%) / 1.4 = 7.14 .

15. Distinguish between active revision and passive revision strategy.

• Active revision involves frequent portfolio adjustments based on market conditions.
• Passive revision focuses on maintaining a long-term asset allocation with minimal
changes
Answers to Part B Questions (16-23) from the 2022 Investment Management Question Paper

(Formatted as per your requested structure, referring to the study materials provided)

Part B – Paragraph Questions (5 Marks Each)

16. Explain briefly various types of investment.

• Equity Investments: Investing in company stocks for capital appreciation. These provide
ownership in a company and the potential for long-term growth.
• Fixed-Income Investments: Includes bonds, debentures, and government securities,
offering a steady income through interest payments.
• Mutual Funds: A pool of investments managed by professionals, providing diversification
across stocks, bonds, or commodities.
• Real Estate Investments: Involves purchasing land, buildings, or rental properties for
income generation and long-term appreciation.
• Derivatives: Financial instruments like futures and options that derive value from an
underlying asset, commonly used for hedging or speculation.
• Commodities: Investments in physical goods like gold, silver, oil, or agricultural products,
used to hedge against inflation and market volatility .

17. What is systematic risk? Give examples.

• Definition: Systematic risk is the risk inherent to the entire market or a specific segment,
which cannot be diversified away.
• Market Risk: Caused by economic downturns, geopolitical events, or recessions,
impacting all investments.
• Interest Rate Risk: Changes in interest rates affect bond prices and borrowing costs,
influencing stock markets.
• Inflation Risk: Rising inflation reduces purchasing power, negatively impacting savings
and fixed-income investments.
• Exchange Rate Risk: Fluctuations in currency values affect international investments and
trade.
• Political Risk: Policy changes, taxation rules, and regulatory shifts influence business
environments and investment returns.
• Example: A global financial crisis affects stock markets worldwide, leading to a decline in
asset prices across different sectors .

18. Calculate the expected return of the investment.

Formula:
Expected Return (ER) = (Return × Probability)

Calculation:
• (30 × 0.10) + (40 × 0.30) + (50 × 0.40) + (60 × 0.10) + (70 × 0.10)
• = 3 + 12 + 20 + 6 + 7
• ER = 48%

Interpretation:
 • The expected return of the investment is 48%, meaning investors can anticipate an
average return of 48% based on historical probabilities .

19. Discuss the advantages of fundamental analysis.

• Long-Term Investment Decisions: Helps investors analyze a company’s financial strength
before making long-term investments.
• Company Valuation: Evaluates intrinsic value by assessing earnings, assets, and growth
potential.
• Economic and Industry Insights: Examines macroeconomic conditions and industry
trends to predict future performance.
• Better Risk Management: Identifies undervalued stocks, helping investors minimize risks
and maximize returns.
• Investor Confidence: Provides logical reasoning for investment choices, reducing
speculation-based decisions.
• Used by Institutional Investors: Many large investment firms rely on fundamental
analysis for portfolio allocation and fund management .

20. Explain briefly different types of charts used for stock analysis.
• Line Chart: Represents closing prices over time, helping in identifying trends easily.
• Bar Chart: Shows open, high, low, and close prices for a given time period, providing a
clearer view of volatility.
• Candlestick Chart: Displays price movements using colored candlesticks, indicating
bullish or bearish trends.
• Point and Figure Chart: Focuses on price movements without considering time, useful for
identifying breakouts.
• Renko Chart: Uses fixed price movements rather than time intervals, filtering out market
noise.
• Heikin-Ashi Chart: Averages price data to smooth trends and reduce volatility noise .
⸻

21. Explain different types of patterns used for stock analysis.

• Reversal Patterns: Indicate a potential trend reversal, including Head and Shoulders,
Double Tops, and Double Bottoms.
• Continuation Patterns: Suggest that an existing trend will continue, such as Triangles,
Flags, and Pennants.
• Candlestick Patterns: Single or multiple candle formations like Doji, Hammer, and
Engulfing indicate buying or selling pressure.
• Support and Resistance Levels: Price levels where stocks consistently bounce or face
resistance.
• Trend Lines: Drawn to identify the direction of price movements over time.
• Gaps: Represent sudden jumps in prices with no trading in between, indicating strong
buying or selling pressure .

22. Explain different types of portfolios.

• Aggressive Portfolio: Focuses on high-risk, high-return investments, suitable for growth-
focused investors.
• Defensive Portfolio: Includes stable, low-risk stocks that perform well during economic
downturns.
• Income Portfolio: Composed of dividend-paying stocks and bonds to generate consistent
income.
• Balanced Portfolio: Maintains a mix of equities and fixed-income securities to balance
risk and reward.
• Growth Portfolio: Invests in stocks with strong earnings potential, focusing on capital
appreciation.
• Value Portfolio: Targets undervalued stocks with solid financial fundamentals for long-
term gains .

⸻
23. Compute the cost of equity capital under CAPM model.

Formula:
Cost of Equity (Ke) = Risk-Free Rate (Rf) + Beta (β) × Market Risk Premium (Rm - Rf)

Given Data:
• Risk-Free Rate (Rf) = 11%
• Beta (β) = 1.25
• Market Return (Rm) = 15%

Calculation:
• Ke = 11% + (1.25 × (15% - 11%))
• Ke = 11% + (1.25 × 4%)
• Ke = 11% + 5% = 16%

If Beta Increases to 1.75:

• Ke = 11% + (1.75 × 4%)
• Ke = 11% + 7% = 18%

Interpretation:
• A higher beta results in a higher cost of equity, indicating that investors expect greater
returns for increased risk .

