Mb-0050 1. a. Differentiate between nominal, ordinal, interval and ratio scales, with an example of each. [ 5marks] b.

What are the purposes of measurement in social science research? [ 5 marks] 2.3 Levels of Measurement Measurement may be classified into four different levels, based on the characteristics of order, distance and origin. 1. Nominal measurement This level of measurement consists in assigning numerals or symbols to different categories of a variable. The example of male and female applicants to an MBA program mentioned earlier is an example of nominal measurement. The numerals or symbols are just labels and have no quantitative value. The number of cases under each category are counted. Nominal measurement is therefore the simplest level of measurement. It does not have characteristics such as order, distance or arithmetic origin. 2. Ordinal measurement In this level of measurement, persons or objects are assigned numerals which indicate ranks with respect to one or more properties, either in ascending or descending order. Example Individuals may be ranked according to their socio-economic class, which is measured by a combination of income, education, occupation and wealth. The individual with the highest score might be assigned rank 1, the next highest rank 2, and so on, or vice versa. The numbers in this level of measurement indicate only rank order and not equal distance or absolute quantities. This means that the distance between ranks 1 and 2 is not necessarily equal to the distance between ranks 2 and 3. Ordinal scales may be constructed using rank order, rating and paired comparisons. Variables that lend themselves to ordinal measurement include preferences, ratings of organizations and economic status. Statistical techniques that are commonly used to analyze ordinal scale data are the median and rank order correlation coefficients. 3. Interval measurement This level of measurement is more powerful than the nominal and ordinal levels of measurement, since it has one additional characteristic equality of distance. However, it does not have an origin or a true zero. This implies that it is not possible to multiply or divide the numbers on an interval scale. Example The Centigrade or Fahrenheit temperature gauge is an example of the interval level of measurement. A temperature of 50 degrees is exactly 10 degrees hotter than 40 degrees and 10 degrees cooler than 60 degrees. Since interval scales are more powerful than nominal or ordinal scales, they also lend themselves to more powerful statistical techniques, such as standard deviation, product moment correlation and t tests and F tests of significance. 4. Ratio measurement

This is the highest level of measurement and is appropriate when measuring characteristics which have an absolute zero point. This level of measurement has all the three characteristics order, distance and origin. Examples Height, weight, distance and area. Since there is a natural zero, it is possible to multiply and divide the numbers on a ratio scale. Apart from being able to use all the statistical techniques that are used with the nominal, ordinal and interval scales, techniques like the geometric mean and coefficient of variation may also be used. The main limitation of ratio measurement is that it cannot be used for characteristics such as leadership quality, happiness, satisfaction and other properties which do not have natural zero points. The different levels of measurement and their characteristics may be summed up. In the table below Levels of measurement Characteristics Nominal No order, distance or origin Ordinal Order, but no distance or origin Interval Both order and distance, but no origin Ratio Order, distance and origin

B---2.2 Definition and Purpose of Measurement Different definitions of measurement have been offered by different authors 1. According to Stevens, measurement is the assignment of numerals to objects or events according to rules. A simple example of assignment of numerals according to a rule is described below Suppose a survey is conducted to study the applicants of an MBA program and one of the objectives of the study is to find out the sex-wise break-up of applicants. In this case, we may assign the number 0 to male applicants and the number 1 to female applicants. Thus numbers may be used to label individuals, events or things. 2. Campbell defines measurement as the assignment of numbers to represent properties. 3. In the words of Torgerson, measurement is the assignment of numbers to objects to represent amounts or degrees of a property possessed by all of the objects. In research, it is necessary to distinguish between objects and properties or characteristics of these objects. For example, a

