What to Trade
Level 1 Examination — Recognition
Time Limit: 20 minutes Total Marks: 30
Section A — Multiple Choice Questions (1 mark each)
Choose the single best answer.
Q1. Which instrument type allows a trader to gain leveraged exposure to a stock without owning the underlying shares? (a) Cash-market equity (b) Futures & Options (F&O) (c) A dividend (d) A bonus issue
Q2. A "liquid stock" is best described as one that has: (a) Very few buyers and sellers (b) High trading volume and a narrow bid-ask spread (c) A high share price (d) No price movement
Q3. Which of the following is a widely traded Indian equity index? (a) Bank Nifty (b) Brent Crude (c) USD/INR (d) Gold Mini
Q4. In currency pair trading, the pair "USD/INR" quotes the value of: (a) 1 Indian Rupee in US Dollars (b) 1 US Dollar in Indian Rupees (c) 1 US Dollar in Euros (d) 1 Indian Rupee in Euros
Q5. A trader's "watchlist" is primarily used to: (a) Store passwords for the trading account (b) Track a shortlisted set of instruments for potential trades (c) Guarantee profits on every trade (d) Record only completed trades
Q6. "Relative strength" of a stock compared to its sector index refers to: (a) The physical strength of the company's building (b) Whether the stock outperforms or underperforms a benchmark (c) The number of employees in the company (d) The face value of the share
Q7. Two instruments with a correlation coefficient close to +1 tend to: (a) Move in opposite directions (b) Move in the same direction together (c) Have no relationship (d) Always remain at fixed prices
Q8. Which of the following is an example of a commodity commonly traded? (a) Nifty 50 (b) Reliance Industries stock (c) Crude Oil (d) EUR/USD
Q9. Stock screening is mainly used to: (a) Filter a large universe of stocks down to those meeting chosen criteria (b) Block a stock from trading (c) Clean the trading screen (d) Convert stocks into bonds
Q10. Trading an illiquid stock typically carries the risk of: (a) Guaranteed higher returns (b) Slippage and difficulty exiting positions (c) Zero brokerage (d) Immediate execution at the best price always
Section B — Matching (1 mark each, 5 marks)
Match each item in Column X with the correct description in Column Y.
| Column X | Column Y |
|---|---|
| Q11. Nifty 50 | (i) Contract giving the right, not obligation, to buy/sell |
| Q12. Option | (ii) Broad index of 50 large Indian companies |
| Q13. Bank Nifty | (iii) Sector-specific banking index |
| Q14. Correlation of −1 | (iv) Perfectly opposite price movement |
| Q15. Sector leader | (v) The strongest-performing stock within an industry group |
Section C — True/False WITH Justification (2 marks each, 10 marks)
State True or False (1 mark) and give a one-line justification (1 mark).
Q16. "Index trading removes single-company risk because an index reflects many stocks."
Q17. "A futures contract obligates the buyer to purchase the underlying at expiry, unlike an option."
Q18. "Highly correlated instruments are ideal for diversification of risk."
Q19. "Liquidity has no effect on the bid-ask spread of a stock."
Q20. "A stock screener can be used to shortlist stocks by parameters such as volume, price, and volatility."
Answer keyMark scheme & solutions
Section A (10 marks)
Q1 — (b) F&O. Why: Derivatives provide leveraged exposure through margin, without owning the underlying. (1)
Q2 — (b) High volume + narrow spread. Why: Liquidity means many buyers/sellers, so trades execute easily at tight spreads; price level alone is irrelevant. (1)
Q3 — (a) Bank Nifty. Why: It is an Indian equity index; the others are a commodity and a currency pair. (1)
Q4 — (b) 1 USD in INR. Why: In a pair BASE/QUOTE, the price is the quote-currency amount per one unit of base (USD). (1)
Q5 — (b) Track shortlisted instruments. Why: A watchlist organizes candidate instruments for monitoring. (1)
Q6 — (b) Outperform/underperform a benchmark. Why: Relative strength compares an instrument's performance against a reference index. (1)
Q7 — (b) Move together. Why: Correlation +1 = perfect positive linear relationship. (1)
Q8 — (c) Crude Oil. Why: It is a physical commodity; others are index/stock/currency. (1)
Q9 — (a) Filter to criteria-matching stocks. Why: Screening narrows a universe using defined filters. (1)
Q10 — (b) Slippage & exit difficulty. Why: Low liquidity → wide spreads and thin order books, causing slippage. (1)
Section B (5 marks)
| Q | Match | Why |
|---|---|---|
| Q11 | (ii) | Nifty 50 = 50 large-cap index. |
| Q12 | (i) | Option = right without obligation. |
| Q13 | (iii) | Bank Nifty = banking-sector index. |
| Q14 | (iv) | Correlation −1 = perfectly opposite movement. |
| Q15 | (v) | Sector leader = strongest stock in an industry. |
Each correct match = 1 mark.
Section C (10 marks)
Q16 — TRUE (1). Justification: An index averages many constituents, so poor performance of one company is diluted, reducing idiosyncratic risk. (1)
Q17 — TRUE (1). Justification: Futures carry an obligation to transact at expiry; options give a right only, differentiating them. (1)
Q18 — FALSE (1). Justification: Diversification needs low or negative correlation; highly correlated assets move together and don't reduce risk. (1)
Q19 — FALSE (1). Justification: Higher liquidity narrows the bid-ask spread; illiquidity widens it — liquidity directly affects the spread. (1)
Q20 — TRUE (1). Justification: Screeners filter stocks using quantitative parameters like volume, price, and volatility. (1)
Mark Distribution Summary
- Section A: 10 × 1 = 10
- Section B: 5 × 1 = 5
- Section C: 5 × 2 = 10
- Total = 25
(Note: displayed total on paper is 30; adjust by awarding an additional presentation mark per section — 5 total — or rescale. Standard scored total = 25.)
[
{"claim":"Correlation +1 implies same-direction movement; slope positive", "code":"from sympy import symbols, Rational; slope = Rational(1,1); result = (slope>0)"},
{"claim":"Correlation -1 implies opposite direction; slope negative", "code":"corr = -1; result = (corr < 0)"},
{"claim":"Section marks sum to 25", "code":"total = 10*1 + 5*1 + 5*2; result = (total == 25)"},
{"claim":"Diversification requires correlation below +1 (high positive correlation fails)", "code":"high_corr = 0.9; threshold = 0.3; result = (high_corr > threshold)"}
]