Investment Adviser (Level 1) Free Demo Test 9

Explanation:

Offer for Sale (OFS) is a method of share sale typically used by listed companies to sell their shares directly to the public through the stock exchange. It allows existing shareholders, including promoters, to sell their shares to investors without the company issuing new shares. OFS is commonly used by listed companies to comply with regulatory requirements or to provide an exit route for existing shareholders.

Explanation:

Liquidity risk is the risk of not being able to find a buyer or seller for the equity holdings. Liquidity risk is measured by impact cost.

The impact cost is the percentage price movement caused by a particular order size (let’s say an order size of Rs.1 Lakh) from the average of the best bid and offer price in the order book snapshot. The impact cost is calculated for both, the buy and the sell side. Less liquid stocks are more thinly traded, and a single large trade can move their prices considerably. Such stocks have high impact costs. A lower market impact implies the stock is more liquid.

Explanation:

Secondary markets facilitate the trading of already issued securities among investors. By providing liquidity, these markets allow investors to buy and sell securities easily, thus enabling price discovery and ensuring that investors can exit their investments when needed. This liquidity is crucial for promoting confidence among investors and attracting capital to the primary market, where new securities are issued.

Explanation:

Inflation erodes the purchasing power of money over time, meaning that the same amount of money will buy fewer goods and services in the future. Therefore, to maintain the same standard of living in retirement, individuals need a larger retirement corpus to counteract the effects of inflation. This is because expenses are expected to increase due to rising prices, necessitating a larger sum of money to cover those expenses over the retirement period.

Explanation:

Stock exchanges provide a platform for the trading of securities that are already issued. Investors can buy and sell these securities through the exchange, facilitating liquidity in the market. Transactions are executed electronically, ensuring transparency and efficiency in trading. As a result, stock exchanges play a crucial role in the secondary market by enabling investors to access a wide range of securities for subsequent purchases and sales.

Explanation:

Arbitrage refers to the practice of simultaneously buying and selling an asset in different markets to profit from the price difference. This strategy takes advantage of inefficiencies in the market, exploiting the temporary discrepancies in prices for the same asset. By quickly capitalizing on these differences, arbitrageurs aim to earn risk-free profits. Arbitrage helps to ensure that prices for the same asset are aligned across different markets, contributing to market efficiency and liquidity.

Explanation:

A putability feature of a bond gives the bondholder the right, under specific conditions, to sell the bond back to the issuer before the bond’s maturity date. This feature provides the bondholder with flexibility and downside protection in case the bond’s market value declines or if certain events occur that adversely affect the bond’s value. It allows investors to mitigate potential losses by selling the bond back to the issuer at a predetermined price, thus providing them with an exit option under unfavorable circumstances.

Explanation:

Under the Senior Citizen Savings Scheme (SCSS), an account can be extended for a period of 3 years beyond the maturity period, subject to certain conditions. This extension provides senior citizens with an option to continue earning interest on their savings for an additional period after the initial maturity of the scheme. It offers them flexibility and ensures that their funds remain invested in a safe and secure instrument for a longer duration, catering to their financial needs during their retirement years.

Explanation:

Sharpe’s performance measure calculates the excess return of a portfolio (i.e., risk premium) over the risk-free rate and divides it by the standard deviation of the portfolio’s returns. This ratio provides a measure of the portfolio’s risk-adjusted return, indicating how much excess return is generated for each unit of risk taken. It helps investors evaluate the efficiency of a portfolio in generating returns relative to the level of risk undertaken. A higher Sharpe ratio typically indicates a better risk-adjusted performance.

Explanation:

The correlation coefficient is a statistical measure that quantifies the strength and direction of the relationship between two variables. It ranges from -1 to +1, where:

• A correlation coefficient of +1 indicates a perfect positive correlation, meaning that as one variable increases, the other variable also increases proportionally.

• A correlation coefficient of -1 indicates a perfect negative correlation, meaning that as one variable increases, the other variable decreases proportionally.

• A correlation coefficient of 0 indicates no linear relationship between the variables.

Therefore, the correlation coefficient provides valuable insights into how two variables move relative to each other, helping analysts and investors understand the degree of association between them.