person is an object and his/her physical characteristics include height, weight, color, etc. while his or her psychological characteristics include intelligence and attitudes. The important point to remember is that the researcher is concerned with measuring properties and not the objects themselves. While physical properties may be directly observed, psychological properties such as intelligence are inferred. For example, a childs score in an IQ test indicates his or her level of intelligence. Measurement also has several purposes The researcher constructs theories to explain social and psychological phenomena (e.g. labor unrest, employee satisfaction), which in turn are used to derive hypotheses or assumptions. These hypotheses can be verified statistically only by measuring the variables in the hypotheses. Measurement makes the empirical description of social and psychological phenomena easier. Example When conducting a study of a tribal community, measuring devices help the researcher in classifying cultural patterns and behaviors. Measurement also makes it possible to quantify variables and use statistical techniques to analyze the data gathered. Measurement enables the researcher to classify individuals or objects and to compare them in terms of specific properties or characteristics by measuring the concerned variables. Examples Comparison of male and female students performance in college exams or of length of stay on the job of older and younger employees.

2. a. What are the sources from which one may be able to identify research problems? [ 5 marks] b. Why literature survey is important in research? [ 5 marks] 3.1 Meaning of Research Problem Research really begins when the researcher experiences some difficulty, i.e., a problem demanding a solution within the subjectare of his discipline. This general area of interest, however, defines only the range of subject-matter within which the researcher would see and pose a specific problem for research. Personal values play an important role in the selection of a topic for research. Social conditions do often shape the preference of investigators in a subtle and imperceptible way. The formulation of the topic into a research problem is, really speaking the first step in a scientific enquiry. A problem in simple words is some difficulty experienced by the researcher in a theoretical or practical situation. Solving this difficulty is the task of research. R. L. Ackoffs analysis affords considerable guidance in identifying problem for research. He visualizes five components of a problem. 1) Research-consumer: There must be an individual or a group which experiences some difficulty. 2) Research-consumers Objectives: The research-consumer must have available, alternative means for achieving the objectives he desires. 3) Alternative Means to Meet the Objectives: The research-consumer must have available, alternative means for achieving the objectives he desires.

4) Doubt in Regard to Selection of Alternatives: The existence of alternative courses of action in not enough; in order to experience a problem, the research consumer must have some doubt as to which alternative to select. 5) There must be One or More Environments to which the Difficulty or Problem Pertains: A change in environment may produce or remove a problem. A research-consumer may have doubts as to which will be the most efficient means in one environment but would have no such doubt in another. Objectives: After studying this unit you should be able to understand: The meaning of Research Problem Choosing the problem Review of Literature Criteria for formulating the problem Objective of Formulating the Problem Techniques involved in Formulating the Problem Criteria of Good Research Problem

3.2 Choosing the Problem The selection of a problem is the first step in research. The term problem means a question or issue to be examined. The selection of a problem for research is not an easy task; it self is a problem. It is least amenable to formal methodological treatment. Vision, an imaginative insight, plays an important role in this process. One with a critical, curious and imaginative mind and is sensitive to practical problems could easily identify problems for study. The sources from which one may be able to identify research problems or develop problems awareness are: Review of literature Academic experience Daily experience Exposure to field situations Consultations Brain storming Research Intuition

3.3 Review of Literature Frequently, an exploratory study is concerned with an area of subject matter in which explicit hypothesis have not yet been formulated. The researchers task then is to review the available material with an eye on the possibilities of developing hypothesis from it. In some areas of the subject matter, hypothesis may have been stated by previous research workers. The researcher has to take stock of these various hypotheses with a view to evaluating their usefulness for further research and to consider whether they suggest any new hypothesis. Sociological journals, economic reviews, the bulletin of abstracts of current social sciences research, directory of doctoral dissertation accepted by universities etc afford a rich store of valuable clues. In addition to these general sources, some governmental agencies and voluntary organizations publish listings of summaries of research in their special fields of service. Professional organizations, research groups and voluntary organizations are a constant source of information about unpublished works in their special fields.

