AS 05 (iv) - Finance and Investment Mock Test 14
This section covers important concepts related to mutual fund taxation, real estate investment, commodity derivatives, portfolio risk, options settlement, bond yield, trusts, and stock investment risk. It explains the tax exemption available to SEBI-registered mutual funds, the three major benefits of real estate investing, the characteristics of futures contracts, the role of covariance in portfolio risk, cash settlement of options in India, calculation of current yield for bonds purchased below par, components of total portfolio risk, the role of a trustee in a trust, the relationship between risk and return, and the various risks associated with investing in stocks.
1. Under Section 10(23D) of the Income Tax Act, what is the tax treatment for income earned by a Mutual Fund Company registered with SEBI?
A. Income is taxed at 30%
B. Income is taxed at a flat 15%
C. The Mutual Fund Company is a trust, and the income earned by any mutual fund registered with SEBI is exempt from tax
D. Income is taxed at a reduced rate of 10%
E. Income is subject to TDS
2. What are the three main uses of real estate investment combined with the concept of leverage through mortgages?
A. Capital preservation, dividend income, and tax savings
B. Income (rental income), capital appreciation (growth in property value), and leverage (ability to borrow against property through mortgages to increase investment capacity)
C. Short-term trading profit, long-term holding gain, and tax arbitrage
D. Physical security, rental income only, and insurance benefits
E. Price discovery, hedging, and speculation
3. What is a 'Futures Contract' in the context of commodity derivatives?
A. A bilateral agreement not traded on any exchange
B. An Over-the-Counter (OTC) contract between two specific parties
C. A standardized agreement between two parties to buy or sell a commodity at a future date, traded on recognized commodity exchanges
D. A contract that can only be used for agricultural commodities
E. A contract with unlimited risk for both parties
4. A portfolio's contribution to the riskiness of an investor's portfolio is proportional to:
A. The total standard deviation of the security
B. The beta of the security
C. The covariance of the security with the portfolio
D. The unsystematic risk of the security
E. The yield to maturity of the security
5. In India, when options are exercised, how is settlement made?
A. By physical delivery of the underlying shares
B. By transfer of underlying futures contracts
C. In cash only; the holder of an in-the-money option receives the intrinsic value (difference between the spot price and the strike price)
D. By a combination of cash and shares
E. Through the forward market at the contracted price
6. If you buy a bond at a price of ₹93.25 (below par of ₹100) and the coupon rate is 10%, what is the approximate current yield?
A. 0.10
B. 0.1072
C. 0.0855
D. 0.09
E. 0.1115
7. Total portfolio risk is:
A. Equal to avoidable risk minus diversifiable risk
B. Equal to systematic risk plus diversifiable risk
C. Equal to avoidable risk plus diversifiable risk
D. Equal to systematic risk plus unsystematic risk
E. Equal to systematic risk minus unsystematic risk
8. Who is the 'trustee' in a trust?
A. The person for whose benefit the trust is created
B. The person who creates the trust
C. The person in whom the trust is reposed and who holds and administers the trust property for the benefit of the beneficiaries
D. The Registrar of Trusts
E. The auditor of the trust's accounts
9. The relationship between risk and return in investing is:
A. Higher risk always guarantees higher return
B. Low risk is associated with lower potential returns, while high risk is associated with higher potential returns
C. Lower risk gives higher returns
D. Risk and return are not related
E. Higher return always means lower risk
10. Risks associated with stocks include:
A. No risk at all
B. Risk varies depending on the company; well-established companies generally carry lower risk, while penny stocks and margin trading involve substantially higher risk and leverage
C. Fixed returns only
D. Risk only from economic downturns
E. Risk only from political changes
