Description

Capital Market and Portfolio Management

Jun 2026 Examination

 

 

Q1. An individual investor, Mr. Arjun, recently opened a trading account and wants to invest in equity shares listed on the stock exchange. While placing his first order, he notices several trading terms such as market order, limit order, bid price, ask price, and order matching mechanism on the trading platform. Since he is new to the stock market, he wants to understand how the stock market trading mechanism works before making investment decisions. Question: Explain the structure of the capital market and the trading mechanisms used in modern stock exchanges. In your answer, discuss the role of stock exchanges, brokers, order types, and electronic order matching systems in facilitating efficient trading. (10 Marks)

Ans 1.

Introduction

The capital market is the segment of the financial system where long-term financial instruments such as equity shares, bonds, and debentures are bought and sold between investors and companies. It plays a critical role in channelling savings into productive investments by connecting those who need capital with those who have surplus funds. For a new investor like Mr. Arjun, understanding how capital markets are structured and how trading actually happens on modern stock exchanges is the essential first step before committing any funds. Without this understanding, even sound investment analysis cannot be translated into effective market

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Q2 (A). A senior manager at an investment firm receives confidential information that a listed company is about to announce a major merger that will significantly increase its share price. Before the news becomes public, the manager considers purchasing shares of the company for personal gain. Question: Identify the ethical and regulatory issues involved in this situation. Explain how securities regulators such as SEBI ensure fair and transparent functioning of capital markets. (5 Marks)

Ans 2(A).

Introduction

The situation described is a clear case of insider trading, one of the most serious violations in capital market regulation. The senior manager possesses material non-public information about a forthcoming merger and is considering using that information to personally profit before the announcement reaches other market participants. This behavior is both ethically indefensible and

 

 

Q2 (B). An investor wants to evaluate the performance of a mutual fund using different risk-adjusted performance measures. The following information is available: Return of the Portfolio (Rp): 14%, Risk-Free Rate (Rf): 6%, Market Return (Rm): 12%, Beta of Portfolio (p): 1.2, Standard Deviation of Portfolio (p): 10%. Required: a) Calculate the Sharpe Ratio of the portfolio. b) Calculate the expected return using CAPM. c) Calculate Jensen’s Alpha and interpret whether the portfolio has outperformed the market. (5 Marks)

Ans 2(B).

Introduction

Risk-adjusted performance measures are essential tools for evaluating whether a portfolio manager has delivered returns that justify the level of risk taken. The Sharpe Ratio measures return per unit of total risk, CAPM provides the expected return for the level of systematic risk the portfolio carries, and Jensen’s Alpha measures whether the portfolio has generated returns