3. a. What are the characteristics of a good research design? [ 5marks] b. What are the components of a research design? [ 5 marks] Needs of Research Design The need for the methodologically designed research: a. In many a research inquiry, the researcher has no idea as to how accurate the results of his study ought to be in order to be useful. Where such is the case, the researcher has to determine how much inaccuracy may be tolerated. In a quite few cases he may be in a position to know how much inaccuracy his method of research will produce. In either case he should design his research if he wants to assure himself of useful results. b. In many research projects, the time consumed in trying to ascertain what the data mean after they have been collected is much greater than the time taken to design a research which yields data whose meaning is known as they are collected. c. The idealized design is concerned with specifying the optimum research procedure that could be followed were there no practical restrictions. 5.2.1 Characteristics of a Good Research Design 1. It is a series of guide posts to keep one going in the right direction. 2. It reduces wastage of time and cost. 3. It encourages co-ordination and effective organization. 4. It is a tentative plan which undergoes modifications, as circumstances demand, when the study progresses, new aspects, new conditions and new relationships come to light and insight into the study deepens. 5. It has to be geared to the availability of data and the cooperation of the informants. 6. It has also to be kept within the manageable limits 5.3 Components of Research Design It is important to be familiar with the important concepts relating to research design. They are: 1. Dependent and Independent variables: A magnitude that varies is known as a variable. The concept may assume different quantitative values, like height, weight, income, etc. Qualitative variables are not quantifiable in the strictest sense of objectivity. However, the qualitative phenomena may also be quantified in terms of the presence or absence of the attribute considered. Phenomena that assume different values quantitatively even in decimal points are known as continuous variables. But, all variables need not be continuous. Values that can be expressed only in integer values are called non-continuous variables. In statistical term, they are also known as discrete variable. For example, age is a continuous variable; where as the number of children is a non-continuous variable. When changes in one variable depends upon the changes in one or more other variables, it is known as a dependent or endogenous variable, and the variables that cause the changes in the dependent variable are known as the independent or explanatory or exogenous variables. For example, if demand depends upon price, then demand is a

dependent variable, while price is the independent variable. And if, more variables determine demand, like income and prices of substitute commodity, then demand also depends upon them in addition to the own price. Then, demand is a dependent variable ques-4 which is determined by the independent variables like own price, income and price of substitute. 2. Extraneous variable: The independent variables which are not directly related to the purpose of the study but affect the dependent variable are known as extraneous variables. For instance, assume that a researcher wants to test the hypothesis that there is relationship between childrens school performance and their self-concepts, in which case the latter is an independent variable and the former, the dependent variable. In this context, intelligence may also influence the school performance. However, since it is not directly related to the purpose of the study undertaken by the researcher, it would be known as an extraneous variable. The influence caused by the extraneous variable on the dependent variable is technically called as an experimental error. Therefore, a research study should always be framed in such a manner that the dependent variable completely influences the change in the independent variable and any other extraneous variable or variables. 3. Control: One of the most important features of a good research design is to minimize the effect of extraneous variable. Technically, the term control is used when a researcher designs the study in such a manner that it minimizes the effects of extraneous independent variables. The term control is used in experimental research to reflect the restrain in experimental conditions. 4. Confounded relationship: The relationship between dependent and independent variables is said to be confounded by an extraneous variable, when the dependent variable is not free from its effects. Research hypothesis: When a prediction or a hypothesized relationship is tested by adopting scientific methods, it is known as research hypothesis. The research hypothesis is a predictive statement which relates a dependent variable and an independent variable. Generally, a research hypothesis must consist of at least one dependent variable and one independent variable. Whereas, the relationships that are assumed but not be tested are predictive statements that are not to be objectively verified are not classified as research hypothesis. Experimental and control groups: When a group is exposed to usual conditions in an experimental hypothesis-testing research, it is known as control group. On the other hand, when the group is exposed to certain new or special condition, it is known as an experimental group. In the afore-mentioned example, the Group A can be called a control group and the Group B an experimental one. If both the groups A and B are exposed to some special feature, then both the groups may be called as experimental groups. A research design may include only the experimental group or the both experimental and control groups together. Treatments: Treatments are referred to the different conditions to which the experimental and control groups are subject to. In the example considered, the two treatments are the parents with regular earnings and those with no regular earnings. Likewise, if a research study attempts to examine through an experiment regarding the comparative impacts of three different types of fertilizers on the yield of rice crop, then the three types of fertilizers would be treated as the three treatments. Experiment: An experiment refers to the process of verifying the truth of a statistical hypothesis relating to a given research problem. For instance, experiment may be conducted to examine the yield of a certain new variety of rice crop developed. Further, Experiments may be categorized into two types namely, absolute experiment and comparative experiment. If a researcher wishes to determine the impact of a chemical fertilizer on the yield of a particular variety of rice crop, then it is known as absolute experiment. Meanwhile, if the researcher wishes to determine the impact of chemical fertilizer as compared to the impact of bio-fertilizer, then the experiment is known as a comparative experiment. Experiment unit: Experimental units refer to the predetermined plots, characteristics or the blocks, to which the different treatments are applied. It is worth mentioning here that such experimental units must be selected with great caution. 5. a. How is secondary data useful to researcher? [ 5 marks] b. What are the criteria used for evaluation of secondary data? [ 5 marks] ANSWER8.4 Advantages of Secondary Data Secondary sources have some advantages: 1. Secondary data, if available can be secured quickly and cheaply. Once their source of documents and reports are located, collection of data is just matter of desk work. Even the tediousness of copying the data from the source can now be avoided,

