Q1. What does the nominal interest rate represent?
A. Growth in purchasing power
B. Rate of inflation
C. Growth rate of money
D. Real interest rate
✅ Answer: C. Growth rate of money
Q2. Which of the following is NOT a type of security in the financial market?
A. Stocks
B. Bonds
C. Real estate property
D. Derivatives
✅ Answer: C. Real estate property
Q3. According to the Fisher equation, the nominal interest rate equals:
A. Real rate minus inflation
B. Real rate plus expected inflation
C. Real rate times tax rate
D. Inflation divided by real rate
✅ Answer: B. Real rate plus expected inflation
Q4. What is the real interest rate approximately equal to, using the Fisher approximation?
A. Nominal rate × inflation
B. Nominal rate − inflation
C. Nominal rate + inflation
D. Nominal rate ÷ inflation
✅ Answer: B. Nominal rate − inflation
Q5. What happens to after-tax return when inflation increases, assuming a constant tax rate?
A. It increases
B. It decreases
C. It remains the same
D. It becomes zero
✅ Answer: B. It decreases
Q6. What is the formula for Holding Period Return (HPR)?
A. (Ending price – Beginning price) ÷ Dividends
B. (Price Change + Income) ÷ Initial Price
C. Initial Price ÷ Dividends
D. Ending Price ÷ Income
✅ Answer: B. (Price Change + Income) ÷ Initial Price
Q7. Which rate explicitly accounts for compound interest?
A. Nominal Rate
B. Annual Percentage Rate
C. Real Rate
D. Effective Annual Rate
✅ Answer: D. Effective Annual Rate
Q8. What is the formula for Effective Annual Rate (EAR)?
A. EAR = APR × n
B. 1 + EAR = (1 + APR/n)ⁿ
C. EAR = Nominal Rate − Tax Rate
D. EAR = 1 ÷ APR
✅ Answer: B. 1 + EAR = (1 + APR/n)ⁿ
Q9. What does APR use for its calculation?
A. Real interest
B. Nominal compounding
C. Simple interest
D. Effective annual growth
✅ Answer: C. Simple interest
Q10. As the frequency of compounding increases, the EAR:
A. Decreases
B. Increases
C. Remains the same
D. Equals APR
✅ Answer: B. Increases
Q11. What are major sources of investment risk?
A. Government debt
B. Stock buybacks
C. Macroeconomic fluctuations
D. High P/E ratios
✅ Answer: C. Macroeconomic fluctuations
Q12. What does the Sharpe Ratio measure?
A. Risk-free returns
B. Risk premium to excess volatility
C. Market efficiency
D. Asset price correlation
✅ Answer: B. Risk premium to excess volatility
Q13. What distribution is used to model investment returns in normal conditions?
A. Lognormal
B. Poisson
C. Normal
D. Exponential
✅ Answer: C. Normal
Q14. What does skewness measure?
A. Standard deviation
B. Symmetry of a distribution
C. Expected return
D. Tax efficiency
✅ Answer: B. Symmetry of a distribution
Q15. What does kurtosis indicate in a distribution?
A. The center of mass
B. Spread of mean
C. Likelihood of extreme values
D. Compound returns
✅ Answer: C. Likelihood of extreme values
Q16. What is the arithmetic average best used for?
A. Measuring variance
B. Estimating compound returns
C. Measuring average yearly return
D. Estimating tax savings
✅ Answer: C. Measuring average yearly return
Q17. What is the geometric average used to compute?
A. Standard deviation
B. Real interest
C. Compound return over time
D. Market volatility
✅ Answer: C. Compound return over time
Q18. Which type of return is compounded annually to match terminal value?
A. Arithmetic mean
B. Real rate
C. Nominal return
D. Geometric mean
✅ Answer: D. Geometric mean
Q19. When estimating standard deviation from historical returns, we divide by:
A. n
B. n + 1
C. n − 1
D. Total assets
✅ Answer: C. n − 1
Q20. A risk-averse investor prefers investments with:
A. Higher variance
B. Lower expected returns
C. Lower risk for the same return
D. Unstable returns
✅ Answer: C. Lower risk for the same return
Q21. What is a risk premium?
