AS 05 (iv) - Finance and Investment Mock Test 12
This section covers important concepts in business organizations, portfolio management, taxation, mutual funds, derivatives, option pricing, and asset allocation. It explains the characteristics of sole proprietorships, covariance as a measure of how assets move together, taxation of long-term capital gains (LTCG) on house property, eligibility conditions under the Post Office Recurring Deposit Protected Savings Scheme, Dividend Distribution Tax (DDT) in mutual funds, hedging through futures contracts, settlement of financial derivatives, probability functions used in the Black-Scholes model, strategic asset allocation, and determining the futures position required for a complete hedge. These concepts strengthen investment analysis, portfolio management, and financial planning skills.
1. Which form of business is described as one where 'generally only one person funds the business activities'?
A. Partnership
B. Limited Liability Company
C. Co-operative
D. Sole Proprietorship
E. Limited Liability Partnership
2. Covariance is a measure of:
A. The degree to which two variables move together over time
B. The volatility of individual assets
C. The average return on a portfolio
D. The systematic risk of a portfolio
E. The correlation between risk and return
3. What is LTCG (Long Term Capital Gain) on the transfer of house property taxed at in India?
A. 10% without indexation
B. 15%
C. 20%
D. 25%
E. 30%
4. Which of the following is a key feature of the Post Office Recurring Deposit Account's 'Protected Savings Scheme' condition regarding the age of the depositor?
A. Age must be at least 50 years and not more than 70 years
B. Age of the depositor must not be less than 18 years and not more than 53 years
C. Age must be exactly 30 years
D. Age must be between 25 and 45 years
E. No age restriction applies
5. What is the 'Dividend Distribution Tax (DDT)' in the context of Mutual Funds?
A. Tax paid by individual investors on dividends received
B. A tax deducted before paying dividends to unit holders in certain mutual fund schemes; tax treatment depends on the type of fund as prescribed under applicable tax laws
C. A tax paid by the AMC on its management fees
D. A tax on capital gains from equity fund sales
E. A tax paid by Trustees on trust income
6. In the context of the Ram-Shyam hedging illustration, if Shyam HONORS the contract, what is Ram's net gain?
A. ₹3,000
B. ₹1,000
C. ₹2,000
D. ₹0
E. ₹4,000
7. What is the general principle that explains why financial derivatives like Futures do not generally terminate in delivery?
A. Physical delivery is prohibited by SEBI regulations
B. Futures contracts are usually closed through offsetting transactions before expiry, so most participants do not take physical delivery
C. All futures in India must be cash settled under the SCRA
D. Delivery occurs only for commodity futures and never for financial futures
E. Delivery costs are always higher than cash settlement
8. In the Black-Scholes model, how are N(d1) and N(d2) found?
A. By looking up bond price tables
B. By using yield curve interpolation
C. They represent cumulative probabilities from the standard normal distribution and can be obtained using the Excel function NORMSDIST (or equivalent cumulative normal distribution function) or standard normal distribution tables
D. By solving a differential equation for each option contract
E. By dividing the option premium by the strike price
9. According to the chapter, what is the primary goal of a strategic asset allocation?
A. To create an asset mix that seeks the optimal balance between expected risk and return for a long-term investment horizon
B. To maximize short-term returns through market timing
C. To invest in satellites and emerging technology
D. To eliminate all risk from the portfolio
E. To achieve a fixed rate of return regardless of market conditions
10. In the hedging example where a portfolio has a beta of 1.2 and a value of ₹1 million, how much Nifty futures should be sold to achieve a complete hedge?
A. ₹0.8 million
B. ₹1.0 million
C. ₹1.2 million
D. ₹1.5 million
E. ₹2.0 million