thanks to Xeroxing facilities. 2. Wider geographical area and longer reference period may be covered without much cost. Thus, the use of secondary data extends the researchers space and time reach. 3. The use of secondary data broadens the data base from which scientific generalizations can be made. 4. Environmental and cultural settings are required for the study. 5. The use of secondary data enables a researcher to verify the findings bases on primary data. It readily meets the need for additional empirical support. The researcher need not wait the time when additional primary data can be collected 8.6 Evaluation of Secondary Data )When a researcher wants to use secondary data for his research, he should evaluate them before deciding to use them. 1. Data Pertinence The first consideration in evaluation is to examine the pertinence of the available secondary data to the research problem under study. The following questions should be considered. What are the definitions and classifications employed? Are they consistent ? What are the measurements of variables used? What is the degree to which they conform to the requirements of our research? What is the coverage of the secondary data in terms of topic and time? Does this coverage fit the needs of our research? On the basis of above consideration, the pertinence of the secondary data to the research on hand should be determined, as a researcher who is imaginative and flexible may be able to redefine his research problem so as to make use of otherwise unusable available data. 2. Data Quality If the researcher is convinced about the available secondary data for his needs, the next step is to examine the quality of the data. The quality of data refers to their accuracy, reliability and completeness. The assurance and reliability of the available secondary data depends on the organization which collected them and the purpose for which they were collected. What is the authority and prestige of the organization? Is it well recognized? Is it noted for reliability? It is capable of collecting reliable data? Does it use trained and well qualified investigators? The answers to these questions determine the degree of confidence we can have in the data and their accuracy. It is important to go to the original source of the secondary data rather than to use an immediate source which has quoted from the original. Then only, the researcher can review the cautionary ands other comments that were made in the original source. 3. Data Completeness The completeness refers to the actual coverage of the published data. This depends on the methodology and sampling design adopted by the original organization. Is the methodology sound? Is the sample size small or large? Is the sampling method appropriate? Answers to these questions may indicate the appropriateness and adequacy of the data for the problem under study. The question of possible bias should also be examined. Whether the purpose for which the original organization collected the data had a particular orientation? Has the study been made to promote the organizations own interest? How the study was conducted? These are important clues. The researcher must be on guard when the source does not report the methodology and sampling design. Then it is not possible to determine the adequacy of the secondary data for the researchers study.

