Q: “If a portfolio falls on CML all unsystematic or unique risk diversified away”.

Do you agree with

this statement? Why or Why Not?

Ans: A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios
depending on the risk-free rate of return and the level of risk (standard deviation) for a particular portfolio.
As we know all portfolio on the CML are perfectly positively correlated(r =1) with the completely
diversified market portfolio. Therefore, complete diversification means elimination all unsystematic or
unique risk. So if a portfolio falls on CML all unsystematic or unique risk diversified away.

Q: What do you mean by “systematic risk” and “unsystematic risk”? Give example.

Ans: Systematic risk that part of a security's risk that is common to all securities of the same general class
(stocks and bonds) and thus cannot be eliminated by diversification; also known as market risk. The
measure of systematic risk in stocks is the beta coefficient. Examples include Changes in GDP, interest
rates and inflation
Unsystematic can be defined as Company or industry specific risk that is inherent in each investment. The
amount of unsystematic risk can be reduced through appropriate diversification. Also known as "specific
risk", "diversifiable risk" or "residual risk". Examples include Strikes, accidents and takeovers

Q: Mr. Ric is a short seller. Is it true that Rics’ potential losses unlimited? Why? Conversely.is it
true that the maximum return that Ric’s can earn on this investment is 100%?Why?

Ans: Borrowing a security (or commodity futures contract) from a broker and selling it, with the
understanding that it must later be bought back (hopefully at a lower price) and returned to the broker.
Short selling (or "selling short") is a technique used by investors who try to profit from the falling price of
a stock.

Consider Mr Ric is a short seller who wants to sell short 100 shares of a company believing it is overpriced
and will fall. The investor's broker will borrow the shares from someone who owns them with the promise
that the investor will return them later. The investor immediately sells the borrowed shares at the current
market price.

If the prices of the shares increase, the potential losses are unlimited. The company's shares may go up and
up, but at some point the investor has to replace the 100 shares he sold. In that case, the losses can mount
without limit until the short position is covered.

If the price of the shares drops, he "covers the short position" by buying back the shares, and his/her broker
returns them to the lender. The profit is the difference between the price at which the stock was sold and
the cost to buy it back, minus commissions and expenses for borrowing the stock. An investor can get
100% profit if the share price is falling more than its borrowing price.

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Q: For what reasons have investors moved towards index mutual fund keep?

Ans: For the following reasons have investors moved towards index mutual fund.

1. The average consumer does not have the time or resources to gain enough knowledge to become a
confident stock picker. Mutual fund portfolio managers have the expertise and resources to do the required
in-depth research needed before an investment is approved.

2. Mutual funds invest in a broad range of securities. Mutual fund unitholders can benefit from
diversification usually available only to individual investors wealthy enough to buy significant positions in
a wide variety of securities.

3. Index funds are appropriate for investors who are willing to settle for average returns. Many well-
managed mutual funds outperform the indexes year after year, providing superior returns for unitholders.
Returns are not the only criteria to examine when choosing a mutual fund.

4. The fees paid to mutual funds companies and managers are well worth the services and benefits
provided to the investor i.e.: diversification, professional management, record keeping, liquidity, etc. There
are fees in any investment product. For example, if you invest in GICs, you pay a fee called a spread.

5. When a fund disburses capital gains to its investors, it means it is making money for its investors.
Capital gains distributions, as well as income and dividend distributions, can be converted into more fund
units, which will continue to grow in value.

6. If you have personal ethical standards such as preferring environmentally friendly companies, you have
the option of choosing from the wide range of funds that are designed specifically to invest in companies
that meet certain ethical criteria.

7. Financial advisors have their clients' best interests at heart when recommending a fund. Financial
advisors must recommend funds that suit the clients' individual goals and objectives.

8. One of the major benefits of investing in mutual funds is liquidity. You can easily sell your units any
time you need cash. Fund companies are required to buy back redeemed units whereas shares sold on the
open market can only be sold if there is a demand for that stock.

9. With over 1,800 mutual funds available, there is a wide range of mutual fund choices with varying fees.
Management fees should not be the most important consideration when choosing a fund. If a fund is
offering superior returns, a higher-than-average management fee may not be an issue.

10. Mutual fund investors continue to believe in the mutual fund product. The industry has grown from
$25 billion in assets under management in 1990 to $317 billion in 1998 as the confidence in mutual funds
as an investment product continues to grow.

