MULTIPLE CHOICE QUESTIONS

PORTFOLIO MANAGEMENT

MULTIPLE CHOICE QUESTIONS

1. A portfolio having two risky securities can be turned risk less if

(A) The securities are completely positively correlated

(B) If the correlation ranges between zero and one

(C) The securities are completely negatively correlated

(D) None of the above

2. For a portfolio containing three securities A, B and C,

correlation coefficients ρAB = +0.4; ρAC = +0.75; ρBC = - 0.4;

standard deviation σA = 9; σB = 11; σC =

6; weights ωA = 0.2; ωB = 0.5; ωC = 0.3;

the covariance of securities A and B is

(A) 3.96

(B) 24.75

(C) 39.6

(D) 247.5

3. This type of risk is avoidable through proper diversification

(A) Portfolio risk

(B) Systematic risk

(C) Unsystematic risk

(D) Total risk

4. A portfolio comprises two securities and the expected return on them is

12% and 16% respectively. Determine return of portfolio if first security
constitutes 40% of total portfolio.

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(A) 12.4%

(B) 13.4%

(C) 14.4%

(D) 15.4%

5. Beta is the slope of

(A) The security market line

(B) The capital market line

(C) A characteristic line

(D) The CAPM

6. Mr. A invested ₹ 10,000 in a shares of XYZ Company 10 years ago, and

that is shares (including reinvested dividends) are currently worth ₹
23,800. Using this information, calculate total investment return of Mr. A

(A) 100%

(B) 38%

(C) 138%

(D) 238%

7. Beta is the slope of

(A) The security market line

(B) The capital market line

(C) A characteristic line

(D) The CAPM

8. Covariance between a stock and a market index and the variance of the
market index were found to be 33.56 and 19.15 respectively. The beta of
the stock is:

(A) 1.55

(B) 1.75

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(C) 1.85

(D) 2.05

9. A measure of risk per unit of expected return

(A) Standard deviation

(B) Coefficient of variation

(C) Correlation coefficient

(D) Beta

10. You are given the following information: required rate of return on risk
free security 7%; required rate of return on market portfolio of
investment 12%; beta of the firm 1.7. The cost of equity capital as per
CAPM approach is

(A) 16.3%

(B) 18.0%

(C) 15.50%

(D) 19%

11. The greater the beta, the security involved

(A) Greater the unavoidable risk

(B) Greater the avoidable risk

(C) Less the unavoidable risk

(D) Less the avoidable risk

12. Betas of two stocks are 0.60 and 1.25 respectively. If the standard
deviation of the market returns is 15.75%, the covariance between the
two stock's return is

(A) 110.20(%)2

(B) 186.05(%)2

(C) 175.20(%)2

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(D) 11.8125(%)2

13. A statistical measure of the Degree to which two variables move together

(A) Coefficient of variation

(B) Variance

(C) Covariance

(D) Certainty equivalent

14. The residual variance of Stock A returns is 23.75% and its beta is 1.50. If
the variance of the market's return is 125%, the coefficient of
determination of stock A's return is

(A) 0.922

(B) 0.705

(C) 0.305

(D) 0.450

15. Market risk is best measured by the _____________.

(A) Alpha

(B) Beta

(C) Standard deviation

(D) Coefficient ofvariation

16. Company-specific risk is also known as____________.

(A) Market risk

(B) Systematic risk

(C) Non-diversifiable risk

(D) Idiosyncratic risk

17. The risk of the whole market as measured by beta is

(A) 1

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(B) 0

(C) -1

(D) Greater than

18. Unsystematic risk may arise due to the following reason.

(A) Change in interest rate

(B) Increase in population

(C) Employee strike in the company

(D) Exchange rate fluctuations

19. Total risk includes __________

(A) Systematic risk only

(B) Unsystematic risk only

(C) Both a and b above

(D) Only diversifiable risks

20. Mr. Pandey has formed a portfolio and the characteristics of his portfolio
are given below:

Security Cipla Ranbaxy Treasury bill Index fund

Weight (Wi) 0.07 0.25 0.25 0.43
Beta (βi) 1.72 0.89 ? ?

Beta of his Portfolio is

(A) 0.8512

(B) 0.9539

(C) 0.7729

(D) 1.5067

21. An investor owns a stock portfolio equally invested in a risk free asset
and two stocks. If one of the stocks has a beta of 0.75 and the portfolio is
as risky as the market, the beta of the stock in portfolio is

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(A) 2.12

(B) 2.25

(C) 2.56

(D) 2.89

22. The following statement is true: (If ‘r’ denotes the correlation coefficient)

(A) r = +1 implies full diversification of securities in a portfolio

(B) r = -1 implies full diversification of securities in a portfolio

(C) r = 0 implies an ideal situation of zero risk

(D) ‘r’ is independent of diversification. Nothing can be inferred based

on r.
(June – 2017)

23. If the covariance between the returns on a portfolio BC and returns on

the market index is 25 and the variance of returns on the market index
is 20, what will be the systematic risk of BC under the variance
approach?