QUESTION-What is the difference between fraud and misinterpretation? What do you understand by mistake? Ans. Fraud is generally defined in the law as an intentional misrepresentation of material existing fact made by one person to another with knowledge of its falsity and for the purpose of inducing the other person to act, and upon which the other person relies with resulting injury or damage. Fraud may also be made by an omission or purposeful failure to state material facts, which nondisclosure makes other statements misleading. Misrepresentation means a false statement of fact made by one party to another party, which has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy ofres cis s ion and sometimesdamages depending on the type of misrepresentation. Difference between fraud and misinterpretation:1. In misrepresentation the person making the false statement believes it to be true. In fraud the false statement is person who knows that it is false or he does not care to know whether it is true or false. 2. There is no intention to deceive the other party when there is misrepresentation of fact. The very purpose of the fraud is to deceive the other party to the contract. 3. Misrepresentation renders the contract voidable at the option of the party whose consent was obtained by misrepresentation. In the case of fraud the contract is voidable It also gives rise to an independent action in tort for damages. 4. Misrepresentation is not an offence under Indian penal code and hence not punishable. Fraud, In certain cases is a punishable offence under Indian penal code. 5. Generally, silence is not fraud except where there is a duty to speak or the relations between parties is fiduciary. Under no circumstances can silence be considered as misrepresentation. 6. The party complaining of misrepresentation cant avoid the contract if he had the means to discover the truth with ordinary deligance. But in the case of fraud, The party making a false statement cannot say that the other party had the means to discover the truth with ordinary deligance. MISTAKE Amis take is an erroneous belief, at contracting, that certain facts are true. It may be used as grounds to invalidate the agreement. Common law has identified two different types of mistake in contract: "unilateral mistake" and "mutual mistake," sometimes called "common mistake."

A mistake is an error in understanding facts, meaning of words or the law, which causes one party or both parties to enter into a contract without understanding the responsibilities or outcomes. Such a mistake can entitle one party or both parties to a rescission (cancellation) of the contract. A mistaken understanding of the law (as distinguished from facts) by one party only is usually no basis for rescission since "ignorance of the law is no excuse." Mistake covers a broad set of situations, and courts often distinguish between unilateral mistake and mutual mistake. A unilateral mistake is an incorrect belief of one party that is not shared by the other party. A mutual mistake is an incorrect belief shared by both parties. Courts have traditionally held that mutual mistakes are more likely than unilateral mistakes to make a contract voidable.

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The difference between a guarantee and an

indemnity
Introduction
Guarantees and indemnities are both long established forms of what the law terms suretyship. There are important legal distinctions between them.

What is what?

A guarantee is For example: An indemnity is

a promise to someone that a third party will meet its obligations to them if they dont pay you, I will a promise to be responsible for anothers loss, and to compensate them for that loss on an agreed basis if it costs you more than 250 to fix that, I will reimburse you the difference.

For example:

Section 4 of the venerable Statute of Frauds Act 1677 requires guarantees to be in writing if they are to be enforceable. There is no such requirement in the case of an indemnity, although of course written agreement is always best as a matter of practice and for proof.

Further, a guarantee provides for a liability co-extensive with that of the principal. In other words, the guarantor cannot be liable for anything more than the client. The document will be construed as a guarantee if, on its true construction, the obligations of the surety are to stand behind the principal and only come to the fore once an obligation has been breached as between the principal and the financier. The obligation is a secondary one, reflexive in character.

An indemnity however, provides for concurrent liability with the principal throughout and there is no need to look first to the principal. In essence it is an agreement that the surety will hold the financier harmless against all losses arising from the contract between the principal and the financier.

It is not always obvious whether a clause or agreement is a guarantee or an indemnity.

And an example...

Some of the differences were highlighted by the Court of Appeal in the 2007 case Pitts and Ors v Jones.

The appellants bringing the claim were minority shareholders in a company of which the other party was managing director and majority shareholder.

The majority shareholder had negotiated the sale of the company to a purchaser who had agreed to buy the shares of the minority at the same price.

The appellants were summoned to the sale completion meeting and were told that as part of the terms agreed their shares would be purchased after a delay of six months.

On being made aware of the risk of the purchaser becoming insolvent within this period they declined to sign the documents but relented when the majority shareholder undertook verbally to pay if the purchaser failed to do so.

