AS 05 (iv) - Finance and Investment Mock Test 11
This section covers fundamental concepts of investing, annuities, risk-return trade-off, mutual funds, hedging, options, gold investments, government securities, portfolio hedging, and Limited Liability Partnerships (LLPs). It explains why merely safeguarding money is not considered an investment, features of annuities, the relationship between risk and return, convenience and flexibility offered by mutual funds, the importance of understanding hedging, differences between options and stocks, risks associated with investing in physical gold, the nature of government securities, the impact of hedging on portfolio performance, and the minimum capital requirement for LLPs. These concepts help investors make informed financial decisions.
1. The safe-keeping of money (e.g., hiding money in a cupboard) does not qualify as an investment because:
A. It is not done in a bank
B. It does not involve any expected compensation
C. It is not tracked by tax authorities
D. It has zero returns officially
E. It is not legally defined as investment
2. Which of the following statements about ANNUITIES is INCORRECT according to the chapter?
A. Annuities are often forgotten by individual investors
B. Deferred annuities allow the benefits of compounding without worrying about tax implications
C. Annuities are a very high-risk investment compared to other investments
D. Annuities are fairly low risk and heavily regulated by the government
E. Annuities may subject withdrawals to stiff penalties
3. Which of the following best describes the risk-return trade-off?
A. Lower risk always yields higher return
B. Higher risk means guaranteed higher return
C. There is a positive relationship between risk and return—lower risk is associated with lower potential returns and higher risk is associated with higher potential returns
D. Higher risk means lower return
E. Risk and return have no relationship
4. What is the key role of 'Convenience and Flexibility' as a benefit of Mutual Funds?
A. Mutual funds have no lock-in period whatsoever
B. There are lots of services and facilities offered by mutual fund companies to facilitate the investment experience
C. Mutual funds offer door-to-door service
D. Mutual funds provide ATM access to fund balance
E. Convenience and Flexibility means mutual funds have no fees
5. What is the key practical recommendation for individual investors regarding hedging according to the chapter?
A. All investors should actively hedge all their positions using derivatives
B. Only professional traders should use derivatives for hedging
C. Even if you never hedge your own portfolio, understanding hedging is important because companies and investment funds use derivatives for risk management, helping investors better understand financial markets
D. Individual investors should only use options for hedging, never futures
E. Individual investors should avoid all derivative instruments entirely
6. Which of the following statements about options and stocks is CORRECT according to the chapter?
A. Options and stocks are identical in their risk-return profiles
B. Options, like stocks, give shareholders voting and dividend rights
C. Options are securities that are listed and traded like stocks, but they are derivatives with expiration dates and do not provide voting or dividend rights
D. Options can only be bought and cannot be sold short like stocks
E. Options and stocks always move in the same direction with the same magnitude
7. What is the main risk associated with investing in GOLD IN PHYSICAL FORM (jewellery)?
A. Gold jewellery depreciates rapidly
B. Resale may not always be profitable because jewellers deduct making and design charges, resulting in significant loss; lack of standardized purity certification can also make buyback difficult
C. Gold jewellery is not considered an investment
D. Gold jewellery cannot be pledged with banks
E. Gold jewellery is always confiscated by the government
8. What does 'Government Security' represent as defined in the chapter?
A. Securities issued by State Governments only
B. Securities issued by the Central Government for external borrowing only
C. A sovereign debt instrument issued by the Reserve Bank of India on behalf of the Government of India to finance the fiscal deficit
D. Securities issued by Public Sector Banks
E. Securities guaranteed by international financial institutions
9. In the hedging illustration, when a portfolio with beta 1.2 is hedged with Nifty futures and the index moves up or down by 10%, what is the net effect on the overall portfolio?
A. Gain of ₹1,20,000
B. Loss of ₹1,20,000
C. Nil (portfolio completely insulated from market movements)
D. Net gain of ₹60,000
E. Net loss of ₹60,000
10. What is a key characteristic of an LLP regarding minimum capital?
A. There is a mandatory minimum capital of ₹1 lakh
B. There is no requirement of minimum capital to start an LLP (unlike companies)
C. Minimum capital must be ₹10 lakhs
D. The minimum capital depends on the number of partners
E. Minimum capital for an LLP is double that of a private limited company
