Answer the following questions in about 150 words each : (a) Explain 'Capital Asset Pricing Model'. 10 (b) Briefly explain any…

Answer the following questions in about 150 words each : (a) Explain 'Capital Asset Pricing Model'. 10 (b) Briefly explain any five risks faced by the financial institutions in India. 10 (c) Discuss Walter's model of dividend decision. 10 (d) Discuss the problem of multiple internal rates of return in relation to capital budgeting decision. 10 (e) Explain the objective of maximising the wealth of shareholders. 10

हिंदी में प्रश्न पढ़ें

निम्नलिखित प्रश्नों में से प्रत्येक का उत्तर लगभग 150 शब्दों में दीजिए : (a) 'पूँजी परिसम्पत्ति कीमत-निर्धारण मॉडल' की व्याख्या कीजिए । 10 (b) भारत में वित्तीय संस्थाओं द्वारा सामना किए जाने वाले किन्हीं पाँच जोखिमों की संक्षेप में व्याख्या कीजिए । 10 (c) लाभांश निर्णय के वाल्टर मॉडल की विवेचना कीजिए । 10 (d) पूँजी बजटन निर्णय के संबंध में प्रतिफल की बहु-आंतरिक दरों की समस्या की विवेचना कीजिए । 10 (e) शेयरधारकों की संपत्ति को अधिकतम करने के उद्देश्य की व्याख्या कीजिए । 10

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Directive word: Explain

This question asks you to explain. The directive word signals the depth of analysis expected, the structure of your answer, and the weight of evidence you must bring.

See our UPSC directive words guide for a full breakdown of how to respond to each command word.

How this answer will be evaluated

Approach

The directive 'explain' requires clear exposition of concepts with causal linkages and underlying logic. Allocate approximately 30 words per mark across five sub-parts: (a) CAPM—present formula with risk-free rate, beta and market premium; (b) five risks—credit, liquidity, operational, market and regulatory risks with brief elaboration; (c) Walter's model—state formula and explain r>ke, r=ke, r<ke scenarios; (d) multiple IRR—explain non-conventional cash flows and reinvestment assumption problem; (e) wealth maximization—contrast with profit maximization and address time value and risk dimensions. Use brief introductions, bullet-pointed core content, and one-line synthesizing conclusions for each part.

Key points expected

(a) CAPM: Expected return formula E(Ri)=Rf+βi(E(Rm)−Rf); systematic vs unsystematic risk; beta as measure of market sensitivity; Security Market Line (SML); assumptions and limitations
(b) Five risks: Credit risk (NPAs, loan defaults); Liquidity risk (asset-liability mismatch); Market risk (interest rate, equity price fluctuations); Operational risk (technology, fraud, cyber threats); Regulatory/compliance risk (RBI norms, Basel III)
(c) Walter's model: P=(D+(r/ke)(E−D))/ke; dividend policy irrelevant when r=ke; retain when r>ke; distribute when r<ke; assumptions including constant r and ke, all financing through retained earnings
(d) Multiple IRR: Occurs with non-normal cash flows (sign changes more than once); NPV profile crossing x-axis multiple times; reinvestment rate assumption criticism; Modified IRR (MIRR) as solution
(e) Wealth maximization: Market value of shares as objective; incorporates time value of money, risk-return trade-off, and dividend policy; superior to profit maximization which ignores risk, timing and scale

Evaluation rubric

Dimension	Weight	Max marks	Excellent	Average	Poor
Demand-directive understanding	20%	10	Demonstrates precise understanding of 'explain' and 'discuss' demands: for (a) and (e) provides clear causal exposition; for (c) and (d) offers analytical discussion with pros/cons; for (b) enumerates with brief elaboration as 'briefly explain' requires; no confusion between directive types	Mixes up directive demands occasionally—treats 'discuss' as mere description or 'explain' as list; covers content but with uneven depth across sub-parts; one sub-part may be underdeveloped	Misinterprets directives—lists points for 'explain', writes essay for 'briefly explain', or omits analytical component for 'discuss'; structural mismatch with what question demands
Content depth & accuracy	20%	10	Mathematically accurate: CAPM formula correct; Walter's formula and three conditions precisely stated; multiple IRR causes clearly identified; five distinct risks correctly named with accurate descriptions; no conceptual errors	Generally accurate but with minor errors—wrong formula notation, confused risk definitions, or incomplete Walter's conditions; understands core concepts but lacks precision in technical details	Major factual errors—incorrect CAPM formula, confused dividend models, wrong identification of multiple IRR causes, overlapping or incorrect risk categories; demonstrates fundamental misunderstanding
Structure & flow	20%	10	Clear five-part structure with visible sub-headings (a) through (e); each part has mini-introduction, core content, and conclusion; balanced word allocation (~30 words per mark); seamless logical progression within and across parts	Sub-parts identifiable but poorly demarcated; some parts disproportionately long or short; logical flow present but uneven; missing internal structure in 1-2 sub-parts	No clear demarcation between sub-parts; highly uneven allocation (e.g., 100 words on one part, 20 on another); disorganized, jumping between concepts; reader must struggle to identify which part is being answered
Examples / case-law / data	20%	10	Contextualizes with Indian relevance: for (b) cites RBI's NPA classification, IL&FS/YES Bank crisis for credit/liquidity risks, or Basel III implementation; for (a) references BSE Sensex or government bond yields as Rf proxy; for (e) contrasts with Satyam-type profit manipulation cases	Generic or no examples; may mention 'RBI' or 'Indian banks' without specificity; examples not tightly linked to concepts; one or two sub-parts have relevant illustration, others lack	No examples whatsoever; or irrelevant examples that demonstrate misunderstanding (e.g., using CAPM for commodity pricing, citing foreign cases without Indian context where domestic relevance is obvious)
Conclusion & analytical edge	20%	10	Each sub-part ends with critical insight: for (a) CAPM limitations in emerging markets; for (c) Walter's model critique regarding constant r/ke assumption; for (d) preference for NPV over IRR; for (e) ESG integration in wealth maximization; demonstrates examiner-level synthesis	Brief concluding lines present but descriptive rather than analytical; no critical evaluation of models; ends with summary rather than insight; 2-3 sub-parts have adequate closure, others trail off	Abrupt endings with no conclusion; or repetitive restatement of points without synthesis; no critical perspective on any model; fails to demonstrate why concepts matter for financial decision-making

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