The purchaser did subsequently become insolvent and could not pay for the minority shareholders shares, so they sued the majority shareholder on his undertaking to pay them.

The Court of Appeal found that, while all the other necessary elements of a legally binding contract were present (offer, acceptance, consideration and the intention to create legal relations), the undertaking given to the minority shareholders was unenforceable since it was a guarantee and was not in writing.

The minority shareholders lost the value of their shares and were left with no recourse.

How to tell which is which

Whether the security document is a guarantee or an indemnity (or both) is a matter of construction. There is a mass of case law on the distinction, but ultimately it comes down to the document in question. Considerations are as follows: The words used; the fact that one label or another is used is not determinative but it may demonstrate what the parties were attempting to achieve; Whether the document purports to make the surety liable for a greater sum than could be demanded under the principal contract, in which case the inference is that he is undertaking an obligation to indemnify; Whether a demand upon the principal debtor is defined as a condition precedent to proceeding against the surety in which case the document may well best be read as a guarantee; An indemnity comprises only two parties- the indemnifier and the indemnity holder. A guarantee

is a contract between three parties namely the surety, principal debtor and the creditor.

Summary
Case law iterates the need to seek proper legal advice and at bare minimum, use a written agreement clearly stating the parties intentions.

Click to buy: Shareholder Agreements

If by chance you find any error in this information page, do please tell us. We should also welcome your suggestions for new subjects for information pages. These notes:

Do not provide a complete or authoritative statement of the law;

Do not constitute legal advice by Net Lawman;

Do not create a contractual relationship;

Do not form part of any other advice, whether paid or free.

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What is the difference between cheque and bill of exchange ?

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A cheque differs from a bill of exchange in the following respects: 1. Drawee: A cheque is always drawn on a bank or a banker while a bill of exchange can be drawn on any person including a banker. 2. Acceptance: A cheque does not require any acceptance while a bill must be accepted before the drawee can be made liable upon it. 3. Payment:

A cheque is payable immediately on demand without any days of grace, but a bill of exchange is normally entitled to three days of grace unless it is payable on demand. 4. Crossing: A cheque may be crossed but there is no such provision in the case of a bill of exchange. 5. Notice of dishonor: When a cheque is not met, notice of dishonor is not necessary. Want of assets in the hands of the banker is sufficient notice. It is necessary to give a notice of dishonor in order to make the drawer of a bill liable. 6. Payable to bearer on demand: A cheque can be drawn payable to bearer on demand. But a bill of exchange cannot be so drawn. 7. Stamp: A bill of exchange must be stamped, whereas a cheque does not require any stamp. 8. Countermanding payment: A cheque may be revoked by countermand of payment. The payment of a bill, however cannot be countermanded. 9. Noting and protesting: A cheque is not noted or protested for dishonor and is generally inland. 10. Presentment: A bill of exchange must be duly presented for payment otherwise the drawer will be discharged. The drawer of a cheque is not discharged by failure of the holder to present it in due time unless the drawer has sustained damage by the delay. 11. Protection: A banker is given statutory protection with regard to payment of cheques in certain circumstances. No such protection is available to the drawee or acceptor of a bill of exchange.
Cheque vs Bill of Exchange While a Cheque can only be drawn on a banker, a bill of exchange can be drawn on any party or individual. There is no need for acceptance in case of a Cheque but a bill of exchange must be accepted before the drawee can be made liable upon it. While there is no grace period in the case of a Cheque and it must be paid immediately by the banker, there is usually a grace period of 2-3 days in the case of a bill of exchange.

 A Cheque is either crossed or uncrossed while there is no such requirement in a bill of exchange. In the case of a bounced Cheque, notice of dishonor is not necessary but it is a must in case of bill of exchange. A Cheque needs no stamp but it is necessary in case of bill of exchange. You can stop payment in case of a Cheque but it is not possible in case of a bill of exchange.

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Difference between company limited by shares and company limited by guarantee?

