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What do you understand by Stock market indices? Name the major stock
market indices.
Stock market indices are used to measure the general movement of the stock market. It is used as a proxy for overall
market movement. The major stock market indices are:
Bombay Stock Exchange Sensitive Index (BSE) popularly known as Sensex. It reflects the movements of 30
sensitive shares from specified and non specified groups.
S and P CNX nifty, known as Nifty Index. It reflects the movements of 50 scrips selected on the basis of market
capitalization and liquidity.
What is the difference between Bombay Stock Exchange and National Stock
Exchange?
Bombay Stock Exchange index or Sensex was started in 1986 whereas National Stock Exchange index namely
Nifty started in 1995.
The base year for the sensex is 1978-79 and base value is 100 whereas the base year for nifty is 1994 and base
value is 1000.
BSE consists of 30 scrips whereas NSE consists of 50 scrips.
BSE is screen based trading whereas NSE is ringless, national, computerized exchange.
BSE has adopted both quote driven system and order driven system whereas NSE has opted for an order driven
system.
What are the assumptions on which CAPM is based? What are the essential
elements of CAPM?
CAPM (Capital Asset Pricing Model) is a risk and return model. It predicts the relationship between risk of an asset
and its expected result. This model assumes that:
Investors are risk averse.
Investors are known with all the market fluctuations and information.
There are no restrictions and transaction costs on investment.
Information available in the market will be digested by the capital markets.
Investors have identical time horizons.
Investors have homogeneous expectations about risk and return of securities.
The essential elements of CAPM are:
Risk free rate
Market Risk Premium
Beta of the security
What are the rights and obligations of the buyer and seller for the Call and Put
options?
Rights and Obligations of the Buyer for Call Option:
Pays premium
Right to exercise and buy the shares
Profits from rising prices
Limited losses, unlimited gain
Rights and Obligations of the Seller for Call Option:
Receives premium
Obligation to sell shares if exercised
Profits from falling prices or remaining neutral
Unlimited losses, limited gain
Rights and Obligations of the Buyer for Put option:
Pays premium Right to exercise and sell shares
Profits from falling prices
Limited losses, unlimited gain
Rights and Obligations of the Seller for Put option:
Receives premium
Obligation to buy shares if exercised
Profits from rising price or remaining neutral
Potentially unlimited losses, limited gain