MMPF 007 Solved Guess Paper 2026 | Equity Markets for IGNOU MBA, MBA Online and MBAFM

Risk appetite, risk-return trade-off and risk measurement

Question: What do you understand by Risk Appetite and Risk Return Trade-off? Explain any four techniques of risk measurement.

Risk-return trade-off means potential return rises as risk rises. Low risk gives low potential return; high risk gives high potential return. If an index fund earns 12 per cent over the long run and risk-free government securities earn 8 per cent, the extra 4 per cent is the risk premium.

Risk appetite (risk tolerance) is an investor's capacity to take risk. A risk-averse investor accepts lower returns for known risk and buys government bonds, T-bills, post office deposits and fixed deposits. A risk-taker accepts extra risk for extra return. A risk-neutral investor deliberately ignores risk and looks only at expected return.

Techniques of risk measurement

1. Variance and standard deviation: the most common measures. σ² = Σ(R_i − R̄)² / (n − 1). For returns of 16, 12, 20, −13, 15 and 10 (mean 10), Σ(R_i − R̄)² = 694, so σ² = 694 / 5 = 138.8 and σ = 11.78 per cent.
2. Sharpe ratio: excess return over the risk-free rate per unit of standard deviation, (r_p − r_f) / σ_p. A fund returning 20 per cent with a risk-free rate of 10 per cent and σ of 8 per cent scores (20 − 10) / 8 = 1.25.
3. Treynor ratio: the same idea using beta, (r_p − r_f) / β_p. Portfolio A: (12 − 9) / 0.7 = 4.29. Portfolio B: (14 − 9) / 1.2 = 4.17. Portfolio A gives the better reward per unit of market risk even though B has the higher raw return.
4. Value at Risk (VaR): the likely maximum loss over a set period at a given confidence level, estimated by the historical, variance-covariance or Monte Carlo method.

Conclusion: higher return needs higher risk, so every investor must know whether they are averse, a taker or neutral. Standard deviation, Sharpe, Treynor and VaR put a number on that risk.

Book building: steps, benefits and limitations

Question: What is Book Building? Explain the steps leading to issue of equity shares using the book building process. Discuss the benefits and limitations of book building method.

Book building is the SEBI-defined process of collecting investor bids within a price band and fixing the issue price from those bids. The cap of the band cannot exceed 120 per cent of the floor price.

Steps in the book building process

1. Appoint the book runner: a SEBI-registered merchant banker acts as lead manager.
2. File draft documents: prospectus, due diligence certificate, board resolution and shareholder approval go to SEBI.
3. Fix the price band: disclosed at least 2 working days before an IPO (1 day for an FPO) if not in the prospectus.
4. Invite quotes: syndicate members collect bids and build the book.
5. Advertise: the bid window usually stays open for five business days.
6. Fix the cut-off price and allocation with the book runner.
7. Limit allotment to any single investor to avoid a takeover threat.
8. File the final prospectus with the Registrar of Companies.
9. Open the placement portion, only after the RoC filing.
10. Close the placement portion a day before the public portion opens.
11. Allot the public portion at the same price, proportionately if oversubscribed.

In a 100 per cent book-built issue, retail individual investors get at least 35 per cent, non-institutional investors at least 15 per cent, and qualified institutional buyers not more than 50 per cent.

Benefits: real price discovery from actual demand, better subscription with less devolvement, and a reliable price benchmark. Limitations: no two-way quote system as in the US, heavy reliance on reputation and peer pressure, and a thin syndicate whose price may not suit retail investors.

Conclusion: book building lets demand set the price, which gives fairer pricing and fewer failed issues, though the Indian version still has gaps.

Order execution, types of orders and settlement

Question: What is an Order Execution System? Describe different types of orders. Explain the settlement procedure of transactions executed on the exchange.

The order execution system is the trading engine matching the best buy quote with the best sell quote on price-time priority. An order that finds a match trades at once; one that does not waits in the order book as a passive order.

Types of orders

1. Market order: executes immediately at the best available price.
2. Limit order: a buy limit fills at that price or lower, a sell limit at that price or higher.
3. Stop loss order: becomes a market order once its trigger price is hit.
4. Market if touched: turns into a market order when a set price is reached.
5. Day order: expires at the close if not executed.
6. Good till cancelled: stays live until executed or cancelled, up to six months.
7. Immediate or cancel: must execute at once or is withdrawn.

Settlement: clearing works out each member's obligations; settlement is the actual transfer of funds and securities, netted multilaterally and completed on T+1. The steps run from trade download to the clearing corporation, confirmation and netting, pay-in advice, instructions to clearing banks and depositories, pay-in of securities and funds, pay-out of securities and funds, and finally confirmation to custodians through depository participants and clearing banks.

If securities are not delivered, the clearing house holds a buy-in auction. Through novation the clearing corporation becomes buyer to every seller and seller to every buyer, which removes counterparty risk.

Conclusion: orders match on price-time priority, seven order types serve different needs, and settlement completes in eleven steps on T+1.

Technical analysis: evolution, assumptions and limitations

Question: What is Technical Analysis? How has it evolved? Discuss the assumptions and limitations of Technical Analysis.

Technical analysis is the in-depth study of price and volume data for a stock or index to predict future price behaviour. It uses only market data such as price, volume, 52-week high and low, and open interest.

Evolution: it traces back to ancient Greek marketplaces, then Joseph de la Vega's account of 17th-century Amsterdam trading, Homma Munehisa's candlestick work on Japanese rice prices in the 18th century, Chinese trading manuals, Charles Dow's Dow Theory from 1896, and Ralph Nelson Elliott's wave theory in the 1930s, later revived by Robert Prechter.

Assumptions: the market prices in all public information; prices move in trends; history tends to repeat because people react the same way; supply and demand decide value; and shifts in supply and demand show up as trend changes on charts.

Limitations: chart reading is subjective, so a signal may be noise; methods like Dow Theory react late; history never repeats exactly; two analysts can read the same chart differently; and indicators often contradict each other.

Conclusion: technical analysis times entry and exit from market data alone. Most investors use it alongside fundamental analysis rather than instead of it.

Mutual funds: concept, structure, benefits and drawbacks

Question: Explain the concept of Mutual Funds. Describe the structure of Mutual Funds in India. Discuss the important benefits and disadvantages of investing through Mutual Funds route.

A mutual fund pools the savings of many investors and invests the total in securities such as shares or bonds according to the scheme's objective. Investors hold units. The idea reached India in 1964 with the Unit Trust of India's US-64 scheme.

Structure: the sponsor seeks SEBI approval; a public trust is formed under the Indian Trusts Act, 1882, and its trustees protect unit holders; the asset management company runs the schemes. SBI, SBI Mutual Fund Trustee Company and SBI Funds Management are the three layers in one real example. Custodians, registrar and transfer agents such as CAMS, distributors, auditors and SEBI-licensed brokers complete the set-up.

Benefits: professional management, diversification, SEBI regulation, easy liquidity at NAV, lower risk, flexibility to switch schemes, lower costs through scale, and less emotional stress than trading yourself.

Drawbacks: management costs come out of investors' money, exit loads act like a lock-in, and diversification dilutes gains along with losses.

Conclusion: a mutual fund turns small savings into professionally managed portfolios. For an informed investor, eight benefits usually outweigh three drawbacks.