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Capital Market and Portfolio Management
Jun 2026 Examination
Q1.
An individual investor, Mr. Arjun, recently opened a trading account and wants
to invest in equity shares listed on the stock exchange. While placing his
first order, he notices several trading terms such as market order, limit
order, bid price, ask price, and order matching mechanism on the trading
platform. Since he is new to the stock market, he wants to understand how the
stock market trading mechanism works before making investment decisions.
Question: Explain the structure of the capital market and the trading
mechanisms used in modern stock exchanges. In your answer, discuss the role of
stock exchanges, brokers, order types, and electronic order matching systems in
facilitating efficient trading. (10 Marks)
Ans
1.
Introduction
The
capital market is the segment of the financial system where long-term financial
instruments such as equity shares, bonds, and debentures are bought and sold
between investors and companies. It plays a critical role in channelling
savings into productive investments by connecting those who need capital with
those who have surplus funds. For a new investor like Mr. Arjun, understanding
how capital markets are structured and how trading actually happens on modern
stock exchanges is the essential first step before committing any funds.
Without this understanding, even sound
Q2
(A). A senior manager at an investment firm receives confidential information
that a listed company is about to announce a major merger that will
significantly increase its share price. Before the news becomes public, the
manager considers purchasing shares of the company for personal gain. Question:
Identify the ethical and regulatory issues involved in this situation. Explain
how securities regulators such as SEBI ensure fair and transparent functioning
of capital markets. (5 Marks)
Ans
2(A).
Introduction
The
situation described is a clear case of insider trading, one of the most serious
violations in capital market regulation. The senior manager possesses material
non-public information about a forthcoming merger and is considering using that
information to personally profit before the announcement reaches other market participants.
This behavior is both ethically indefensible and legally prohibited under
Indian securities law.
Concept
and Application
Insider
trading occurs when a person with access to price-sensitive, non-public
information about a listed company trades in its securities before that
information is publicly disclosed. The ethical problem is fundamental: when
privileged information is used for personal gain, the market is no longer a
level playing field. Other investors who do not have access to the same information
make decisions based on incomplete knowledge, resulting in unfair losses or
missed gains. The senior manager's fiduciary duty to the
Q2
(B). An investor wants to evaluate the performance of a mutual fund using
different risk-adjusted performance measures. The following information is
available: Return of the Portfolio (Rp): 14%, Risk-Free Rate (Rf): 6%, Market
Return (Rm): 12%, Beta of Portfolio (p): 1.2, Standard Deviation of Portfolio
(p): 10%. Required: a) Calculate the Sharpe Ratio of the portfolio. b)
Calculate the expected return using CAPM. c) Calculate Jensen's Alpha and
interpret whether the portfolio has outperformed the market. (5 Marks)
Ans
2(B).
Introduction
Risk-adjusted
performance measures are essential tools for evaluating whether a portfolio
manager has delivered returns that justify the level of risk taken. The Sharpe
Ratio measures return per unit of total risk, CAPM provides the expected return
for the level of systematic risk the portfolio carries, and Jensen's Alpha measures
whether the portfolio has generated returns above or below what CAPM predicts.
Together, these three measures give a comprehensive picture of portfolio
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