Q: Explain “stop buy order” and “stop loss order” with numerical example.

Ans: Stop buy order: Variation of a stop order in which a broker is instructed to buy a commodity or
security when its price reaches a certain level

Stop loss order: An order placed with a broker to sell a security when it reaches a certain price. Also
known as a "stop order" or "stop-market order". A stop-loss is designed to limit an investor's loss on a
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security position. Setting a stop-loss order for 10% below the price at which you bought the stock will limit
your loss to 10%. For example, let's say you just purchased Microsoft (Nasdaq: MSFT) at $20 per share.
Right after buying the stock you enter a stop-loss order for $18. This means that if the stock falls below
$18, your shares will then be sold at the prevailing market price.
Q: What factors might an individual investor take into account in determining his investment
policy?

Ans: The following factors should take into account to determine IP

• Account information

• Investment objective

• Risk tolerance

• Allowable assets

• Rebalancing guidelines

• Unique circumstances

Account Information
Account information reveals the actual accounts that will be managed according to the IPS. For instance,
an investor may elect to manage a qualified retirement plan, taxable account and a trust based on the same
IPS.

Investment Objective
The investment objective is self explanatory. This section of the investment policy statement identifies the
investor's investment objective. Investors who seek to generate high returns may use a term such as
"growth" here. Investors who only desire to produce income in the portfolio may describe their investment
objective as "current income"
Risk Tolerance
Risk tolerance is another section that is fairly straightforward. Risk tolerance indicates the amount of
volatility that the investor is comfortable with having in the portfolio. Risk tolerance questionnaires
available on the internet or from a financial services company may aid investors in determining their
individual risk tolerances.
Allowable Assets
This section of the IPS indicates the assets that the investor will allow to direct investments. Risk and
return, by convention, are factors that may cause investors to choose one asset over the next. For example,
an investor with low risk tolerance that is near retirement would be more likely to choose safe, but lower
yield assets like Treasury bonds. Liquidity, marketability and withdrawal fees could be additional factors
that are used to determine an investor's allowable assets. Items such as domestic equity, international
equity, private equity and real estate may be included here.
Rebalancing Guidelines
Rebalancing guidelines reveal the conditions under which the investor will rebalance the portfolio.
Investors may choose to rebalance the portfolio quarterly, semi-annually or annually. Other investors
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believe that a better approach to take is to rebalance when target ranges have been violated. For instance,
an IPS may indicate that 75% of a portfolio should be invested in domestic equity. However, the portfolio
is allowed to hold as little as 70% domestic equity and as much as 80%. Thus, the portfolio would be
rebalanced any time the domestic equity is outside of the 70-80% window. Individual investors can also
use this opportunity to evaluate portfolio performance. One method of doing so is to compare the absolute
return generated to his individual needs. For example, if the portfolio generated 6% during the calendar
year but the investor's needs call for 8%, then the portfolio has underperformed by 2%.
Unique Circumstances
Finally, it is essential for all investor-created IPs to contain a unique circumstances section. This section
would detail any investor specific information. For example, charitable giving or ownership of closely held
stock may be indicated in this section.
There are a host of additional sections that could also be included in an IPS. Sections titled "frequency of
portfolio reviews", "tax considerations" and "constraints" are only a few examples of additional sections
that could be added. Finally, some investors may find a "constraints" section beneficial as well.

Q: Why does it not make sense to establish an investment objective of “Making a lot of money”?
Ans: The investment objective is to “making lot of money” not making sense. It is because of legal and
ethical issue. We earn lot of money illegally and unethically. But it is the violation of legal and ethical
issue of investment. So investors who seek to generate high returns may use a term such as "growth" here.
Investors who only desire to produce income in the portfolio may describe their investment objective as
"current income".
Short Notes

Economic analysis: Systematic approach to determining the optimum use of scarce resources, involving
comparison of two or more alternatives in achieving a specific objective under the given assumptions and
constraints. It takes into account the opportunity costs of resources employed and attempts to measure in
monetary terms the private and social costs and benefits of a project to the community or economy

Industry analysis: A market assessment tool designed to provide a business with an idea of the complexity
of a particular industry. Industry analysis involves reviewing the economic, political and market factors
that influence the way the industry develops. Major factors can include the power wielded by suppliers and
buyers, the condition of competitors, and the likelihood of new market entrants.

