The IIT Madras BS Corporate Finance (Corporate Finance) End Term paper sat on 21 Dec 2025, in the September 2025 term: 30 questions for 100 marks in 180 minutes. Every question is below with its answer. Take it as a timed mock test to be marked, or read it through first.
A firm is considering an investment opportunity promising to pay Rs 8,000 in one year and Rs 12,000 in two years. If the prevailing constant rate of return is 6%, what is the maximum price the firm should pay for the project? (Round off to the nearest integer)
Rs 12,000
Rs 16,350
Rs 18,227
Rs 20,000
Correct answer
Rs 18,227
A stock currently trading at Rs 60 can either rise to Rs 75 or fall to Rs 50 in three months. The three-month risk-free rate is 5%. Using the risk-neutral approach, what is the risk-neutral probability that the stock price increases?
52.0%
78.6%
60.0%
45.0%
Correct answer
52.0%
An investor opts for a straddle strategy for his portfolio by purchasing a call option and a put option with strike price of Rs 30 and expiration time of 3 months. The call option price is Rs 3 and put option price is Rs 4. What is maximum loss the investor can incur with this strategy?
Rs 7
Rs 3
Rs 4
Rs 1
Correct answer
Rs 7
according to the uncovered interest parity condition?
2.91%
0.91%
5.94%
7.94%
Correct answer
2.91%
A risky asset has an expected rate of return of 15% and a standard deviation of the rate of return of 20%. If the Sharpe ratio of this risky asset is 0.6, then what is the prevailing risk-free rate of return?
1.00%
3.00%
4.00%
5.00%
Correct answer
3.00%
3 shares
7 shares
10 shares
Insufficient Information
Correct answer
7 shares
A firm is financed with 60% debt and 40% equity. The equity beta is 2.5. The debt has a beta of 0.2. What is the asset beta of the firm?
0.88
1.00
1.12
1.20
Correct answer
1.12
Your portfolio consists of two stocks, X and Y, with returns that have a correlation coefficient of 0.5. Stock X has an expected return of 12% and a standard deviation of 20% and Stock Y has an expected return of 10% and a standard deviation of 25%. What is the covariance between the returns of the two stocks?
0.006
0.012
0.018
0.025
Correct answer
0.025
You invest 80% of your money in a security with a beta of 1.5, and the rest of your money in a risk-free security. What is the beta of your resulting portfolio?
0.80
1.20
1.50
Insufficient information
Correct answer
1.20
The current market price of a stock is Rs 400. Next year's expected dividend is Rs 25 per share. The dividend growth rate is expected to be 4% per year forever, and the required rate of return is 8%. According to the Gordon Growth Model, what is the estimated fair price of the stock?
Rs 312.5
Rs 400
Rs 500
Rs 625
Correct answer
Rs 625
An investment is expected to yield a total holding period return of 140% over a period of 30 years. What is the annualized rate of return (in percent) on this investment?
1.13%
2.96%
4.67%
1.40%
Correct answer
2.96%
A European put option with a strike price of Rs 90 is trading at a price of Rs 5. The stock price is Rs 88, and the risk-free rate is 4% (continuously compounded) for the 1-year time to expiration. According to the put-call parity theorem, what is the corresponding European call option price (in Rupees)?
Rs 10.45
Rs 6.53
Rs 1.33
Rs 0.67
Correct answer
Rs 6.53
The expected return on the market portfolio is 10% and the risk-free rate is 5%. A security has an expected rate of return of 12.5%. According to CAPM, what is the beta of this security?
0.75
1.00
1.50
2.00
Correct answer
1.50
Your expected return on a stock is 15%. The stock has a beta of 1.5. If the risk-free rate is 4% and the expected market return is 10%, what is the stock's alpha (in percent)?
-2.0%
-1.0%
1.0%
2.0%
Correct answer
2.0%
The real interest rate in the US is 4%, and the expected US inflation rate is 1%. What is the nominal interest rate in the US (in percent)?
3.04%
4.04%
5.04%
6.04%
Correct answer
5.04%
A long straddle strategy is executed by buying a one-year call option (price Rs 5) and a one year put option (price Rs 3) with the same strike price of Rs 70. If the stock price at expiration is Rs 80, what is the net profit (in Rupees) from this position?
Rs 10
Rs 5
Rs 2
There is a loss
Correct answer
Rs 2
A trader executes a strategy by selling a call option on a stock and simultaneously holding a long position (buying) in the same stock. This strategy is known as a
Protective Put
Long Straddle
Covered Call
Long Call
Correct answer
Covered Call
What option position results in the profit diagram as given in the figure, on the exercise date? ST denotes the price of the underlying asset and X denotes the strike price.
Long call
Short call
Long put
Short put
Correct answer
Short call
-1.45%
0.00%
2.45%
4.34%
Correct answer
2.45%
5.0%
2.6%
8.6%
3.6%
Correct answer
8.6%
A risky asset has an expected rate of return of 16% and a standard deviation of 20%. If the risk-free rate is 4%, select the correct statements.
The Sharpe ratio of the asset is 0.6.
