Previous Year Paper
CAT-2007-Previous Years Paper
Shabnam is considering three alternatives to invest her surplus cash for a week. She wishes to guarantee maximum returns on her investment. She has three options, each of which can be utilized fully or partially in conjunction with others.
Option A: Invest in a public sector bank. It promises a return of +0.10%
Option B: Invest in mutual funds of ABC Ltd. A rise in the stock market will result in a return of +5%, while a fall will entail a return of –3%.
Option C: Invest in mutual funds of CBA Ltd. A rise in the stock market will result in a return of –2.5%, while a fall will entail of +2%.
What strategy will maximize the guaranteed return to Shabnam?
A 64% in option B and 36% in option C
B 1/3 in each of the three options
C 30% in option A, 32% in option B and 38% in option C
D 100% in option A
E 36% in option B and 64% in option C
Let us assume that Shabnam has Rs 100
We calculate her guaranteed return in case of each of the given options:
Option (d): 0.1% of 100 = 0.1
Option (e): If there is a rise in the stock market, earning = 5% of 36 – 2.5% of 64
If there is a fall in the stock market, earning = –3% of 36 + 2% of +64 =
Therefore guaranteed return = 0.2
Option (a): Rise in market gives earning = 5% if 64 + 2.5% of 36 = 2.4
Fall in market gives earning = –3% of 64+ 2% of 36 = –1.2 which is negative. Similarly, the guaranteed returns for options (b) and (c) are also negative.
Therefore option (e) offers the highest guaranteed return.