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Indian Institute of Technology Kharagpur

Financial Institutions and Markets

Assignment- Week 6
TYPE OF QUESTION: MCQ/MSQ
Number of questions: 20 Total mark: 20 X 1 = 20
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QUESTION 1:
State whether the following statement is true or false:
“Savings in Provident Funds in India is contractual obligation for financial security without any
motive of capital growth”
a. True
b. False

Correct Answer: a. True

Detailed Solution:
Savings in Provident Funds in India is contractual obligation for financial security without any
motive of capital growth
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QUESTION 2:
The new pension system (NPS) would be based on _____________ and represents a market linked
retirement investment product
a. Defined Benefits Pension Plan (DBPP)
b. Defined Contribution Pension Plan (DCPP)
c. Pay-as-you-go Pension Plan (PAYGPP)
d. None of the above

Correct Answer: b. Defined Contribution

Detailed Solution:
The new pension system (NPS) would be based on defined contributions and represents a market
linked retirement investment product
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QUESTION 3:
Individuals who are aged between __________ years as on the date of submission of his/her
application can join new pension system (NPS) either as individuals or as an employee-employer
group(s) (corporates) subject to submission of all required information and Know Your Customer
(KYC) documentation.
a. 18-55
b. 18-60
c. 18-65
d. 21-65
Correct Answer: b. 18-60
Detailed Solution:
Individuals who are aged between 18 – 60 years as on the date of submission of his/her application
can join NPS either as individuals or as an employee-employer group(s) (corporates) subject to
submission of all required information and Know your customer (KYC) documentation.

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QUESTION 4:
State whether the following statement is true or false:
“A NRI cannot open a NPS account”
a. True
b. False
Correct Answer: b. False
Detailed Solution:
A NRI can open an NPS account
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QUESTION 5:
State whether the following statement is true or false:
“Individuals can exit from the new pension system (NPS) at the age of 60 years but they would
have to invest mandatorily 40 per cent of the pension wealth to purchase an annuity from the IRDA
regulated life insurer.”

a. True
b. False

Correct Answer: a. True

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Detailed Solution:
Individuals can exit from the new pension system (NPS) at the age of 60 years but they would
have to invest mandatorily 40 per cent of the pension wealth to purchase an annuity from the
IRDA regulated life insurer
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QUESTION 6:
Indian Life Insurance companies which are licensed by Insurance Regulatory and Development
Authority (IRDA) are empanelled by ___________ to act as Annuity Service Provider’s to provide
annuity services to the subscribers of NPS

a. RBI
b. LIC
c. SEBI
d. PFRDA

Correct Answer: d. PFRDA

Detailed Solution:
Indian Life Insurance companies which are licensed by Insurance Regulatory and Development
Authority (IRDA) are empanelled by PFRDA to act as Annuity Service Provider’s to provide
annuity services to the subscribers of NPS

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QUESTION 7:
The Atal Pension Yojana (APY) is open to all citizens of India who have a savings bank account.
The minimum age of joining APY is _________ years and the maximum age is __________ years
a. 18-40
b. 18-55
c. 18-65
d. 21-60

Correct Answer: a. 18-40

Detailed Solution:
The Atal Pension Yojana (APY) is open to all citizens of India who have a savings bank account.
The minimum age of joining APY is 18 years and the maximum age is 40 years
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______________________________________________________________________________
QUESTION 8:
According to the ___________ principle, the insured may not collect more money than the actual
loss in the event of damage covered by an insurance peril.

a. Moral Hazard
b. Warranties
c. Subrogation
d. Indemnity

Correct Answer: d. Indemnity

Detailed Solution:

Indemnity refers to the assurance given by one to put the person who buys insurance, in the event
of loss, in the same position that he/she occupied immediately before the happening of the event
for which indemnity is sought.The principle of subrogation refers to the right of the insurer to stand
in the place of insured after the settlement of a claim and it gives the insurer right to recover from
an alternative source, which is involved in this case. Warranties are the conditions that are written
by the insured in the insurance contract that state the truth by affirming or denying the existence
of a particular state of facts

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QUESTION 9:
The ___________ performance measure does not require the measures to be compared to another
value
a. Sharpe Ratio
b. Treynor Ratio
c. Jensen's Alpha
d. All of the above
Correct Answer: c. Jensen's Alpha
Detailed Solution:
The sign of Jensen's Alpha indicates whether or not the portfolio has outperformed the market. If
alpha is positive, the portfolio has outperformed the market.
______________________________________________________________________________
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QUESTION 10:
Under the Principle of ___________ insured can’t make profit by making claim for some loss
more than once.
a. Warranties
b. Cause Proxima
c. Contribution
d. Loss Minimization

Correct Answer: c. Contribution

Detailed Solution:
Under the Principle of Contribution insured can’t make profit by making claim for some loss more
than once.
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QUESTION 11:
The objectives of Life Insurance Companies include ____________

I To mobilize people's savings through insurance-linked savings

schemes
II To invest the funds to serve the best interests of both the policy-
holders and the nation
III To act as trustees of the policy-holders and protect their individual and
collective interests

a. Only I and II
b. Only II and III
c. Only I and III
d. I, II and III
Correct Answer: d. I, II and III
Detailed Solution:
The objectives of Life Insurance Companies include:
• To provide life insurance protection to the masses at reasonable cost.
• To mobilize people's savings through insurance-linked savings schemes.
• To invest the funds to serve the best interests of both the policy-holders and the nation.
• To act as trustees of the policy-holders and protect their individual and collective
interests.
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• To involve all the people working in the corporation to ensure efficient and courteous
service to the insured public.

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QUESTION 12:
Which of the following statement(s) is/are true about the nature of Non-Life Insurance Policies?

