Banking Financial Awareness · Economics

Financial Markets and Instruments

1,955 Questions

Financial markets and instruments cover mutual funds, risk management, portfolio optimization, and investment strategies. These topics are critical for banking and financial awareness sections in competitive exams. Practice these questions to understand operational risk, asset valuation, and market regulations.

Portfolio optimizationOperational risk managementMutual funds valuationInvestment income typesHedging strategies

Financial Markets and Instruments Questions

Multiple choice

Units of a mutual fund are short term capital assets, if

  1. they are held for not more then twelve months preceeding the date of transfer.

  2. they are held for less than twelve months preceeding the date of transfer.

  3. they are held for not more than three years preceeding the date of transfer.

  4. they are held for less than three years preceeding the date of transfer.
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Under income tax laws, mutual fund units are classified as short-term capital assets if held for NOT MORE THAN 12 months preceding the date of transfer. Option A correctly states 'not more than twelve months' which includes exactly 12 months. Option B incorrectly says 'less than twelve months' which would exclude holdings of exactly 12 months. The distinction matters for the exact 12-month holding period.

Multiple choice

Yield curve is a graph that shows

  1. yields of various equities of various firms

  2. yields from mutual funds

  3. yields of various bonds of various maturities using one set of bonds such as Govt. security

  4. none of the above
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

A yield curve plots bond yields against their time to maturity, showing how interest rates vary across different terms. Government securities are typically used because they are risk-free and have consistent credit quality. Option C correctly describes this fundamental fixed-income concept.

Multiple choice

Which of the following is NOT required to appear on the cover page of the offer document?

  1. Date new fund offer opens

  2. Date new fund offer closes

  3. Earliest closing date (if any) for the new fund offer

  4. Date on which approved by trustees
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The offer document cover page displays key dates for investors: NFO opening/closing dates and earliest closing date. The trustees' approval date is an internal regulatory matter, not investor-facing information. Option D is correctly identified as NOT required on the cover.

Multiple choice

An investor has opted for a Systematic Transfer Plan. This means

  1. he can transfer on a periodic basis, a specified amount from one scheme to another

  2. he is required to invest a fixed sum periodically

  3. the investment would provide the benefit of rupee cost averaging

  4. he can transfer on a periodic basis a specified amount from the scheme to his bank account
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

STP allows periodic transfers from one scheme to another, helping investors rebalance or move from debt to equity funds gradually. Option A accurately defines STP. Option B describes SIP (Systematic Investment Plan), and Option D describes withdrawal, not transfer.

Multiple choice

How would you measure the performance of an Equity Index Fund?

  1. There is no need to benchmark an Equity Index Fund

  2. By comparing it with return on Government securities

  3. By comparing its performance with a money market mutual fund

  4. By comparing its performance with the Index it is designed to track
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

An Equity Index Fund is designed to replicate the performance of a specific market index. The only meaningful way to measure its performance is by comparing it with the index it tracks. Tracking error (deviation from the index) is the key metric for evaluating how well the fund fulfills its purpose.

Multiple choice

Sharpe and Treynor ratios are measures of

  1. average return

  2. risk

  3. risk adjusted return

  4. beta of the portfolio
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Sharpe Ratio and Treynor Ratio are both risk-adjusted performance measures. Sharpe Ratio uses total risk (standard deviation), while Treynor Ratio uses systematic risk (beta). Both divide excess return by a risk measure, producing metrics that evaluate returns relative to risk taken.

Multiple choice

Fund House ratings by CRISlL, can be used by distributors

  1. to know CRISlL's opinion on the fund management practices and over all management quality of an AMC / a fund house

  2. to know risk of default by the AMC / Fund house

  3. to evaluate the performance of the schemes managed by the AMC / Fund house

  4. to compare the performance of the schemes managed by different fund houses
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

CRISIL's Fund House ratings evaluate the fund management company's practices, processes, and overall management quality - not scheme performance or default risk. These ratings assess the AMC's operational capability, risk management, and governance standards rather than comparing returns across schemes or houses.

Multiple choice

When would you review the financial plans of your client?

  1. Whenever the investor's personal circumstances or financial goals change

  2. Whenever stock market prices fall sharply

  3. Shortly before the filling of the income tax returns of your client

  4. Each year at the time of the presentation of the Government budget
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Financial planning is dynamic and must adapt to changes in a client's life circumstances, goals, or financial situation. Market movements and tax filing deadlines are not the appropriate triggers for reviewing a comprehensive financial plan.

Multiple choice

Which classification of mutual funds does not exist?

  1. Pension fund or provident fund

  2. Closed - end or open - end

  3. Load fund or no load fund

  4. Active fund or passive fund.
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Mutual funds are classified by structure (closed-end or open-end), fee structure (load or no-load), and investment strategy (active or passive). Pension and provident funds are distinct retirement savings vehicles, not mutual fund classifications.

Multiple choice

A sponsor of a mutual fund

  1. can act as the distributor of the mutual fund

  2. cannot act as the distributor of the mutual fund

  3. can act as the trustee of the mutual fund

  4. can act as the custodian of the mutual fund
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

A mutual fund sponsor can perform multiple roles including distribution of the fund's schemes to investors. However, the sponsor cannot act as trustee or custodian, as these must be independent entities to ensure proper governance and investor protection.

Multiple choice

Which of the following is true?

  1. A fund sponsor can contribute to the initial corpus of the trust

  2. A fund sponsor can contribute to the capital of the AMC

  3. A fund sponsor can invest in his own fund's schemes

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

A fund sponsor has multiple roles and investment capacities: contributing to the trust's initial corpus, investing in the AMC's capital, and investing in schemes of their own fund. This demonstrates the sponsor's multifaceted involvement in the mutual fund structure.

Multiple choice

Jacob recommends of the following risk allocation for a low risk portfolio:

  1. 50% govt. securities fund + 50% money market funds

  2. 50% govt. securities fund + 50% index fund

  3. 50% govt. securities fund + 50% international funds

  4. 50% govt. securities fund + 50% aggressive growth funds
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

A low-risk portfolio should prioritize capital preservation and stable returns. Government securities funds provide safety, while money market funds offer liquidity and low volatility, making this 50-50 allocation appropriate for conservative investors seeking minimal risk.

Multiple choice

Asset allocation of a portfolio should be re-evaluated every time, there is change in the

  1. family size and requirements

  2. market condition

  3. job of the investor

  4. all of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Asset allocation is not a one-time decision - it must align with your current financial situation and capacity. When your family size grows (or shrinks), your financial obligations change significantly. Similarly, job changes affect your income stability and risk profile. Market conditions also matter - a bull market might require rebalancing to maintain your target allocation. All these factors warrant re-evaluation.

Multiple choice

Which of the following statements is an adequate description of reality?

  1. When compared to gilt funds, securities in debt funds have higher risk of default

  2. Growth and risk are associated with equity funds

  3. Debt funds have higher NAV fluctuation when compared to money market funds

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

All three statements accurately describe the risk-return characteristics of different mutual fund categories. Gilt funds invest in government securities and carry virtually no default risk, unlike debt funds that may hold corporate bonds. Equity funds offer higher growth potential but with significantly higher volatility - risk and growth are positively correlated. Money market funds invest in ultra-short-term instruments making them very stable, whereas debt funds with longer duration securities show more NAV fluctuation.