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Answers.com > Wiki Answers > Categories > Business & Finance > Difference between company limited by shares and company limited by guarantee?

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The main diffrerence between a company limited by guarantee and a company limited by shares is that the company has no share capital. A company limited by guarantee has members, rather than shareholders, the members of the company guarantee/undertake to contribute a predetermined sum to the liabilities of the company which becomes due in the event of the company going under.

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arbitrageurs can make this risky. Those with the fastest computers and the most expertise take advantage of series of small differences that would not be profitable if taken individually. Economists use the term "global labor arbitrage" to refer to the tendency of manufacturing jobs to

flow towards whichever country has the lowest wages per unit output at present and has reached the minimum requisite level of political and economic development to support industrialization. At present, many such jobs appear to be flowing towards China, though some which require command of English are going to India and the Philippines. In popular terms, this is referred to as offshoring. (Note that "offshoring" is not synonymous with "outsourcing", which means "to subcontract from an outside supplier or source", such as when a business outsources its bookkeeping to an accounting firm. Unlike offshoring, outsourcing always involves subcontracting jobs to a different company, and that company can be in the same country as the outsourcing company.) Sports arbitrage numerous internet bookmakers offer odds on the outcome of the same event. Any given bookmaker will weight their odds so that no one customer can cover all outcomes at a profit against their books. However, in order to remain competitive their margins are usually quite low. Different bookmakers may offer different odds on the same outcome of a given event; by taking the best odds offered by each bookmaker, a customer can under some circumstances cover all possible outcomes of the event and lock a small risk-free profit, known as a Dutch book. This profit would typically be between 1% and 5% but can be much higher. One problem with sports arbitrage is that bookmakers sometimes make mistakes and this can lead to an invocation of the 'palpable error' rule, which most bookmakers invoke when they have made a mistake by offering or posting incorrect odds. As bookmakers become more proficient, the odds of making an 'arb' usually last for less than an hour and typically only a few minutes. Furthermore, huge bets on one side of the market also alert the bookies to correct the market. Exchange-traded fund arbitrage Exchange Traded Funds allow authorized participants to exchange back and forth between shares in underlying securities held by the fund and shares in the fund itself, rather than allowing the buying and selling of shares in the ETF directly with the fund sponsor. ETFs trade in the open market, with prices set by market demand. An ETF may trade at a premium or discount to the value of the underlying assets. When a significant enough premium appears, an arbitrageur will buy the underlying securities, convert them to shares in the ETF, and sell them in the open market. When a discount appears, an arbitrageur will do the reverse. In this way, the arbitrageur makes a low-risk profit, while fulfilling a useful function in the ETF marketplace by keeping ETF prices in line with their underlying value. Some types of hedge funds make use of a modified form of arbitrage to profit. Rather than exploiting price differences between identical assets, they will purchase and sell securities, assets and derivatives with similar characteristics, and hedge any significant differences between the two assets. Any difference between the hedged positions represents any remaining risk (such as basis risk) plus profit; the belief is that there remains some difference which, even after hedging most risk, represents pure profit. For example, a fund may see that there is a substantial difference between U.S. dollar debt and local currency debt of a foreign country, and enter into a series of matching trades (including currency swaps) to arbitrage the difference, while simultaneously entering into credit default swaps to protect against country risk and other types of specific risk. Comparison between APT & CAPM APT applies to well diversified portfolios and not necessarily to individual stocks. With APT it is possible for some individual stocks to be mispriced - not lie on the SML. APT is more general in that it gets to an expected return and beta relationship without the assumption of the market portfolio. APT can be extended to multifactor models. Both the CAPM and APT are risk-based models. There are alternatives.

