Q 1. what is stock exchange?

Ans: A stock exchange may be defned or described in different ways. A simple description of a stock
exchange is as follows: "A centralised market for buying and selling stocks where the price is determined
through supply-demand mechanisms.
A somewhat similar description of a stock exchange is the following: "An organisation that provides a
facility for buyers and sellers of listed securities to come together to make trades in these securities.
In a stock exchange, the trading in listed securities is carried out by qualified members who act either for
customers principals for their own accounts. Stock may exchanges may, therefore, be described as
"Associations of brokers and dealers in securities who transact business together".
Q. How a stock exchange defined under the Securities Contracts( Regulation) act?
Ans: According to the Securities Contracts (Regulation) Act, 1956, which is the main law governing
stock exchanges in India, stock exchange means any body of individuals, whether incorporated or not,
constituted for the purpose of assisting regulating or controlmg the business of buying, selling or dealing
in securities.
Q3. Functions of stock exchanges.
Ans: Functions of Stock Exchanges
A stock exchange has an important role to fulfill the economic development of a country, It is essential for
the smooth functioning of the sector corporate economy . The stock exchange performs four essential
functions,
Firstly, it provides a market place for purchase and sale of securities such as shares, bonds, debentures,
etc. It provides a market for the trading of securities to individuals and organizations seeking to invest
their saving or excess funds through the purchase of securities.

secondly, stock exchanges provide liquidity to the investments in securities. The presence of stock
exchange market gives assurance to investors that their investment can be converted into cash whenever
they want. The investors can invest in long term investment projects without any hesitation, as because of
stock exchange they can convert long term investment into short term and medium term.
Thirdly, the stock exchanges help in the valuation of securities by providing the market quotations of the
prices of securities. Market quotations of share prices provide valuable information to prospective
investors as well as shareholders regarding the value of shares traded in the stock exchanges. Speculative
forces in the securities market also influence share valuations.
Fourthly, stock exchanges play the role of a barometer, namely, an indicator of the state of health of the
nation's economy as a whole. Every major change in country and economy is reflected in the prices of
shares. The rise or fall in the share prices indicates the boom or recession cycle of the economy.
Q5. Stock exchanges provide the linkage between the savings in the household sector and the
investments in the corporate sector explain.
Ans: The stock exchanges provide the linkage between the savings in the household and the investments
in the corporate sector. They indirectly help in mobilizing savings and channelising them into the
corporate sector as securities.

Chapter-7

Q1. what is fundamental analysis?

Ans: An investor who would like to be rational and scientific in his investment activity has to evaluate a
lot of information about the past performance and the expected future performance of companies,
industries and the economy as a whole before taking the investment decision. Such evaluation or analysis
is called fundamental analysis.
Fundamental analysis is a method that attempts to predict the intrinsic value of an investment. It is based
on the theory that the market price of an asset tends to move towards its 'real value' or 'intrinsic value'.
Q3. Key economic variables
Ans: The performance of a company depends on the performance of the economy. If the ecomony is
booming, incomes rise, demand for goods increases. On the other hand, if the ecomony is in recession, the
performance of companies will be generally bad. Let us look at some of the key ecomonic variables that
an investor must monitor as part of his fundamental analysis.
Growth Rates of National Income
The estimated growth rate of the economy would be a pointer towards the prosperity of the economy. The
four stages of an economic cycle are depression , recovery, boom and recession.
-Depression is the worst of the four stages.During a depression demand is low and declining.
-During the recovery stage, the economy begins to revive after a depression.
-The boom phase of the economic cycle is characterised by high demand.Companies generally post higher
profits.
-In recession, demand are downturn, the profits of companies also start to decline.
Inflation
Inflation prevailing in the economy has considerable impact on the performance of companies.Inflation
leads to erosion of purchasing power in the hands of consumers. This will result in lower demand for
products. Thus, high rates of inflation in an economy are likely to affect the performance of companies
adversely.
Interest rates
Interest rates determine the cost and availability of credit for companies operating in an economy. A low
interest rate stimulates investment by making credit available easily and cheply. On the other hand,
higher interest rates result in higher cost of production which may lead to lower profitability and lower
demand.
Government Revenue, Expenditure and Deficits
As the government is the largest investor and spender of maney, the trends in government revenue,
expenditure and deficits have a significant impact on the performance of industries and companies.
Expenditure by the government stimulates the economy by creating jobs and generating demand. When
government expenditure exceeds its revenue, their occurs a deficit. This deficit is known as budget deficit.
Infrastructure
The development of an economy depends very much on the infrastructure available.The availability of
infrastructural facilities such as power, transportation and communication systems affects the performance
of companies. Bad infrastructure leads to inefficiencies,lower peoductivity, wastage and delays.

