MULTIPLE CHOICE QUESTIONS AND ANSWERS
SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT MCQS (SAPM MCQS)
Short type questions and answers asked from 2013 to 2020 exam
1) Investment: Investment is the employment of funds with the aim of getting return on it. In general terms, investment means the use of money in the hope of making more money.
2) Fixed securities: Fixed securities also known as fixed income securities refers to those investments that provides their owners fixed rate of income irrespective of market forces. Risks in case of fixed securities are minimum and returns are also low as compared to common stock. Classic examples of fixed securities are debentures and bonds.
3) Concentration of securities: Concentration of securities in just opposite to diversification. It means investments in some specific securities rather than in variety of securities. This type of strategy can be disastrous in volatile market.
4) Time value of money: Time value of money is the concept that the value of a rupee to be received in future is less than the value of a rupee on hand today.
5) Beta: Beta attempts to measure an investment's sensitivity to market movements. A high beta means that an investment is highly volatile and that it will likely outperform its benchmark in up markets, thus exceeding the benchmark's return, and underperform it in down markets. A lower beta means an investment is likely to underperform its benchmark in up markets, but is likely to do better when the markets fall.
6) One advantage of Sharpe performance model: This index gives a measure of portfolios total risk and variability of returns in relation to the risk premium.
7) Risk: Risk may be described as variability/fluctuation/deviation of actual return from expected return from a given asset/investment. Higher the variability, greater is the risk. In other words, the more certain the return from an asset, lesser is the variability and thereby lesser is the risk.
8) Expenditure: Investment expenditure refers to the expenditure incurred either by an individual or any financial institutions in the acquisition of various types of investments such as shares, debentures, bonds etc.
9) Security market line: Security market line (SML) is the representation of the Capital asset pricing model. It displays the expected rate of return of an individual security as a function of systematic, non-diversifiable risk (its beta). It is also referred to as the "characteristic line".
10) Diversification: Risks involved in investment and portfolio management can be reduced through a technique called diversification. Diversification is a strategy of investing in a variety of securities in order to lower the risk involved with putting money into few investments. The traditional belief is that diversification means “Not putting all eggs in one basket.” Diversification helps in the reduction of unsystematic risk and promotes the optimization of returns for a given level of risks in portfolio management.
11) Convertible security: A convertible security is a type of security, usually a bond or a preferred stock, that can be converted into a different form of security, normally equity shares.
12) Full form of CAPM: Capital asset pricing model
13) Unsystematic risk: Unsystematic Risk refers to that portion of total risk that is unique or peculiar to a firm or an industry, above and beyond that affecting securities markets in general.
14) Market timing: Market timing implies assessing correctly the direction of the market, either bull or bear and positioning the portfolio accordingly.
15) Systematic Risk: Systematic Risk refers to that portion of total variability (risk) in return caused by factors affecting the prices of all securities.
16) Market risk: The price of a stock may fluctuate widely within a short span of time even though earnings remain unchanged. The causes of this phenomenon are varied, but it is mainly due to a change in investors’ attitudes towards equities in general, or toward certain types or groups of securities in particular. Variability in return on most common stocks that is due to basic sweeping changes in investor expectations is referred to as market risk.
17) Valuation of securities: The process of determining how much a security is worth is called valuation of securities. Security valuation is highly subjective, but it is easiest when one is considering thevalue of tangible assets, level of debt, and other quantifiable data of the company issuing a security.
18) Portfolio: A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non publicly tradable securities, like real estate, art, and private investments.
19) Volatile Market: Volatile markets are ones where the price moves vigorously and unpredictably. It is very difficult to guess the direction of market and prices of securities in such market.
20) Risk Adjustment: Risk adjustment is a method to offset the cost of investments.
21) Risk-adjusted return defines an investment's return by measuring how much risk is involved in producing that return, which is generally expressed as a number or rating. Risk-adjusted returns are applied to individual securities, investment funds and portfolios.
22) Return: Return can be defined as the actual income from a project as well as appreciation in the value of capital. Thus there are two components in return—the basic component or the periodic cash flows from the investment, either in the form of interest or dividends; and the change in the price of the asset, commonly called as the capital gain or loss.
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