Description
Capital Market and Portfolio Management
Dec 2026 Examination
Q1 A mid-cap Indian company has been experiencing low trading volumes and wide bid- ask spreads in its shares. At the same time, institutional investors are increasingly using algorithmic trading to execute large orders, while retail investors primarily use online discount-broker platforms.
As a Capital Market Consultant, analyse how market structure and trading mechanisms can influence the liquidity, price discovery and execution quality of such a security. In your response:
– compare the roles of exchange-based and OTC markets;
– evaluate the suitability of market orders, limit orders and stop-loss orders for different market participants;
– analyse the role of liquidity and market depth in execution; and
– evaluate how algorithmic trading can influence market efficiency and create risks for market participants. (10 Marks)
Ans 1.
Introduction
This mid-cap company is facing low trading volumes and wide bid-ask spreads, a situation that points directly to weak liquidity in its shares. At the same time, institutional investors are placing large orders through algorithmic systems, while retail investors trade mostly through online discount brokers. These differences in participant behaviour and trading technology shape how efficiently the stock can be bought or sold. Understanding the underlying market structure, the available order types, and the influence of algorithmic trading helps explain why this security
Q2 (A) During a sharp rise in the Indian stock market, a large number of retail investors begin purchasing a particular stock simply because “everyone is buying it.” Some investors continue holding the stock despite deteriorating fundamentals because they fear realising a loss. As an investment advisor, analyse the behavioural biases reflected in this situation and evaluate how such behaviour challenges the assumptions of the Efficient Market Hypothesis (EMH). Design two practical decision-making measures that investors could adopt to reduce the influence of these biases. (5 Marks)
Ans 2(A).
Introduction
Retail investors buying a stock simply because others are buying it, and investors holding a losing position rather than accept a loss, both reveal predictable patterns in decision-making rather than purely rational analysis. These patterns are well documented in behavioural finance and put pressure on the Efficient Market Hypothesis. Examining these biases, and how they
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Q2 (B) Two diversified equity portfolios, Alpha Fund and Beta Fund, have generated the following annual performance:
| Standard Deviation | 12% | 10% |
| Beta | 1.25 | 0.90 |
The market return during the period was 12%. Required:
- a) Calculate the Sharpe Ratio and Treynor Ratio for both portfolios. (3 Marks)
- b) Based on the results, identify which portfolio provides better risk-adjusted performance under each measure and explain briefly why the rankings differ. (2Marks)
(5 Marks)
Ans 2(B).
Introduction
Alpha Fund and Beta Fund have each delivered solid returns above the risk-free rate, but a raw comparison of returns alone does not reveal how much risk each fund took. The Sharpe Ratio and Treynor Ratio offer two distinct ways of adjusting returns for risk, using different risk definitions. Comparing both funds under each measure shows why the two ratios can produce