Exchange rates
The performance and profitability of industries and companies that are major importers or exporters are
considerably affected by the exchange rates of the taka against major currencies of the world. An investor

has to keep track of the trend in exchange rates of taka. An analysis of the balance of trade deficit, balance
of payments deficit and the foreign exchange reserves will help to project the future trends in exchange
rates.
Monsoon
Because of the strong forward and backward linkages between agriculture and industary, performance of
several industries and companies are dependent on the performance of agriculture. But the performacne of
agriculture to a very great extent depends on the monsoon. The adequacy of the monsoon determines the
success or failure of the agriculttural activities in a industry.
Economic and Political Stability
A stable political environment is necessary for steady and balanced growth.Stable long-term economic
policies are what are needed for industrial growth. A stable government with clear cut long-term economic
policies will be conductive to good performance of the economy.
Q4. Explain the impact of the following economic variables
a)Interest rates
b)Government revenue, expenditure and deficits
c)Infrastructure
Chapter-8
Q1. what is 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.
An industry analysis is a marketing process that provides statistics about the market potential of business
products and services. This section have specific information about the current state of the industry, and
its target markets.
Q2. Industry life cycle
Ans: We may define an industry as a group of firms producing reasonably similar products which serve
the same needs of a common set of buyers. Marketing experts believes that each product has a life cycle.
They have identified four stages in the life of a product, namely-Introduction stage,Growth stage,Maturity
stage and Decline stage.
In the simillar way, according to Julius Grodinsky industry life cycle theory-the life of an industry can be
segregated into the Pioneering Stage
Expansion Stage
Stagnation Stage
Decay Stage
Pioneering Stage: This is the first stage in the industrial life cycle of a new industry where the technology
as well as the product are relatively new and have not reached a state of perfection. The pioneering stage
is characterized by rapid growth in demand for the output of industry. As a result, there is a great
opportunity for profit & highly risk. Its also called sunrises industries. For example, a leasing industry
Computer Software & information technology etc.
Expansion Stage: This is second stage of expansion or growth and survived the pioneering stage. This
stage of an industry are quite attractive for investment purposes. Investors can get high returns at low risk

because demand exceeds supply in the this stage. Companies will earn increasing amounts of profits and
pay attractive dividends.
Stagnation Stage: This is the third stage in the industry life cycle. In this stage, the growth of the industry
stabilizes. The ability of the industry to grow have been lost. Sales may be increasing but at a slower rate
than that experienced by competitive industries or by the overall economy. For example, Black and white
television industry.
Decay Stage: From the stagnation stage the industry passes to the decay stage. This occurs when the
products of the industry are no longer in demand. Decay stage is characterized by declining growth as
demand shifts to other substitute(new) products. New products and new technologies have come to the
market. Customers have change their habits, style and liking. As a result, the industry becomes obsolete
and gradually ceases to exist.
Q4. What are sunrise industries? Describe their characteristics.
Ans: Investment in companies in an industry that is in the pioneering stage is highly risky. Industries in
the pioneering stage are called sunrise industries. Telecommunications, computer software, information
technology etc. Are examples of sunrise industries.
It can be characterised by rapid growth in demand for the output of industry. As a result there is a great
opportunity for profit and risk.
Chapter-11
Q1. What is technical analysis?
Ans: Technical analysis claims that by examining past share price movements future share prices can be
accurately predicted. Technical analysis is the name given to forecasting techniques that utilize historical
share price data.
Technical analysis is a security analysis methodology for forecasting the direction of prices through the
study of past market data, primarily price and volume.
Q3. Formation of Bullish trend and Bearish trend
Ans: Bullish Trend
During a bull market (upward moving market) in the first phase the prices would advance with the revival
of confidence in the future of business. This will prompt investors to buy share of companies. During the
second phase, prices would advance due to the improvements in corporate earnings. In the third phase,
prices advance due to inflation and speculation. Thus, during the bull market, the line chart would exhibit
the formation of three peaks. Each peak would be higher than the previous peak, each bottom would be
higher than the previous bottom. According to Dow theory, the formation of higher bottoms and tops
indicates a bullish trend.
Bearish Trend
The bear market is also characterised by three phases. In the first phase, prices begin to fall due to
abandonment of hopes. Investors begin to sell their shares. In the second phase, companies start reporting
lower profits and lower dividends. In the final phase, prices fall still further due to distress selling. A
bearish market would be indicated by the formation of lower tops and lower bottoms.

Q2. Explain the basic principles and objectives of Dow theory.

Ans: Principles:
According to the Dow theory volume should expand along the main trend. This means that if the main
trend is bullish, the volume should increase with the rise in prices and fall during the intermediate
reaction.

In a bearish market when prices are falling the volume should increase with the fall in prices and be
smaller during the intermediate reaction.
Hypothesis: The theory makes certain assumptions which have been refferred to as the hypotheses of the
theory.
The first hypothesis states that the primary trend cannot be manipulated.

The second hypothesis states that the averages discount everything.

The third hypothesis states that the theory is not infallible.

Chapter- 12
Q1. What is random walk theory?
Ans: The random walk theory is the occurrence of an event determined by a series of random movements.
in other words, events that cannot be predicted. For example, one might consider a drunken person's path
of walking to be a random walk because the person is impaired and his walk would not follow any
predictable path.
The random walk theory presupposes that the stock markets are so efficient and competitive that there is
immediate price adjustment. The random walk theory is based on the hypothesis that the stock markets
are efficient. Hence, this theory later came to be known as the efficient market hypothesis(EMH) or the
efficient market model.
Q3. Weak
Chapter-15
Q7. Compare and contrast Capital Market Line and Security Market Line
Ans: It is necessary to compare sml with cml. Both postulate a linear(straight line) relationship between
risk and return.
Capital Market line

Security Market Line

In CML the risk is defined as total risk.

In SML the risk is defined as systematic risk.

In CML risk is mesured by standard deviation.

In SML risk is measured by B

Valid only for efficient portfolios

Valid for all portfolios and all individual securities.

CML is the basis of the capital market theory.

SML is the basis of the capital asset pricing model.