I Liabilities are normally long-term in nature

II Claims against them are unpredictable
III Assets are held in relatively liquid form

a. Only I and II
b. Only II and III
c. Only I and III
d. I, II and III

Correct Answer: b. Only II and III

Detailed Solution:
The nature of Non-Life Insurance Policies
• The essence of general insurance is the collective pooling of risks arising from fortuitous
occurrences.
• The general insurance companies do not collect savings, yet they do accumulate pools of
funds from premium and investment income out of which they meet claims under their
policies.
• Liabilities are normally short-term in nature
• Claims against them are unpredictable
• Assets are held in relatively liquid form
______________________________________________________________________________
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QUESTION 13:
___________ the price paid by investors at the time of investing in a mutual fund scheme.

a. Entry Load
b. Sale Price
c. Sum Assured
d. Premium

Correct Answer: b. Sale Price

Detailed Solution:
Sale Price: It is the price paid by investors at the time of investing in a scheme. Or in other
words, it is the purchase price for investors and is also called as ‘Offer Price’.
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QUESTION 14:
Which of the following statement(s) is/are true about Non-Banking Financial Company (NBFC)?
I It has principal business of receiving deposits under any scheme or arrangement
in one lump sum or in installments by way of contributions or in any other manner
II It can accept demand deposits
III It cannot issue cheques drawn on itself

a. Only I and II
b. Only II and III
c. Only I and III
d. I, II and III

Correct Answer: c. Only I and III

Detailed Solution:
A non-banking institution which is a company and has principal business of receiving deposits
under any scheme or arrangement in one lump sum or in installments by way of contributions or
in any other manner, is also a non-banking financial company (Residuary non-banking
company).
NBFC cannot accept demand deposits
NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn
on itself
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______________________________________________________________________________
QUESTION 15:
NBFCs whose asset size is of Rs. _________ cr or more as per last audited balance sheet are
considered as systemically important NBFCs.
a. 100
b. 200
c. 500
d. 1000

Correct Answer: c. 500

Detailed Solution:
NBFCs whose asset size is of Rs. 500 cr or more as per last audited balance sheet are considered
as systemically important NBFCs.
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QUESTION 16:
An AFC is a company which is a financial institution carrying on as its principal business the
financing of physical assets supporting productive/economic activity. ______ % of its income
should come from principal business.
a. 50
b. 60
c. 70
d. 80

Correct Answer: b. 60
Detailed Solution:
An AFC is a company which is a financial institution carrying on as its principal business the
financing of physical assets supporting productive/economic activity, such as automobiles,
tractors, lathe machines, generator sets, earth moving and material handling equipment, moving
on own power and general purpose industrial machines. (60 % income should come from
principal business)

______________________________________________________________________________
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QUESTION 17:
__________ is defined as a system under which term loans for purchases of goods and services
are advanced to be fractionally liquidated through a contractual obligation.
a. Mortgage
b. Asset Finance
c. Lease Finance
d. Hire Purchase Credit

Correct Answer: d. Hire Purchase Credit

Detailed Solution:
Hire Purchase Credit is defined as a system under which term loans for purchases of goods and
services are advanced to be fractionally liquidated through a contractual obligation

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QUESTION 18:
Assume RMKT=15%, Rf=7% and the standard deviation of the annual rate of return for the market
portfolio over the past 10 years was 20 percent (σMKT= 0.20). Using information from the table
below, according to Sharpe Ratio, which of the following portfolio is performing the poorest?

AVERAGE ANNUAL RATE STANDARD DEVIATION OF

PORTFOLIO
OF RETURN RETURN

A 0.18 0.30

B 0.15 0.09

C 0.11 0.10

D 0.19 0.30

a. A
b. B
c. C
d. D

Correct Answer: a. A
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Detailed Solution:
STANDARD
AVERAGE ANNUAL RATE
PORTFOLIO DEVIATION OF Sharpe= (Ri-Rf)/SD
OF RETURN
RETURN

A 0.18 0.3 0.37

B 0.15 0.09 0.89

C 0.11 0.1 0.40

D 0.19 0.3 0.40

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QUESTION 19:
The following information is available on the performance of four portfolio during past 7 years.
Given RMKT=9%, T-bills=3% Using information from the table below, according to Treynor Ratio,
which of the following portfolio is performing the worst?
Portfolio Total risk Systematic Risk Average Annual Rate Of Return

1 1.45 1.325 19.0

2 1.09 0.150 -6.0
3 2.07 1.013 23.5
4 1.70 0.669 12.1
a. 1
b. 2
c. 3
d. 4
Correct Answer: b. 2
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Detailed Solution:
Portfolio Systematic Risk Average Annual Rate Of Trenyor Ratio:
Return
(Ri – Rf)/
Systematic Risk
1 1.325 19.0 12.075
2 0.150 -6.0 -60.000
3 1.013 23.5 20.237
4 0.669 12.1 13.602

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QUESTION 20:
Consider the following data on four mutual funds:
Portfolio Total risk Systematic Risk Average Annual Rate Of Return

1 1.45 1.325 19.0

2 1.09 0.150 -6.0
3 2.07 1.013 23.5
4 1.70 0.669 12.1

The market return during the evaluation period was 12% with a variance of 7%. The risk free
interest rate is 6%. Calculate the Treynor’s measure of performance evaluation. ___ mutual fund
has performed the best.

a. 1
b. 2
c. 3
d. 4

Correct Answer: c. 3
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Detailed Solution:

Portfolio Systematic Risk Average Annual Rate Of Trenyor Ratio:

Return
(Ri – Rf)/
Systematic Risk
1 1.325 19.0 9.811

2 0.150 -6.0 -80.000

3 1.013 23.5 17.275

4 0.669 12.1 9.118

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