Company analysis: Investors conduct company analysis to evaluate securities, gathering information about
the financials and operations, especially sales, earnings, growth potential, assets, debt, management,
products, and competition. Company analysis takes into consideration only those variables that are directly
related to the company itself, rather than the overall state of the market or technical analysis data. It is also
called fundamental analysis
Market order: A market order is a buy or sells order to be executed by the broker immediately at current
market prices. As long as there are willing sellers and buyers, a market order will be filled.
A market order is the simplest of the order types. Once the order is placed, the customer has no control
over the price at which the transaction is executed. The broker is merely supposed to find the best price
available at that time. In fast-moving markets, the price paid or received may be quite different from the
last price quoted before the order was entered.

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The first answer was a little misleading when it said "the price the broker is selling the stock for" since the
broker is not the one selling the stock.

Example would be:

"Buy 200 shares of GE stock at the market" and
"Sell 100 shares of GE stock at the market."
This is the best type of order to make sure the transaction is completed, but it may not be at the best price.
Limit order: A limit order is an order to buy a security at no more (or sell at no less) than a specific price.
This gives the customer some control over the price at which the trade is executed, but may prevent the
order from being executed ("filled").
Examples would be:
"Buy 200 shares of GE stock limit $31.99" and
Sell 100 shares of GE stock limit $31.97."
Stop order: A stop order (also stop loss order) is an order to buy (or sell) a security once the price of the
security climbed above (or dropped below) a specified stop price. When the specified stop price is reached,
the stop order is entered as a market order (no limit).
With a stop order, the customer does not have to actively monitor how a stock is performing. However,
because the order is triggered automatically when the stop price is reached, the stop price could be
activated by a short-term fluctuation in a security's price. Once the stop price is reached, the stop order
becomes a market order.
Examples would include:
"Buy 200 shares of GE stock stop $32.00" and
"Sell 100 shares of GE stock stop $31.96."
Stop-limit order: A stop-limit order combines the features of a stop order and a limit order. Once the stop
price is reached, the stop-limit order becomes a limit order to buy (or to sell) at no more (or less) than a
specified price.
The first answer is incorrect in saying "a stop limit is the same as the stop loss." The difference between
the two is that the stop loss order becomes a market order when the stop price is reached, while a stop-limit
order becomes a market order when the stop price is hit.
Examples would include:
"Buy 200 shares of GE stock stop $32.00 limit $32.05" and
"Sell 100 shares of GE stock stop $31.96 limit $31.91."
To this point all that I have listed are types of orders used to buy or sell and are mutually exclusive. An
order to buy or sell a stock can only be one of the types listed.

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Short Sale: A short sale means selling securities the seller does not then own. This can be done with a
market order, a limit order, a stop order or a stop-limit order.
Examples would include
"Sell 100 shares of GE stock short at the market" and
"Sell 100 shares of GE stock short limit $31.97."
Much of this text was cut and pasted from the Wikipedia sources listed. The original sources have some
more details and discussions.
Derivative security: A financial security, such as an option or future, whose characteristics and value
depend on the characteristics and value of an underlying security.
Maintenance Margin: The minimum amount of equity that must be maintained in a margin account. In the
context of the NYSE and NASD, after an investor has bought securities on margin, the minimum required
level of margin is 25% of the total market value of the securities in the margin account. Keep in mind that
this level is a minimum, and many brokerages have higher maintenance requirements of 30-40%.
Call Option: An agreement that gives an investor the right (but not the obligation) to buy a stock, bond,
commodity, or other instrument at a specified price within a specific time period.
Over-The-Counter Market: A decentralized market of securities not listed on an exchange where market
participants trade over the telephone, facsimile or electronic network instead of a physical trading floor.
There is no central exchange or meeting place for this market.
Secondary market: The market in which securities are traded after they are initially offered in the primary
market. Most trading occurs in the secondary market. The New York Stock Exchange, as well as all other
stock exchanges and the bond markets, are secondary markets. Seasoned securities are traded in the
secondary market.
Money market: Market for short-term debt securities, such as banker's acceptances, commercial paper,
repos, negotiable certificates of deposit, and Treasury Bills with a maturity of one year or less and often 30
days or less. Money market securities are generally very safe investments which return a relatively low
interest rate that is most appropriate for temporary cash storage or short-term time horizons. Bid and ask
spreads are relatively small due to the large size and high liquidity of the market

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