A. Additional tax on gains
B. Amount paid for diversification
C. Difference between expected return and risk-free rate
D. Return earned in zero-risk environment
✅ Answer: C. Difference between expected return and risk-free rate
Q22. What is excess return?
A. Total return minus fees
B. Return above inflation
C. Actual return minus risk-free rate
D. Nominal return minus taxes
✅ Answer: C. Actual return minus risk-free rate
Q23. What two variables are needed to calculate Sharpe ratio?
A. Tax rate and nominal return
B. Excess return and standard deviation
C. Real return and inflation
D. Stock price and bond yield
✅ Answer: B. Excess return and standard deviation
Q24. Which distribution has symmetric properties and only requires mean and standard deviation to describe it?
A. Skewed
B. Lognormal
C. Uniform
D. Normal
✅ Answer: D. Normal
Q25. What is the standard deviation of a normal distribution with mean 10% and SD 20%?
A. 5%
B. 10%
C. 20%
D. 30%
✅ Answer: C. 20%
Q26. Which of the following is true about skewness in returns?
A. Negative skew implies more large gains
B. Positive skew implies more small losses
C. Negative skew implies more large losses
D. Skewness is unrelated to risk
✅ Answer: C. Negative skew implies more large losses
Q27. What does higher kurtosis in a return distribution suggest?
A. Less volatility
B. More frequent extreme returns
C. Lower mean
D. Equal spread
✅ Answer: B. More frequent extreme returns
Q28. What is the formula for Sharpe Ratio?
A. Return / Standard deviation
B. (Return – Inflation) / Variance
C. (Return – Risk-free rate) / Standard deviation
D. Risk-free rate / Return
✅ Answer: C. (Return – Risk-free rate) / Standard deviation
Q29. Which of these assets is considered risk-free in most financial models?
A. Corporate bond
B. Treasury bill
C. Preferred stock
D. Blue-chip equity
✅ Answer: B. Treasury bill
Q30. What does diversification help reduce?
A. Systematic risk
B. Interest rate
C. Unsystematic risk
D. Expected return
✅ Answer: C. Unsystematic risk
Q31. What type of risk cannot be eliminated through diversification?
A. Company-specific risk
B. Market risk
C. Unsystematic risk
D. Credit risk
✅ Answer: B. Market risk
Q32. If the correlation between two assets is -1, combining them will:
A. Increase overall portfolio risk
B. Eliminate all risk
C. Have no effect
D. Maximize the Sharpe ratio
✅ Answer: B. Eliminate all risk
Q33. What is the best measure of total risk in a portfolio?
A. Beta
B. Mean
C. Standard deviation
D. Correlation coefficient
✅ Answer: C. Standard deviation
Q34. The covariance between two perfectly correlated assets is:
A. Zero
B. Positive and maximum
C. Negative
D. Undefined
✅ Answer: B. Positive and maximum
Q35. Which of these combinations leads to the most diversification benefit?
A. Assets with positive correlation
B. Assets with high standard deviation
C. Assets with low beta
D. Assets with negative correlation
✅ Answer: D. Assets with negative correlation
Q36. What is the correlation value between two independent assets?
A. 0
B. 1
C. −1
D. Undefined
✅ Answer: A. 0
Q37. The primary objective of portfolio management is to:
A. Minimize taxes
B. Maximize profits
C. Maximize return for a given risk
D. Maximize asset count
✅ Answer: C. Maximize return for a given risk
Q38. Which of the following represents systematic risk?
A. Labor strike in a firm
B. Product recall
C. Market-wide recession
D. Legal suit against a company
✅ Answer: C. Market-wide recession
Q39. Which tool helps identify efficient portfolios?
A. Capital Asset Pricing Model
B. Sharpe Ratio
C. Efficient Frontier
D. Jensen’s Alpha
✅ Answer: C. Efficient Frontier
Q40. In portfolio theory, which variable is minimized by diversification?
