Unit study guide · NISM Series X-A
Investing in Stocks
20 questions in this unit
What this unit covers
- An investor replaces a holding in one company with holdings in many companies across different sectors, with no single company dominating. Which statement about the effect on risk is most appropriate?
- A portfolio contains shares in 15 different airlines and no other investments. A sustained increase in aviation-fuel costs adversely affects all 15 businesses. Which shared exposure has the portfolio most clearly retained?
- An investor needs to sell a large shareholding. Few buyers are available near the last traded price, and selling the entire position immediately would require accepting substantially lower prices. Which risk is most directly illustrated?
- An unhedged investment costs 100 units of a foreign currency when the exchange rate is ₹80 per foreign-currency unit. It is later sold for 110 units when the rate is ₹76 per unit. There are no distributions or other cash flows. What is the holding-period return measured in rupees?
- An investor buys one share for ₹250 and later sells it for ₹265. During the holding period the investor receives a cash dividend of ₹10, which is not reinvested. Ignoring the time value of that interim payment, what is the total holding-period return?
- An analyst first studies the overall economy, then identifies industries likely to benefit from those conditions, and finally examines individual companies in the selected industries. Which research approach does this describe?
- Analyst P studies historical share-price patterns and trading volumes. Analyst Q estimates future business cash flows after examining demand, costs and management decisions. Which pairing best describes their primary approaches?
- An investor expects a dividend of ₹11 per share at the end of year one and ₹12.10 at the end of year two. Immediately after receiving the second dividend, the investor expects to sell the share for ₹121. This sale price excludes the dividend just received. With a 10% annual discount rate and no other cash flows, what is the present value of the expected receipts?
- Share A trades at ₹80 with trailing EPS of ₹4. Share B trades at ₹400 with trailing EPS of ₹20. Which conclusion about their trailing P/E is justified?
- A share trades at ₹360. Earnings per share for the latest completed year are ₹15, while estimated earnings per share for the next year are ₹18. What are the trailing and forward P/E ratios respectively, using the current price for both?
- Company A has a share price of ₹100 and a loss per share of ₹5, so price divided by signed earnings per share is −20. Company B has positive earnings and a P/E of 15. Which conclusion is justified from these facts alone?
- A share has a P/E of 24 and expected earnings growth of 12% a year. What is its PEG ratio?
- A share trades at ₹400 with trailing EPS of ₹20. No dividend figure is given. Which statement follows?
- A share's last five closing prices, oldest first, are ₹100, ₹104, ₹102, ₹110 and ₹109. What is its three-day simple moving average at the end of day five?
- Which scenario most directly raises a concern about transparency and a potential conflict of interest that warrants further investigation?
- CASE: A company's share price is ₹180. It has 2 crore shares and full-year profit after tax of ₹30 crore. What is its trailing P/E?
- CASE: A company's share price is ₹180. It has 2 crore shares and book equity of ₹120 crore. What is its price-to-book ratio?
- CASE: A company's share price is ₹180 and it has 2 crore shares. Full-year revenue is ₹480 crore. What is its price-to-sales ratio?
- CASE: A company's market capitalisation is ₹360 crore. It has debt of ₹90 crore, cash of ₹30 crore and EBITDA of ₹60 crore. What is its EV/EBITDA multiple?
- CASE: A share trades at ₹180 and paid a cash dividend of ₹4.50 a share last year. What is its historical dividend yield?
Key ideas
From the practice bank · 1
An investor replaces a holding in one company with holdings in many companies across different sectors, with no single company dominating. Which statement about the effect on risk is most appropriate?
This correctly distinguishes reduced company-specific concentration from remaining market-wide risk. A problem isolated to one company—such as a failure at that company’s plant—has less influence when no one holding dominates. A broad economic shock can affect many companies in different sectors at the same time, so owning several names does not remove that common exposure. Diversification therefore addresses concentration in company-specific outcomes, not every possible source of loss. Remember: Diversification can reduce the impact of individual-company events while common market risk remains.
Hint Common mistake: Treating a diversified portfolio as risk-free or assuming each underlying company becomes safer simply because it is one holding among many.
X-A-056From the practice bank · 2
A portfolio contains shares in 15 different airlines and no other investments. A sustained increase in aviation-fuel costs adversely affects all 15 businesses. Which shared exposure has the portfolio most clearly retained?
