Name ID

Birla Institute of Technology & Science, Pilani

ECON C412/MGTS C412/CDP C313 Security Analysis & Portfolio Management

I. There are 40 True/False Questions, each question carries 1 mark. There is NO negative
marking. Write the answer in the table given below. Answers written elsewhere will NOT be
evaluated.

Write the answers in the table below (overwritten answers will not be evaluated):
1 2 3 4 5 6 7 8 9 10

11 12 13 14 15 16 17 18 19 20

21 22 23 24 25 26 27 28 29 30

31 32 33 34 35 36 37 38 39 40

Please note:
All interest rates are in annual terms unless explicitly mentioned.
If you think any answer is False under plausible assumptions/conditions, answer False.

1. If an investor finds out that a stock consistently goes up for two days after declining for three days; the
trader will conclude that the markets are in-efficient.
2. Markets are inefficient possibly because of the behavioural biases inherent in the investors.
3. An efficient market allows profit making opportunities only to rational investors.
4. If markets are informationally efficient an order for trade given by an investor on the basis of a tip
received from an analyst will always result in abnormal profits.
5. A bonus issue is usually considered by firms as a mode of distributing excess cash from retained
surplus.
6. Initial public offerings of equities (common stocks) are often underpriced because of information
asymmetry.
7. A firm that announces a share buy-back program is usually of the opinion that its stock price is
currently undervalued.
8. If total assets of a firm are 33% more than its total liabilities. In the event of a bankruptcy and the
subsequent liquidation the shareholders will claim 27% of the assets and remaining 73% will be used to
pay off the liabilities.
9. The risk that prevails when an asset is a part of diversified portfolio is referred to as its systematic risk.
10. In the absence of capital (financial) markets the rate of exchange required for foregoing present
consumption for a higher future consumption is the pure time value of money.
11. If the risk free interest rate is constant 6% and the expected annual inflation is 3%, the real rate of
return earned by an investor on risk free securities will be less than 2.94%.
12. Return on investment must only compensate the investor over and above the risk-free rate and for the
uncertainty of future payments.
13. The return on short selling will be 10% percent if the investor shorts an asset for Rs 110 and buys it
back at Rs 100 (assume 100% margin).
14. If a stock, on average, is 20% more volatile than the market its beta is 1.2.
15. We can think of a stop loss order as a potential market order.
16. It is possible to use a stop loss order as a loss minimizing strategy and use limit orders as profit
maximizing strategy.
17. If annual returns vary in the sample period the geometric mean of annual returns will always be higher
than the corresponding arithmetic mean.
18. If the firm pays Rs 5 per share as dividend in year 0 (t=0) and pays Rs 12 per share as dividend in year
6 (at t=6), the compounded annualized growth rate (CAGR) of dividends enjoyed by the investors over
these years is greater than 17%.
19. We can think of market orders as orders that supply liquidity to the market.
20. Due to effects of compounding the holding period yield (HPY) on an asset held for 3 years will always
be greater than the HPY of an asset held for 1 year.
21. An investor creates a following portfolio: shorts A at Rs 65; buys B at Rs 50; and buys C at Rs 120.
The weights of security A and B will be (approx.) wa= -62% and wb = 48%.
22. When comparing between two or more asset classes the investor will choose the one with the highest
value of coefficient of variation.
23. As more stocks are included in the portfolio the systematic risk declines non-linearly and approaches
zero (as the number of stocks in portfolio approaches infinity).
24. Investors will prefer to short securities that lie below the security market line.
25. It is a good idea for old persons to take insurance cover.
26. Typically in the accumulation phase investors can afford to invest more on stocks and less on fixed
income instruments.
27. The longest phase of an investor’s life cycle is the consolidation phase.
28. In a gamble of flipping coin (fair coin) if you win I pay you Rs 1,000 and if you lose I pay you nothing.
Given rational expectations you will be willing to pay to play this game for Rs 450 for every trial.
29. The conditions required for an asset’s marketability are stricter than that required for the liquidity of
the asset.
30. All else equal (Ceteris paribus) the present value of an asset is inversely proportional to time and
interest rate.
31. If the best bid is Rs 75.45 and best ask is Rs 75.85, a market sell order of Rs 75 will be immediately
executed.
32. Investors prefer to invest in bonds when the current interest rates prevailing in the economy are at their
peak and are most likely to decline.
33. An upward sloping yield-curve is an indication of negative term premium.
34. A steeper slope of an investor’s risk-return indifference curve indicates a greater aversion towards
investment risk.
35. The unrealized losses on short term investment can be used to offset (reduce) the tax liability of the
investor.
36. If the Bid-Ask spread is Rs 0.50 then the implied transaction cost incurred by an investor on a round-
trip trade of 1000 shares will be Rs 500.
37. The normal trading at National Stock Exchange (NSE) commences at 9:15 hours.
38. If all the assumptions of an ideal capital market (perfect competition, infinite traders, etc.) satisfy and
transaction costs do not exist it is possible that the ask price quote may be lower than the bid price
quote.
39. Maintenance margin is generally lower than the initial margin.
40. The return on investment for the following margin trade is 80%: Trade details are - Buy stock A for Rs
80, initial margin 25%, square-off at Rs 96.

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