A. Expected return
B. Risk premium
C. Variance
D. Correlation
✅ Answer: C. Variance
Q41. If two securities move exactly together in returns, their correlation is:
A. 0
B. −1
C. 1
D. Undefined
✅ Answer: C. 1
Q42. What does beta measure in a security?
A. Standard deviation of returns
B. Risk-free return
C. Systematic risk
D. Alpha
✅ Answer: C. Systematic risk
Q43. A beta greater than 1 means:
A. Lower volatility than the market
B. Equal volatility to the market
C. Higher volatility than the market
D. No correlation with the market
✅ Answer: C. Higher volatility than the market
Q44. What does a beta of zero indicate?
A. Stock is riskier than the market
B. No systematic risk
C. Perfect correlation with market
D. Always earns market return
✅ Answer: B. No systematic risk
Q45. In the CAPM, what is the intercept of the Security Market Line (SML)?
A. Market risk premium
B. Inflation rate
C. Risk-free rate
D. Beta
✅ Answer: C. Risk-free rate
Q46. What is the slope of the Security Market Line in CAPM?
A. Beta
B. Risk premium
C. Market risk premium
D. Alpha
✅ Answer: C. Market risk premium
Q47. What is the CAPM equation for expected return?
A. Risk-free rate + inflation
B. Market return × beta
C. Risk-free rate + beta × (Market return − Risk-free rate)
D. Return / standard deviation
✅ Answer: C. Risk-free rate + beta × (Market return − Risk-free rate)
Q48. What does alpha represent in a portfolio performance context?
A. Total portfolio risk
B. Return above what CAPM predicts
C. Risk-free rate
D. Maximum diversification
✅ Answer: B. Return above what CAPM predicts
Q49. What happens to a portfolio's risk if we add a risky asset with negative correlation?
A. It increases
B. It stays the same
C. It decreases
D. It becomes zero
✅ Answer: C. It decreases
Q50. What measure compares excess return to beta risk?
A. Sharpe Ratio
B. Treynor Ratio
C. Alpha
D. Jensen’s Alpha
✅ Answer: B. Treynor Ratio
Q51. Which measure is best for evaluating total portfolio risk-adjusted performance?
A. Treynor Ratio
B. Sharpe Ratio
C. Alpha
D. Beta
✅ Answer: B. Sharpe Ratio
Q52. The Treynor Ratio evaluates portfolio performance using:
A. Standard deviation
B. Alpha
C. Beta
D. Correlation
✅ Answer: C. Beta
Q53. In portfolio theory, which term defines the weight assigned to each security?
A. Risk premium
B. Capitalization
C. Asset allocation
D. Portfolio proportion
✅ Answer: D. Portfolio proportion
Q54. Which of the following is NOT a feature of a good portfolio?
A. Liquidity
B. High return only
C. Risk diversification
D. Tax efficiency
✅ Answer: B. High return only
Q55. In portfolio construction, the process of choosing various assets is called:
A. Asset allocation
B. Risk mapping
C. Beta selection
D. Risk-free investing
✅ Answer: A. Asset allocation
Q56. What does a low standard deviation imply in a portfolio?
A. High volatility
B. High risk
C. Consistent returns
D. High beta
✅ Answer: C. Consistent returns
Q57. Which type of market allows immediate buying and selling of securities?
A. Money market
B. Capital market
C. Derivatives market
D. Spot market
✅ Answer: D. Spot market
Q58. The geometric mean is always:
A. Greater than arithmetic mean
B. Equal to arithmetic mean
C. Less than or equal to arithmetic mean
D. More volatile than arithmetic mean
✅ Answer: C. Less than or equal to arithmetic mean
Q59. The real rate of return is adjusted for:
A. Tax
B. Risk
C. Inflation
D. Beta
✅ Answer: C. Inflation
Q60. If the inflation rate is higher than the nominal return, the real return is:
A. Positive
B. Negative
C. Zero
D. Infinite
✅ Answer: B. Negative
Q61. Which of the following is considered a speculative activity?
