Investment Adviser (Level 1) Free Demo Test 8

Explanation:

Tracking error measures the deviation of the returns of a portfolio or a fund from its benchmark index. In the context of an equity index fund, tracking error reflects how closely the fund’s returns follow the returns of the index it aims to replicate. A lower tracking error indicates that the fund closely tracks the index, while a higher tracking error suggests greater divergence from the index. Tracking error is a key measure of risk in index funds because it indicates the fund’s ability to replicate the performance of its benchmark index accurately. Options a) (Portfolio’s beta), b) (Sharpe ratio), and d) (Credit rating) are not specific measures of risk in an equity index fund.

Explanation:

Bond prices and interest rates have an inverse and linear relationship. When interest rates rise, bond prices fall, and vice versa. This relationship is linear, meaning that a proportional change in interest rates leads to a proportional change in bond prices in the opposite direction. This phenomenon occurs because existing bonds with fixed coupon rates become less attractive when market interest rates increase, causing their prices to decrease to maintain parity with newly issued bonds offering higher yields. Conversely, when interest rates decrease, bond prices rise as existing bonds become more valuable relative to newly issued bonds with lower yields.

Explanation:

Intermediaries collectively facilitate interaction between investors and issuers in the market. They play crucial roles in connecting buyers and sellers, providing liquidity, and ensuring smooth transactions. Intermediaries include various entities such as brokers, investment banks, exchanges, and market makers. They help investors access investment opportunities and assist issuers in raising capital by underwriting securities offerings, providing advisory services, and facilitating trading activities. Intermediaries serve as essential intermediaries in the financial markets, enhancing market efficiency and liquidity.

Explanation:

Shares issued in a public issue, where the company offers its shares to the general public, are mandatorily required to be listed on a stock exchange. This listing requirement ensures transparency, liquidity, and fair trading of the company’s shares in the secondary market. Listing on a stock exchange provides investors with access to information about the company and the opportunity to buy or sell shares, contributing to market efficiency. It also enhances the company’s visibility and credibility among investors and stakeholders. Therefore, shares issued in a public offering must be listed on a stock exchange to comply with regulatory requirements and promote a well-functioning capital market.

Explanation:

FV = Rs. 50000; r = 8%; n = 15 years; Hence PV = Rs.15762.00.

Explanation:

For a young investor with a long-term goal such as building a corpus for retirement, a higher allocation to equity is recommended. Equity investments typically offer higher potential returns over the long term compared to debt or cash equivalents. Since the investor has a longer time horizon until retirement, they can afford to take on higher risk in exchange for potentially higher returns. Equity investments have historically provided higher returns compared to other asset classes over long periods, which can help the investor accumulate a larger corpus by the time of retirement. Additionally, equities provide the benefit of inflation protection and the ability to participate in the growth of the economy, making them suitable for long-term wealth accumulation goals like retirement planning.

Explanation:

Hedge funds are typically characterized as high-risk funds because they employ aggressive investment strategies aimed at generating high returns. These funds often use leverage, derivatives, and other complex financial instruments to amplify returns, which also increases the level of risk. Additionally, hedge funds may engage in short selling, derivatives trading, and other speculative tactics to capitalize on market inefficiencies or directional movements. While hedge funds aim to provide above-average returns, their strategies can also lead to significant losses, making them unsuitable for conservative investors or those with low-risk tolerance. Overall, due to their aggressive strategies and potential for substantial losses, hedge funds are considered high-risk investments.

Explanation:

=NPER(11%/4,0,-500000,1000000)

=25.55035862

26 Quarters

Explanation:

When Ms. L takes a loan against her mutual fund holdings and only a portion of her units are required as security, she can mark a lien only on the portion of units that are needed for the loan. This means that only the specific units required for collateralization will be encumbered, while the remaining units will remain free from any lien. This approach allows Ms. L to maintain control over her investment portfolio while using only the necessary portion as security for the loan, thus optimizing her financial flexibility.

Explanation:

Beta = Cov(MrPr) / Var(Mr)

Where

Cov(MrPr) = Covariance between the market’s return and the portfolio return

Var(Mr) = Variance in the Market return (Square of Std deviation of Market)

Covariance = Correlation * Std deviation of Market * Std deviation of Portfolio

Covariance = 0.4 * 1.5 * 2.4 = 1.44

Beta = Covariance / (1.5 * 1.5) (Variance of market is Square of Std deviation of market) = 0.64