AS 05 (iv) - Finance and Investment Mock Test 02
This section covers important concepts in finance and investment, including book-building in IPOs, co-operative governance, hedging and the risk-return trade-off, option delta, equity mutual funds, advantages of public listing, futures versus forward contracts, portfolio performance measurement using the Treynor Measure, benefits of holding gold in dematerialized (Demat) form, and the yield curve. It explains how capital markets function, how investment risks are managed, and how different financial instruments are structured. The chapter also emphasizes investor protection, market efficiency, corporate fundraising, and the importance of understanding financial products and performance measures for informed investment decisions.
1. Book-building is:
A. A process of issuing shares at a fixed price
B. A process of price discovery used in public offers where the issuer sets a base price and a band within which the investor is allowed to bid for shares
C. A method of allocating shares only to retail investors
D. A process used only for government securities
E. A method of direct listing on stock exchanges
2. Under the Co-operative's governing Act, what is the principle of control for each member?
A. Control is proportional to the amount of capital invested
B. Control is based on hours worked in the co-operative
C. Each member has equal control through the principle of "one person one vote"
D. Control is determined by seniority
E. Only founding members have control; new members have no voting rights
3. According to the chapter, what is the PRIMARY REASON hedging reduces potential profits along with risk?
A. Hedging always requires paying higher taxes on gains
B. Hedging instruments are always more expensive than the returns they generate
C. Although some may fantasize about limitless profits with no risk, hedging can't escape the hard reality of the risk-return trade-off; a reduction in risk will always mean a reduction in potential profits
D. Hedging locks in future prices that are always less than expected spot prices
E. Hedging removes the possibility of benefiting from favorable price movements
4. At-the-money options are usually said to have a delta of approximately:
A. 0 (zero)
B. 1
C. -1
D. 0.50 (or "50 delta")
E. 0.25
5. Which of the following best describes an "Equity Fund"?
A. A fund that invests only in debt instruments
B. A fund that invests their pooled money in equity shares of companies either through IPO or secondary market; exposed to market fluctuation and all kinds of risk (market level, industry level, company specific); more risky than other funds
C. A fund that exclusively invests in government securities
D. A fund that invests in money market instruments
E. A fund that guarantees returns equal to inflation
6. Benefits of being a public company through an IPO include all of the following EXCEPT:
A. Diversifying equity base
B. Access to capital
C. Exposure, prestige and public image
D. Attracting and retaining better management and employees
E. Guaranteeing profits to all shareholders
7. A futures contract differs from a forward contract primarily because futures:
A. Are privately negotiated between buyer and seller with no exchange involvement
B. Are subject to high counterparty risk
C. Are standardized, traded on an exchange, government-regulated market with clearing house guarantee and low counterparty risk
D. Cannot be used for hedging purposes
E. Do not require any initial deposit
8. The Treynor Measure formula is:
A. (Ri − Rf) / Si
B. (Ri − Rf) / Bi
C. (Ri − Rf) × Bi
D. Ri / (Rm − Rf)
E. (Ri − Rf) × Si
9. What are the advantages of DEMATERIALIZED (Demat) form of gold through NCDEX?
A. Only institutional investors can use it
B. Dematerialization of gold eliminates risk related to physical storage and theft, reduces paperwork, and facilitates easy transfer of holdings through the electronic mode
C. It guarantees a fixed return on gold investment
D. It is exempt from all capital gains tax
E. It can only be done through post offices
10. What is meant by the "Yield Curve"?
A. A graphical representation of the relationship between stock prices and earnings
B. A graphical representation showing the relationship between the yield on a bond and its term to maturity
C. A chart showing the coupon payments of a bond over time
D. A curve showing the relationship between risk and return
E. A chart of bond prices versus credit ratings