A. Diversified mutual fund investing
B. Government bond holding
C. Buying stocks based on rumors
D. Investing in pension plans
✅ Answer: C. Buying stocks based on rumors
Q62. What defines a risk-free asset in financial theory?
A. High return, no volatility
B. No default risk, no variance
C. Positive beta
D. High liquidity and volatility
✅ Answer: B. No default risk, no variance
Q63. Which portfolio strategy involves periodic rebalancing?
A. Active management
B. Value investing
C. Buy-and-hold
D. Passive investing
✅ Answer: A. Active management
Q64. Which of the following best describes liquidity risk?
A. Inability to find buyers in the market
B. Exposure to interest rate changes
C. Uncertainty in price volatility
D. Risk of credit default
✅ Answer: A. Inability to find buyers in the market
Q65. What does "risk appetite" refer to?
A. Maximum return expectation
B. Investor’s ability to time the market
C. Willingness to take risk for potential return
D. Time horizon of investment
✅ Answer: C. Willingness to take risk for potential return
Q66. Which term represents a reduction in purchasing power over time?
A. Interest
B. Inflation
C. Depreciation
D. Deflation
✅ Answer: B. Inflation
Q67. If beta of a stock is 1, it means the stock:
A. Moves less than the market
B. Is uncorrelated with the market
C. Moves in tandem with the market
D. Is risk-free
✅ Answer: C. Moves in tandem with the market
Q68. What is the role of a risk-free asset in a portfolio?
A. Maximize beta
B. Reduce portfolio return
C. Enhance volatility
D. Provide stability
✅ Answer: D. Provide stability
Q69. Which type of analysis focuses on company financials?
A. Technical analysis
B. Fundamental analysis
C. Quantitative analysis
D. Sentiment analysis
✅ Answer: B. Fundamental analysis
Q70. Which tool is used in technical analysis?
A. Income statement
B. Balance sheet
C. Moving average
D. Discounted cash flow
✅ Answer: C. Moving average
Q71. Which of the following is NOT a technical indicator?
A. Bollinger Bands
B. RSI (Relative Strength Index)
C. P/E Ratio
D. MACD
✅ Answer: C. P/E Ratio
Q72. What does over-diversification lead to?
A. Reduced risk with increased return
B. Increased portfolio cost and complexity
C. Enhanced market timing
D. Maximized alpha
✅ Answer: B. Increased portfolio cost and complexity
Q73. In which phase is portfolio rebalancing most important?
A. Portfolio selection
B. Execution
C. Revision
D. Objective setting
✅ Answer: C. Revision
Q74. In SAPM, what is a benchmark?
A. Total investment capital
B. Goal return target
C. Standard to compare portfolio performance
D. Stock market volatility
✅ Answer: C. Standard to compare portfolio performance
Q75. Which market structure is essential for SAPM implementation?
A. Monopoly
B. Perfect competition
C. Efficient market
D. Oligopoly
✅ Answer: C. Efficient market
Q76. Which of the following is the most direct way to reduce unsystematic risk?
A. Hedging
B. Investing in Treasury bonds
C. Diversification
D. Buying options
✅ Answer: C. Diversification
Q77. Which market deals with short-term debt instruments?
A. Capital market
B. Derivatives market
C. Money market
D. Equity market
✅ Answer: C. Money market
Q78. What is the main objective of fundamental analysis?
A. Study historical price trends
B. Analyze chart patterns
C. Estimate intrinsic value of securities
D. Track moving averages
✅ Answer: C. Estimate intrinsic value of securities
Q79. A portfolio's beta measures its:
A. Expected return
B. Diversification level
C. Systematic risk
D. Total risk
✅ Answer: C. Systematic risk
Q80. The efficient frontier in portfolio theory represents:
A. All possible investment portfolios
B. Portfolios with the least risk
C. Portfolios with the maximum risk
D. Optimal portfolios offering the highest return for a given risk
✅ Answer: D. Optimal portfolios offering the highest return for a given risk
Q81. Which one is a debt instrument among the following?