The risk premium of the asset is 12%.
The slope of the capital allocation line passing through this asset is 0.8.
Correct answers
The Sharpe ratio of the asset is 0.6.
The risk premium of the asset is 12%.
Consider a put option and a call option on the same stock with the same strike price of Rs 250 and time to maturity of three months. Select the correct statements
If the stock price at expiration is Rs 260, call option is in the money.
If the stock price at expiration is Rs 260, put option is out of the money.
If the stock price at expiration is Rs 240, call option is in the money.
If the stock price at expiration is Rs 240, put option is in the money.
Correct answers
If the stock price at expiration is Rs 260, call option is in the money.
If the stock price at expiration is Rs 260, put option is out of the money.
If the stock price at expiration is Rs 240, put option is in the money.
A trader buys a call option on a stock with a strike price of Rs 40 when the call option price is Rs 4. He also buys two put options with the same strike price of Rs 40 and the put option price is Rs 3. The trader makes a profit when the stock price at expiration is
Rs 32
Rs 40
Rs 48
Rs 56
Correct answers
Rs 32
Rs 56
A call option on a non-dividend-paying stock has a hedge ratio of 0.6, select the correct statements
If the stock price increases by Rs 1, the call option price increases by approximately Rs 0.6.
If an investor sells 10 call options, she must buy 6 shares of the underlying stock to form a delta-hedged position.
A put option with same strike price and expiry time has Delta of -0.4.
The put option price increases if the stock price increases, as Delta is positive.
Correct answers
If the stock price increases by Rs 1, the call option price increases by approximately Rs 0.6.
If an investor sells 10 call options, she must buy 6 shares of the underlying stock to form a delta-hedged position.
A put option with same strike price and expiry time has Delta of -0.4.
A one-year call option with strike price of Rs 125 should have price more than Rs 15.
A six-month call option with strike price of Rs 120 should have price less than Rs 15.
The price of a one-year European put option on the same stock is approximately Rs 10.77.
Correct answers
A six-month call option with strike price of Rs 120 should have price less than Rs 15.
The price of a one-year European put option on the same stock is approximately Rs 10.77.
Security A has an expected return of 14% and a standard deviation of 20%. Security B has an expected return of 18% and a standard deviation of 25%. Suppose that the rates of return of the two securities have a correlation coefficient of 0.8. Based on the given information select the correct statements from below.
The covariance of security A and security B is 1.5%.
If an investor invests 50% of wealth in each security, then his portfolio’s expected return is 16%.
If an investor invests 50% of wealth in each security, then his portfolio’s standard deviation is 21.36%.
If short selling is not allowed, it is not possible to build a portfolio with expected return of 20%.
Correct answers
If an investor invests 50% of wealth in each security, then his portfolio’s expected return is 16%.
If an investor invests 50% of wealth in each security, then his portfolio’s standard deviation is 21.36%.
If short selling is not allowed, it is not possible to build a portfolio with expected return of 20%.
A money manager calculates that JLK Inc stock has an expected rate of return of 16%. JLK Inc has a beta of 1.5. The risk-free rate of return is 6%, and the expected market rate of return is 12%. Which of the following statements are correct?
JLK stock is overpriced.
JLK stock is underpriced.
JLK stock would lie above the security market line.
JLK stock would lie below the security market line.
Correct answers
JLK stock is underpriced.
JLK stock would lie above the security market line.
A stock is trading at Rs 100 today. In 6 months, the stock price can either increase to Rs 120 or decrease to Rs 90. The six-month risk-free rate is 2%. A six-month call option has an exercise price of Rs 110. Select the correct statements based on the given information.
The risk-neutral probability that stock price increases is 40%.
The hedge ratio for the given call option is 2/3.
The purchase of one share can be hedged with 3 call options.
According to risk-neutral approach, the price of call option is Rs 3.92.
Correct answers
The risk-neutral probability that stock price increases is 40%.
The purchase of one share can be hedged with 3 call options.
According to risk-neutral approach, the price of call option is Rs 3.92.
KLM Inc. has an expected return of 12% and a beta of 1.6. The risk-free rate is 6% and the expected return on market portfolio is 10%. Select the correct statements according to CAPM
The required expected return for KLM Inc. should be 12.4%.
KLM Inc. stock is overpriced.
KLM Inc. has a positive Alpha of 0.4%.
An investor following the CAPM recommendation should sell KLM Inc. shares.
Correct answers
The required expected return for KLM Inc. should be 12.4%.
KLM Inc. stock is overpriced.
An investor following the CAPM recommendation should sell KLM Inc. shares.
The optimal weight allocated to the risky asset for the investor is 70%.
The standard deviation of the optimal portfolio is 7%.
The expected return of the optimal portfolio is 9.9%.
The Sharpe ratio of the risky asset is 0.7.
Correct answers
The optimal weight allocated to the risky asset for the investor is 70%.
The standard deviation of the optimal portfolio is 7%.
The expected return of the optimal portfolio is 9.9%.
The Sharpe ratio of the risky asset is 0.7.
