Capital Market and Portfolio Management June 2026
Q.1: 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.
Answer:
Introduction:
The Financial System has Capital Market is a major component of financial systems by providing all types of persons and corporations along with government access to source long-term funds, while at the same time providing an efficient way for investors to invest excess funds and earn returns on their investment. In India; Investors, such as Arjun, directly invest in Capital Markets primarily by purchasing equity shares through organized stock exchanges like National Stock Exchange and Bombay Stock Exchange. Stock exchanges act as intermediary platforms where buyers and sellers meet to conduct their trade, which are done in a regulated, systematic and open manner.
Equity Shares are listed and traded on Primary and Secondary Capital Markets. The Primary Capital Market is where new equity shares and other form of Securities are created and then offered to the public (known as Initial Public Offerings - "IPO"). The Secondary Capital Market is where all other equity shares or other forms of securities are bought and sold by investors.
Over the years, the Trading Mechanism in the Secondary Capital Market has changed to improve the efficiency of trading through the use of new technology. Technology has now made it possible for Stock Exchanges to utilize Electronic Trading Systems, which provide: Speed; Transparency and Fairness for all Market Participants.
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Q.2 (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.
Answer:
Introduction:
There is a senior manager that knows confidential information about an impending merger with their company and may want to profit from using this confidential information for themselves. This creates some serious legal and ethical questions in capital markets. One of the foundations of the financial markets is trust, fairness and equal access to information. In other words, if people misuse privileges (i.e., misuse use of confidential information), this gives them an unfair advantage over other investors. Similarly, in India, other regulatory bodies such as SEBI (Securities and Exchange Board of India) have been created to stop this from occurring and ensure the transparency and integrity of the securities market.
Q.2 (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.
Answer:
Introduction:
To assess the success of a mutual fund, you must look at more than just the returns it produces; you must also look at the risks you took to earn those returns. Risk-adjusted performance metrics enable investors to determine if their portfolio manager has provided sufficient returns when compared to the amount of risk they have assumed. There are three common metrics used to measure risk-adjusted performance: the Sharpe ratio, the Capital Asset Pricing Model (CAPM), and Jensen's Alpha. All three of these metrics will assist an investor in determining how their portfolio performs in relation to a market benchmark or risk-free investment. If we know a mutual fund's portfolio return, market return, beta, standard deviation, and risk-free interest rate, we can determine whether or not the mutual fund has performed efficiently and added value above what was expected.