Sector-specific risk remains because every holding is concentrated in the airline industry. Every holding is an airline, so the stated fuel-cost increase affects an important shared operating input. Because all 15 businesses are adversely affected through that industry exposure, the example is not an event isolated to one company. The question describes an airline-sector shock rather than establishing an equally broad shock to every sector of the economy. Remember: Count independent sources of economic exposure, not just the number of stocks.
Hint Common mistake: Assuming that diversification within one industry automatically removes industry-level risk.
X-A-057From the practice bank · 3
An investor needs to sell a large shareholding. Few buyers are available near the last traded price, and selling the entire position immediately would require accepting substantially lower prices. Which risk is most directly illustrated?
The shortage of buyers for the required size near the quoted price is risk. The investor needs to sell a large position but available buyers near the last traded price are limited. Accepting much lower prices to complete an immediate sale is the liquidity difficulty described. The scenario does not specify missed debt payments, foreign-exchange changes or deterioration of the company’s operating results as the cause. Remember: Check depth and executable size, not only the latest quotation, when considering liquidity.
Hint Common mistake: Assuming that the price of a small last trade is available for the whole holding.
X-A-058From the practice bank · 4
An unhedged investment costs 100 units of a foreign currency when the exchange rate is ₹80 per foreign-currency unit. It is later sold for 110 units when the rate is ₹76 per unit. There are no distributions or other cash flows. What is the holding-period return measured in rupees?
4.5% includes both the foreign-asset gain and the adverse currency conversion. Initial rupee cost = 100 foreign-currency units × ₹80 = ₹8,000. Final rupee proceeds = 110 units × ₹76 = ₹8,360. Rupee return = (₹8,360 − ₹8,000) ÷ ₹8,000 × 100 = 4.5%. An equivalent check is 1.10 × (76 ÷ 80) − 1 = 1.10 × 0.95 − 1 = 0.045. The +10% asset return and −5% currency movement combine multiplicatively. Remember: Convert both the initial and final amounts to the same currency before measuring the return.
Hint Common mistake: Adding asset and currency percentage returns instead of multiplying their growth factors.
X-A-059From the practice bank · 5
An investor buys one share for ₹250 and later sells it for ₹265. During the holding period the investor receives a cash dividend of ₹10, which is not reinvested. Ignoring the time value of that interim payment, what is the total holding-period return?
10% includes each source of return once. Price gain = ₹265 − ₹250 = ₹15, or ₹15 ÷ ₹250 = 6% of the original cost. Dividend contribution = ₹10 ÷ ₹250 = 4%. The question assumes no reinvestment and ignores the time value of this interim cash. Total return = (₹15 + ₹10) ÷ ₹250 × 100 = 10%, also equal to 6% + 4%. Remember: Measure total gain relative to the original investment and include all stated distributions.
Hint Common mistake: Treating price appreciation as the complete return or annualising when the holding period has not been specified.
X-A-060From the practice bank · 6
An analyst first studies the overall economy, then identifies industries likely to benefit from those conditions, and finally examines individual companies in the selected industries. Which research approach does this describe?
Top-down fundamental analysis matches the broad-to-narrow sequence. The sequence in the question starts with the overall economy. It then selects industries and finally assesses companies within them. That economy → industry → company sequence is top-down. A company-first sequence or a chart-pattern study would be a different analytical route. Neither is described here. Remember: Identify the direction of analysis, not just whether the analyst discusses companies somewhere in the process.
Hint Common mistake: Calling any company research bottom-up even when the companies were selected after an economy and industry screen.
X-A-061From the practice bank · 7
Analyst P studies historical share-price patterns and trading volumes. Analyst Q estimates future business cash flows after examining demand, costs and management decisions. Which pairing best describes their primary approaches?
P is technical and Q is fundamental, matching the described inputs. P studies historical price patterns and trading volumes, which identifies the technical approach. Q studies demand, costs and management decisions to estimate cash flows, which identifies fundamental analysis. For example, a price trend is a market-data input, whereas a sales or cost forecast is a business-value input. Neither approach assures a correct forecast. Remember: Distinguish the information being analysed before assigning an analytical label.
Hint Common mistake: Assuming that all analysis of a share is fundamental analysis merely because the subject is a company.