Answers to Part C Questions (24-27) from the 2022 Investment Management Question Paper

(Formatted as per your requested structure, referencing the study materials provided)

Part C – Essay Questions (10 Marks Each)

24. Why do people conduct investment? What are the factors favorable for making investments
in an economy?
• Wealth Creation: Individuals invest to grow their wealth over time and achieve financial
security. Investments help in accumulating assets for future financial goals.
• Beating Inflation: Investing allows individuals to earn returns that outpace inflation,
ensuring that the purchasing power of their money is maintained.
• Regular Income Generation: Certain investments, such as fixed deposits, bonds, and
dividend-paying stocks, provide periodic income. This is beneficial for retirees and individuals
seeking passive income.
• Retirement Planning: Investments in pension funds, mutual funds, and insurance policies
help individuals build a financial corpus for their post-retirement years.
• Tax Benefits: Some investment avenues like Public Provident Fund (PPF), tax-saving fixed
deposits, and Equity Linked Savings Schemes (ELSS) provide tax deductions, making investments
more attractive.
• Diversification of Risk: A well-planned investment portfolio helps mitigate risks by
spreading investments across different asset classes like stocks, bonds, real estate, and gold.
• Factors Favorable for Investments:
• Economic Stability: A growing and stable economy attracts investors by
providing a favorable investment climate.
• Interest Rates: Lower interest rates encourage borrowing and investment in
financial markets and businesses.
• Government Policies: Tax incentives, subsidies, and investment-friendly
regulations encourage both domestic and foreign investments.
• Technological Advancements: The rise of financial technology and digital
platforms has made investing more accessible and efficient for individuals .

25. Calculate alpha and beta for XYZ Ltd.

• Beta Calculation:
• Beta (β) measures stock volatility relative to the market. It is calculated using
the formula:
• β = Covariance (Stock, Market) / Variance (Market)
 • The monthly return data of XYZ Ltd. and the BSE index for 12 months is used to
compute beta using statistical methods such as regression analysis.
• Alpha Calculation:
• Alpha (α) represents the stock’s excess return compared to the expected return
based on CAPM.
• Formula: α = Actual Return - [Risk-Free Rate + (β × Market Risk Premium)]
• A positive alpha indicates the stock outperformed expectations, while a
negative alpha suggests underperformance.
• Interpretation of Alpha and Beta:
• Beta helps investors assess risk exposure to market fluctuations. A beta greater
than 1 indicates higher volatility than the market, while a beta less than 1 suggests
lower risk.
• Alpha measures the stock’s ability to generate excess returns over the market
benchmark, indicating fund manager efficiency .

26. What do you mean by fundamental analysis? Discuss the various steps involved in
fundamental analysis.
• Definition:
• Fundamental analysis evaluates a company’s financial health, economic
conditions, and industry performance to determine its intrinsic value. It helps investors
make informed decisions based on financial and economic factors.
• Steps in Fundamental Analysis:
• Economic Analysis: Evaluates macroeconomic indicators like GDP growth,
inflation rates, interest rates, and government policies to determine overall economic
stability.
• Industry Analysis: Assesses the industry’s growth potential, competition,
regulatory environment, and technological advancements to identify profitable sectors.
• Company Analysis: Examines a company’s financial statements, management
efficiency, business model, and competitive advantages to gauge its long-term
prospects.
• Financial Statement Analysis: Analyzes balance sheets, profit and loss
 statements, and cash flow statements to evaluate profitability, liquidity, and solvency.
• Valuation Techniques: Uses valuation models like Price-to-Earnings (P/E) ratio,
Discounted Cash Flow (DCF), and Earnings Per Share (EPS) to estimate a company’s
fair value.
• Risk Assessment: Identifies risks such as market risks, credit risks, operational
risks, and external threats that may affect investment returns.
• Investment Decision: Based on the analysis, investors decide whether to buy,
hold, or sell a stock based on its potential for future growth.
• Continuous Monitoring: Fundamental analysis is not a one-time process;
investors must continuously review their investments based on changing economic and
financial conditions .

27. What is Technical Analysis? Discuss its assumptions and various trading strategies.
• Definition:
• Technical analysis involves predicting future stock price movements based on
historical price data, trading volumes, and chart patterns. It is widely used by traders to
make short-term investment decisions.
• Assumptions of Technical Analysis:
• Market Discounts Everything: All available information is reflected in stock
prices, making technical analysis a reliable tool for price prediction.
• Prices Move in Trends: Stocks follow identifiable upward, downward, or
sideways trends, which can be analyzed for investment decisions.
• History Repeats Itself: Past price movements provide insights into future
trends, as investor behavior tends to follow patterns.
• Trading Strategies in Technical Analysis:
• Momentum Trading: Investors buy stocks experiencing upward trends and sell
those in decline, capitalizing on momentum shifts.
• Breakout Trading: Traders buy when a stock breaks above resistance levels and
sell when it drops below support levels.
• Reversal Trading: Identifying points where a stock trend changes direction
using indicators like the Relative Strength Index (RSI) and Moving Average
 Convergence Divergence (MACD).
• Moving Average Strategy: Uses short-term and long-term moving averages
(e.g., 50-day and 200-day moving averages) to determine buy and sell signals.
• Candlestick Patterns: Traders analyze formations like Doji, Hammer, and
Engulfing patterns to predict market sentiment.
• Support and Resistance Levels: Buying near support and selling near
resistance helps maximize profits while minimizing losses.
• Chart Patterns: Using patterns like Head and Shoulders, Triangles, and Flags to
make trading decisions.
• Relative Strength Index (RSI): Measures whether a stock is overbought or
oversold, helping traders identify potential entry and exit points.
• MACD Indicator: Measures momentum changes and helps identify trend
reversals, commonly used in conjunction with moving averages.
• Fibonacci Retracement: Identifies price correction levels based on historical
price data, helping traders determine support and resistance levels .