(A) 1.25

(B) 1.56

(C) 5.45

(D) 31.25

24. Following is the data regarding six securities:

U V W X Y Z
Return (%) 10 10 15 5 11 10
Risk (%) (Standard 5 6 13 5 6 7
Deviation)

Efficient Portfolio is

(A) U, V & X

(B) U, Z & W

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(C) U, W & Y

(D) W, Y & Z

25. Given below is information of market rates of Returns and Data from
CompanyA:

Year 2007 Year 2008 Year 2009

Market (%) 12.0 11.0 9.0
Company A (%) 13.0 11.5 9.8

Beta coefficients of the shares of Company A

(A) 1.50

(B) 1.03

(C) 1.25

(D) 1.17

26. There are three stocks in a portfolio.

Stock Amount Beta

A 2,00,000 2

B 2,00,000 1.8

C 1,00,000 0.9

We want to increase beta to 1.90 then how much amount should be

invested or borrowed at risk free rate.

(A) Invest Rs. 52,632

(B) Borrow 1,25,650

(C) Borrow Rs. 52,632

(D) Invest Rs. 1,23,500

27. The standard deviation of Greaves Ltd. Stock is 24% and its correlation
coefficient with market portfolio is 0.5. The expected return on market is

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16% with the standard deviation of 20%. If the risk free return is 6%,
what will be the required rate of return on Greaves Ltd. Script?

(A) 12%

(B) 11%

(C) 13%

(D) 11.5%

28. Historically, when the market return changed 10%, the return on stock
of Arihant Ltd changed by 16%. If variance of market is 257.81, what
would be the systematic risk for Arihant Ltd?

(A) 320%

(B) 480%

(C) 660%

(D) Insufficient information

29. Correlation between stock & market= 0.9

Standard deviation of stock = 20%

Standard deviation of error term.

(A) 5.29

(B) 76

(C) 8.72

(D) 10.54

30.

Stock ER Beta Specific TR

Risk
A 18% 1.2 5% ?
B 10% 0.5 4% ?
C ? 1.4 7% 22%

Assuming CAPM holding good.

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Total Risk (SD) of Stock A

(A) 55.25

(B) 15.25

(C) 18.56

(D) 9.45

Total Risk (SD) of Stock B

(A) 8.45

(B) 76.24

(C) 8.45

(D) 14.35

Expected Return of Stock C

(A) 15

(B) 14.90

(C) 8.45

(D) 20.28

31. Arbitrage Pricing Theory was Developed by

(A) William Sharpe

(B) Harry markowitz

(C) Stephan Ross

(D) Black Scholes

32. Risk Premium is

(A) Extra rate of return expected by the investor as reward for bearing
extra risk

(B) Equivalent to the rate of Government Securities

(C) Return provided to Equity Shareholders

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(D) Risk free rate of return

33. Mr. Abhishek is interested in investing ₹ 2,00,000 for which he is

considering following three alternatives:

(i) Invest ₹ 2,00,000 in Mutual Fund X (MFX)

(ii) Invest ₹ 2,00,000 in Mutual Fund Y (MFY)

(iii) Invest ₹ 1,20,000 in Mutual Fund X (MFX) and ₹ 80,000 in Mutual

Fund Y (MFY)

Average annual return earned by MFX and MFY is 15% and 14%
respectively. Risk free rate of return is 10% and market rate of return is
12%.

Covariance of returns of MFX, MFY and market portfolio Mix are as

follow:

MFX MFY Mix

MFX 4.800 4.300 3.370

MFY 4.300 4.250 2.800

Mix 3.370 2.800 3.100

1. Variance of Market

(A) 4.800

(B) 3.370

(C) 4.250

(D) 3.100

2. Portfolio standard Deviation

(A) 2.115

(B) 3.100

(C) 2.800

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(D) 1.725

3. Systematic Risk of Portfolio

(A) 3.663

(B) 2.528

(C) 2.800

(D) 3.181

4. Sharpe Ratio of MFX

(A) 2.282

(B) 1.940

(C) 2.175

(D) 3.663

5. Treynor Ratio of MFY

(A) 4.60

(B) 4.54

(C) 4.43

(D) 4.95

6. Based on standard deviation, the optimum investment for Mr A

would be……

(A) Portfolio

(B) All investment in MFX

(C) All investment in MFY

(D) Both MFY and mix are indifference

7. Standard Deviation of MFX

(A) 2.191

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(B) 2.071

(C) 1.761

(D) 1.433

8. Portfolio Return would be

(A) 13.50%

(B) 14.60%

(C) 15.50%

(D) 18.60%

34. X Co., Ltd., invested on 1.4.2009 in certain equity shares as below:

Name of Co. No. of shares Cost (₹)

M Ltd. 1,000 (₹ 100 each) 2,00,000
N Ltd. 500 (₹ 10 each) 1,50,000

In September, 2009, 10% dividend was paid out by M Ltd. and in

October, 2009, 30% dividend paid out by N Ltd. On 31.3.2010 market
quotations showed a value of ₹ 220 and ₹ 290 per share for M Ltd. and N
Ltd. respectively.

1. Annual Return of N Ltd

(A) 15%

(B) -3.55%

(C) 7.55%

(D) -2.33%

2. Annual Return of Portfolio

(A) 15.34%

(B) 13.45%

(C) 7.55%

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(D) 8.50%

35. Arbitrage Pricing Theory was Developed by

(A) William Sharpe

(B) Harry markowitz

(C) Stephan Ross

(D) Black Scholes

36. Risk Premium is

(A) Extra rate of return expected by the investor as reward for bearing
extra risk

(B) Equivalent to the rate of Government Securities

(C) Return provided to Equity Shareholders

(D) Risk free rate of return

37. According to the CAPM, the intercept of Security Market Line (SML)
should be equal to ……….

(A) Zero

(B) the expected risk premium on the market portfolio

(C) the riskfree rate

(D) the expected return on the market portfolio

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