X-A-062From the practice bank · 8
An investor expects a dividend of ₹11 per share at the end of year one and ₹12.10 at the end of year two. Immediately after receiving the second dividend, the investor expects to sell the share for ₹121. This sale price excludes the dividend just received. With a 10% annual discount rate and no other cash flows, what is the present value of the expected receipts?
₹120 discounts all stated receipts to today and includes each once. At year 1, receive ₹11. Its present value is ₹11 ÷ 1.10 = ₹10. At year 2, receive ₹12.10 dividend plus ₹121 sale proceeds = ₹133.10. Present value = ₹133.10 ÷ 1.10^2 = ₹110. Total present value = ₹10 + ₹110 = ₹120. These are expected inputs, not assured future receipts. Remember: Put receipts on a timeline, then discount amounts occurring at each date.
Hint Common mistake: Omitting the final dividend because a sale occurs at the same time, despite the sale price being explicitly ex-dividend.
X-A-063From the practice bank · 9
Share A trades at ₹80 with trailing EPS of ₹4. Share B trades at ₹400 with trailing EPS of ₹20. Which conclusion about their trailing P/E is justified?
Both P/E ratios are 20, so nominal share price alone does not make A cheaper on the stated measure. A’s trailing P/E = ₹80 ÷ ₹4 = 20. B’s trailing P/E = ₹400 ÷ ₹20 = 20. Each is priced at 20 times the stated trailing earnings per share. The equal ratios establish only equality on this measure. They do not establish identical growth, risk, accounting quality or future returns. Remember: Compare like ratios and their underlying economics, not nominal share prices in isolation.
Hint Common mistake: Calling a lower-priced share cheap without examining how much earning power each share represents.
X-A-064From the practice bank · 10
A share trades at ₹360. Earnings per share for the latest completed year are ₹15, while estimated earnings per share for the next year are ₹18. What are the trailing and forward P/E ratios respectively, using the current price for both?
24 trailing and 20 forward use the correct earnings period for each ratio. Trailing P/E = current price ₹360 ÷ historical EPS ₹15 = 24. Forward P/E = current price ₹360 ÷ forecast EPS ₹18 = 20. With an unchanged numerator, a higher positive earnings denominator produces a lower multiple. The forecast may not be realised. Remember: Always specify which earnings period a P/E ratio uses.
Hint Common mistake: Treating a lower forward P/E as evidence that earnings have already grown rather than that growth is forecast.
X-A-065From the practice bank · 11
Company A has a share price of ₹100 and a loss per share of ₹5, so price divided by signed earnings per share is −20. Company B has positive earnings and a P/E of 15. Which conclusion is justified from these facts alone?
This correctly recognises the negative denominator and the limit of the comparison. For A, ₹100 ÷ (−₹5) = −20 because the denominator is a loss. For B, the stated P/E of 15 is based on positive earnings. Simply ranking −20 below +15 mixes economically different earnings situations. The facts do not establish A’s future profits, a recovery date or investment merit. The signed arithmetic result is acknowledged without treating it as a valuation verdict. Remember: Understand the denominator before comparing valuation multiples.
Hint Common mistake: Treating a negative P/E as more attractive merely because it is numerically lower than a positive multiple.
X-A-066From the practice bank · 12
A share has a P/E of 24 and expected earnings growth of 12% a year. What is its PEG ratio?
2.0 follows the stated convention: 24 ÷ 12. Use P/E = 24 and enter the 12% growth assumption as 12, as instructed. PEG = 24 ÷ 12 = 2.0. The calculation compares the price/earnings multiple with the specified growth input. A result of 2.0 is not a guaranteed return or a stand-alone fair-value conclusion. It depends on the earnings and growth assumptions used. Remember: Write down the unit convention before calculating a ratio that mixes a multiple and a percentage input.
Hint Common mistake: Entering 12% as 0.12 despite the specified PEG convention, or treating a PEG threshold as a universal valuation rule.
X-A-067From the practice bank · 13
A share trades at ₹400 with trailing EPS of ₹20. No dividend figure is given. Which statement follows?
5% is the earnings yield, while the dividend remains unspecified. Trailing earnings yield = ₹20 ÷ ₹400 × 100 = 5%. The reciprocal price/earnings multiple is ₹400 ÷ ₹20 = 20, not 5. No dividend amount is supplied. A company may retain some or all earnings rather than distribute the entire EPS, so cash dividend yield cannot be inferred here. Remember: Distinguish accounting earnings, cash distributions and market-price-based ratios.