 Empirical methods are based less on theory and more on looking for some regularities in the historical record. Be aware that correlation does not imply causality. Related to empirical methods is the practice of classifying portfolios by style e.g. o Value portfolio o Growth portfolio The APT assumes that stock returns are generated according to factor models such as: As securities are added to the portfolio, the unsystematic risks of the individual securities offset each other. A fully diversified portfolio has no unsystematic risk. The CAPM can be viewed as a special case of the APT. Empirical models try to capture the relations between returns and stock attributes that can be measured directly from the data without appeal to theory. Difference in Methodology CAPM is an equilibrium model and derived from individual portfolio optimization. APT is a statistical model which tries to capture sources of systematic risk.Relation between sources determined by no Arbitrage condition. Difference in Application APT difficult to identify appropriate factors. CAPM difficult to find good proxy for market returns. APT shows sensitivity to different sources. Important for hedging in portfolio formation. CAPM is simpler to communicate, since everybody agrees upon.

Q. 5 Diversification is key to good investment. What are pros and cons of foreign investment? Ans: Q. 6 Explain in brief APT with single factor model. Ans: Arbitrage pricing theory (APT), in finance, is a general theory of asset pricing, that has become influential in the pricing of stocks. APT holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor-specific beta coefficient. The model-derived rate of return will then be used to price the asset correctly - the asset price should equal the expected end of period price discounted at the rate implied by model. If the price diverges, arbitrage should bring it back into line. The theory was initiated by the economist Stephen Ross in 1976. The APT model Risky asset returns are said to follow a factor structure if they can be expressed as: where E(rj) is the jth asset's expected return, Fk is a systematic factor (assumed to have mean zero), bjk is the sensitivity of the jth asset to factor k, also called factor loading,

 andj is the risky asset's idiosyncratic random shock with mean zero. Idiosyncratic shocks are assumed to be uncorrelated across assets and uncorrelated with the factors.

F F F R R
S S GDP GDP I I

+ + + + =

The APT states that if asset returns follow a factor structure then the following relation exists between expected returns and the factor sensitivities: where RPk is the risk premium of the factor, rf is the risk-free rate, That is, the expected return of an asset j is alinear function of the assets sensitivities to the n factors.

Note that there are some assumptions and requirements that have to be fulfilled for the latter to be correct: There must be perfect competition in the market, and the total number of factors may never surpass the total number of assets (in order to avoid the problem of matrix singularity). Using the APT Identifying the factors As with the CAPM, the factor-specific Betas are found via a linear regression of historical security returns on the factor in question. Unlike the CAPM, the APT, however, does not itself reveal the identity of its priced factors - the number and nature of these factors is likely to change over time and between economies. As a result, this issue is essentiallyemp ir ical in nature. Several a priori guidelines as to the characteristics required of potential factors are, however, suggested: 1.their impact on asset prices manifests in theirunex p ected movements 2.they should representund iver s ifiab l e influences (these are, clearly, more likely to be macroeconomic rather than firm-specific in nature) 3. timely and accurate information on these variables is required 4. the relationship should be theoretically justifiable on economic grounds Chen, Roll andRos s (1986) identified the following macro-economic factors as significant in explaining security returns: surprises ininflat ion; surprises inGNP as indicated by an industrial production index; surprises in investor confidence due to changes in default premium in corporate bonds; surprise shifts in the yield curve. As a practical matter, indices or spot or futures market prices may be used in place of macro-economic factors, which are reported at low frequency (e.g. monthly) and often with significant estimation errors. Market indices are sometimes derived by means of factor analysis. More direct "indices" that might be used are: short term interest rates; the difference in long-term and short-term interest rates; a diversified stock index such as the S&P 500 or NYSE Composite Index; oil prices gold or other precious metal prices Currency exchange rates Single factor model rj = bj0 + bj1F1 + j; j = 1; 2; : : : ; n whererj is the rate of return on asset (or portfolio) j, F1 denotes the factors value, bj0 and bj1 are parameters, and "j denotes an unobserved random error. It is assumed that E[jl F1] = 0, that is, the expected value of the random error, conditional upon the value of the factor, is zero. APT prediction, single factor model: The weight 1 is interpreted as the risk premium associated with the factor, that is, the risk premium corresponds to the source of the systematic risk.