Description

Capital Market and Portfolio Management

September 2024 Examination

 

 

Q1. There are different users of financial statements like supplier, customer, investors etc. It is very necessary to check all financial statements & to do proper analysis before taking any business decision. Fundamental analysis is very helpful to understand company’s financial status. Elaborate different types of fundamental analysis which are necessary while taking any kind of business decision.  (10 Marks)

Ans 1.

Introduction

In the complex landscape of business and investment, financial statements serve as crucial tools for various stakeholders including suppliers, customers, and investors, to understand a company’s financial health and make informed decisions. Fundamental analysis, a cornerstone of financial evaluation, scrutinizes economic, financial, and other qualitative and quantitative factors. This method provides a deep dive into a company’s condition and market value, beyond what raw financial data might suggest. It involves a series of techniques designed to assess the intrinsic value of securities, predict future financial performance, and determine the overall health of a company. The utility of fundamental analysis spans from helping investors align their investment portfolios with their risk and

 

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Q2.An efficient market is one that rapidly and completely possesses all the information related to the prices of the assets. In this market, stock prices cannot be change with rumors’ that are not verified by investors.  Efficient market theory is classified in to four categories elaborate it.      (10 Marks)

Ans 2.

Introduction

The concept of market efficiency is foundational in the field of financial economics, reflecting the extent to which stock prices reflect all available information. According to the Efficient Market Hypothesis (EMH), if a market is efficient, current stock prices are the best reflection of the information available and securities are always traded at their fair value. This means that it is impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. Therefore, consistent outperformance of the market, when adjusted for risks, should be more about luck than skill. The EMH is divided into several categories, each assuming different levels of information assimilation and investor rationality, which in

 

 

Q3a. Suppose the expected return from the market is 15%. The risk free rate is 5% & beta for the stock is 1.5. Find the expected return for the stock.   (5 Marks)

Ans 3a.

Introduction

In investment theory, understanding how to calculate the expected return of a stock using the Capital Asset Pricing Model (CAPM) is fundamental. CAPM provides a framework that links the risk associated with a particular stock relative to the market, and the expected return on the stock. This model is particularly useful for investors who want to determine if a security offers a reasonable expected return for its level of risk. Given the market parameters

 

1. Capital Asset Pricing Model is a financial model used to rate risky securities, which examine the link between risk & return. CAPM helps to calculate the expected rate of return for an asset or investment. But CAPM have some disadvantages explain those limitations. (5 Marks)

Ans 3b.

Introduction

The Capital Asset Pricing Model (CAPM) is a cornerstone of modern financial theory that offers a method to assess the relationship between risk and expected return in financial markets. This model has been extensively used by finance professionals to set prices for individual securities or to construct portfolios. Despite its widespread adoption and theoretical appeal, CAPM faces criticism and limitations that can affect its accuracy and relevance in practical scenarios. Understanding these limitations is crucial for investors and