Hint Common mistake: Equating earnings yield with the investor’s actual cash income yield.
X-A-068From the practice bank · 14
A share's last five closing prices, oldest first, are ₹100, ₹104, ₹102, ₹110 and ₹109. What is its three-day simple moving average at the end of day five?
₹107 is the arithmetic mean of the latest three closing prices. Select the last three closes: ₹102, ₹110 and ₹109. Add them: ₹102 + ₹110 + ₹109 = ₹321. Divide by 3 to obtain ₹107. The older ₹100 and ₹104 observations drop outside the three-day window. An average summarises these prices. It does not guarantee the next price. Remember: Select the correct observations before doing the averaging.
Hint Common mistake: Using the full five-day list, the first three observations or a forecast instead of the specified rolling window.
X-A-069From the practice bank · 15
Which scenario most directly raises a concern about transparency and a potential conflict of interest that warrants further investigation?
A significant connected transaction combined with refusal to explain its terms is the stated transparency and conflict concern. The chief executive’s family connection creates a potential conflict to examine. The question does not assume that every connected transaction is unlawful. Refusing to explain a large transaction prevents the analyst from assessing its terms and rationale. That is the specific concern. The other scenarios describe disclosure, scrutiny or conflict-management steps rather than the refusal and opacity specified in A. They do not by themselves guarantee good governance. Remember: Treat a governance red flag as a reason for further investigation, not automatically as a legal finding.
Hint Common mistake: Concluding that a related-party connection alone proves illegality, or that a governance procedure alone proves an absence of all conflicts.
X-A-070From the practice bank · 16
CASE: A company's share price is ₹180. It has 2 crore shares and full-year profit after tax of ₹30 crore. What is its trailing P/E?
EPS = ₹30 crore ÷ 2 crore shares = ₹15. P/E = ₹180 ÷ ₹15 = 12. Remember: Convert total ordinary-shareholder earnings to per-share earnings before using a per-share price.
Hint Common mistake: Mixing total-profit units with per-share price units or confusing EPS with P/E.
X-A-071From the practice bank · 17
CASE: A company's share price is ₹180. It has 2 crore shares and book equity of ₹120 crore. What is its price-to-book ratio?
Book value per share = ₹120 crore ÷ 2 crore = ₹60. P/B = ₹180 ÷ ₹60 = 3.0. Remember: Use equity attributable to the same shareholder class in both sides of an equity valuation ratio.
Hint Common mistake: Confusing accounting book equity with total assets, or combining aggregate rupees with per-share rupees.
X-A-072From the practice bank · 18
CASE: A company's share price is ₹180 and it has 2 crore shares. Full-year revenue is ₹480 crore. What is its price-to-sales ratio?
Market capitalisation = ₹180 × 2 crore = ₹360 crore. Price-to-sales = ₹360 crore ÷ ₹480 crore = 0.75. Remember: Name the numerator and denominator before inserting numbers into any valuation ratio.
Hint Common mistake: Substituting a different familiar multiple merely because its inputs are also provided in the case.
X-A-073From the practice bank · 19
CASE: A company's market capitalisation is ₹360 crore. It has debt of ₹90 crore, cash of ₹30 crore and EBITDA of ₹60 crore. What is its EV/EBITDA multiple?
EV = ₹360 crore + ₹90 crore − ₹30 crore = ₹420 crore. EV/EBITDA = ₹420 crore ÷ ₹60 crore = 7.0. Remember: Distinguish equity value from enterprise value and follow the signs of the stated adjustments.
Hint Common mistake: Using market capitalization as EV or treating the resulting multiple as an investor return.
X-A-074From the practice bank · 20
CASE: A share trades at ₹180 and paid a cash dividend of ₹4.50 a share last year. What is its historical dividend yield?
Dividend yield = ₹4.50 ÷ ₹180 = 2.5%. Remember: Use the actual dividend numerator and identify the period before labelling a yield.
Hint Common mistake: Confusing historical cash yield, earnings yield and a guarantee of future distributions.
X-A-075Liquidity describes how easily a given quantity can be traded.
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