Description

Investment Analysis and Portfolio Management

April 2025 Examination

 

 

1. Riya is an aspiring entrepreneur who has recently come up with a promising idea for a tech startup. However, she faces a major hurdle – raising enough funds to bring her vision to life. After exploring various options, Riya decides to approach the capital market to seek funding. She begins researching how the capital market works and realizes that it can play a vital role in the growth of her startup. Highlights the functions of capital market plays in the financial system. (10 Marks)

Ans 1.

Introduction

The capital market plays a fundamental role in the financial system by facilitating the movement of funds from investors to businesses, enabling economic growth and development. For an aspiring entrepreneur like Riya, the capital market offers a structured avenue to secure funding, which is essential for transforming her tech startup idea into reality. Unlike traditional financing options such as bank loans, capital markets provide access to a larger pool of investors willing to take risks in exchange for potential returns.

The capital market comprises two main segments: the primary market, where new securities are issued, and the secondary market, where existing securities are traded. These markets

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2. Arvind is a financial analyst working at a leading investment firm. Arvind decides to use the Capital Asset Pricing Model (CAPM) to calculate the expected return on the stock. While working on the model, Arvind’s senior warnings about the limitations of CAPM, especially in real-world applications. Although CAPM is a widely used model, it comes with certain assumptions that might not always hold true in the actual market. Describe all those limitations which Arvind has to keep in mind. (10 Marks)

Ans 2.

Introduction

The Capital Asset Pricing Model (CAPM) is a fundamental financial model used to determine the expected return of an asset based on its systematic risk. Developed by William Sharpe, CAPM establishes a relationship between an asset’s expected return and its beta, which measures the asset’s sensitivity to market fluctuations. It provides a framework for investors and analysts, like Arvind, to assess the risk-adjusted return of stocks and make informed investment decisions.

While CAPM is widely used due to its simplicity and practical applicability, it is based on several theoretical assumptions that may not always align with real-world market conditions.

 

 

3a. Mr. Aditya purchase 500 shares of XYZ co. at Rs.100 each. During the year company declare a dividend 50 per share. At the end of year Mr. Aditya sale, the shares at Rs.200 per share. Calculate total return at the end of the year.   (5  Marks)

Ans 3a.

Introduction

Investing in the stock market offers opportunities for capital appreciation and dividend income, which together contribute to an investor’s total return. Mr. Aditya’s investment in XYZ Co. is a prime example of how stock market returns are generated through both price appreciation and dividend payments. Understanding total return is crucial for evaluating the profitability of an investment. By calculating total return, investors can assess the overall

 

 

1. Ajay has recently started investing in the stock market. He has been reading a lot about the potential of earning high returns, but he is also keen on understanding the various costs associated with trading stocks. Suppose you are good friend of Ajay & investing in the stock market from last few years. Explain him about the different types of transaction costs involved while trading. (5 Marks)

Ans 3b.

Introduction

Investing in the stock market comes with potential returns, but it also involves various transaction costs that can impact an investor’s net profits. Ajay, a new investor, is keen on understanding these costs to make informed trading decisions. As an experienced investor, it is essential to explain to him the different types of costs associated with buying and selling stocks. These costs include brokerage fees, taxes, and other charges that affect overall returns.