A. Preference shares
B. Mutual fund
C. Debentures
D. Equity shares
✅ Answer: C. Debentures
Q82. A highly positive correlation between two securities means:
A. Returns always differ
B. Returns move in opposite directions
C. Returns move in same direction
D. Returns are unrelated
✅ Answer: C. Returns move in same direction
Q83. The Capital Market Line (CML) is based on:
A. Portfolio beta
B. Total risk (standard deviation)
C. Sharpe ratio
D. Systematic risk
✅ Answer: B. Total risk (standard deviation)
Q84. Systematic risk can be mitigated by:
A. Holding risk-free assets
B. Diversification
C. Investing in gold
D. Cannot be diversified
✅ Answer: D. Cannot be diversified
Q85. Which of the following defines the expected return of a portfolio?
A. Arithmetic mean of individual returns
B. Weighted average of individual returns
C. Maximum return among the assets
D. Sum of all asset risks
✅ Answer: B. Weighted average of individual returns
Q86. Inflation impacts which of the following the most?
A. Treasury bills
B. Equity returns
C. Real rate of return
D. Market capitalization
✅ Answer: C. Real rate of return
Q87. Which type of bond is most affected by interest rate changes?
A. Short-term bond
B. Floating rate bond
C. Long-term bond
D. Zero-coupon bond
✅ Answer: D. Zero-coupon bond
Q88. In SAPM, the term “alpha” refers to:
A. Total portfolio return
B. Risk-adjusted return over benchmark
C. Beta-neutral investment
D. Return from government bonds
✅ Answer: B. Risk-adjusted return over benchmark
Q89. What is meant by 'covariance' in portfolio theory?
A. Measure of individual risk
B. Risk of market volatility
C. Extent to which two assets move together
D. Value at risk
✅ Answer: C. Extent to which two assets move together
Q90. Which is NOT a stage in portfolio management?
A. Objective setting
B. Portfolio revision
C. Tax assessment
D. Performance evaluation
✅ Answer: C. Tax assessment
Q91. What is the key difference between speculation and gambling?
A. Speculation is legal, gambling is illegal
B. Speculation involves informed decisions, gambling is based on chance
C. Gambling guarantees profit
D. Speculation involves sports bets
✅ Answer: B. Speculation involves informed decisions, gambling is based on chance
Q92. A well-diversified portfolio ideally contains assets with:
A. High correlation
B. No correlation
C. Negative correlation
D. Perfect correlation
✅ Answer: C. Negative correlation
Q93. The 'Sharpe Ratio' is used to compare:
A. Risk-free rates
B. Price movements
C. Return per unit of total risk
D. Return per unit of beta
✅ Answer: C. Return per unit of total risk
Q94. What is meant by a “bull market”?
A. Market going sideways
B. Declining market
C. Rising market
D. Volatile market
✅ Answer: C. Rising market
Q95. What does P/E ratio indicate in fundamental analysis?
A. Return on investment
B. Market capitalization
C. Valuation of a company’s earnings
D. Risk level
✅ Answer: C. Valuation of a company’s earnings
Q96. Which of the following is a feature of equity investment?
A. Fixed returns
B. Priority in liquidation
C. Ownership in company
D. Tax-free income
✅ Answer: C. Ownership in company
Q97. Which component does not directly affect the intrinsic value of a stock?
A. Dividends
B. Earnings growth
C. P/E ratio
D. Moving average
✅ Answer: D. Moving average
Q98. A mutual fund investing only in government securities is considered:
A. High-risk
B. Equity-oriented
C. Debt-oriented
D. Balanced fund
✅ Answer: C. Debt-oriented
Q99. A defensive stock typically belongs to which sector?
A. Technology
B. Healthcare
C. Real estate
D. Aviation
✅ Answer: B. Healthcare
Q100. The primary goal of portfolio management is to:
A. Maximize trading frequency
B. Minimize taxes
C. Maximize return at acceptable risk
D. Buy low, sell high
✅ Answer: C. Maximize return at acceptable risk
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