Security Analysis and Portfolio Management

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Unit I

Investment Meaning, Nature and Scope Investment Decision Process Environment Investment Risks Interest risk, Inflation risk Valuation of Securities Notion of Dominance
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Unit II

Techniques of Risk Measurement and their application Concept of Beta Classification of Beta SML Vs CML Portfolio Revision Portfolio Reconstruction
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Unit III

Security Analysis : Fundamental Analysis EIC Technical Analysis Efficient Market Hypothesis Dow Jones Theory Measurement of Systematic and Unsystematic risk

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Unit IV

Portfolio Analysis: Portfolio selection and theories 1. Markowitz Model 2. CAPM Portfolio Revision and Performance Evaluation of Managed Portfolios : 1. Sharpe Ratio 2. Treynor Ratio 3. Jensens Alpha
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Investment

Movement of funds from Surplus Sector to Deficit Sector When a person has more money than he requires for current consumption, he would be a potential investor. Definition: The process of sacrificing something now for the purpose of gaining something later.
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Dimensions of Investment

Sacrifice Today Gain Later Time

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Different views..

Layman Monetary Commitment Economist Net Addition made to the nations capital stock that consists of goods and services that are used in the production process. Financial investment is the allocation of money to assets that are expected to yield some gain over a period of time.
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Features of Investment

Return Risk Time Period Liquidity / Marketability Safety

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Objectives of Investment

Maximization of Return 1. Annual Income (Dividend, Interest etc) 2. Capital Appreciation Minimization of Risk Liquidity Hedge against Inflation Tax Considerations
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Other

Near-Term High Priority Goals Long-Term High Priority Goals Low Priority Goals Entrepreneurial or Money - Making Goals

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Features of an Ideal Investment

Safety Liquidity Regularity and Stability of Income Stability of Purchasing Power Capital Appreciation Tax Benefits Legality
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Types of Investors

Individuals Institutions 1. Insurance Companies 2. Mutual Funds 3. Banks 4. FII

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Investment Constraints

Risk Tolerability Liquidity / Marketability Investors Age Need for Regular Income Tax Liability / Exemption

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Errors While Investing

Inadequate comprehension of return and risk. Vaguely formulated investment policy. Naive extrapolation of the past. Cursory decision-making. Simultaneous Switching Misplaced love for cheap stocks.
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Investment vs. Speculation

Basis 1. Time Horizon 2. Holding Period 3. Risk 4. Return 5. Decision Basis Investment Plans for a longer time horizon Speculation Plans for a very short period From 1 year to few years Varies from few days to months Assumes moderate risk Willing to undertake high risk

Likes to have moderate Likes to have high rate of rate of return return Considers fundamental factors and evaluates the performance of the company regularly Considers inside information, hearsays and market behavior

6. Funds / Leverage 7/21/12

Uses his own funds and Relies on borrowed funds avoids borrowed funds to supplement his personal resources

Investment vs. Gambling

Gambling is a very short term investment in a game. Time horizon is shortest. Results are determined by the roll of dice or turn of a card. Entertainment is primary, Earning income is secondary. Employs artificial risks while investment involves commercial risk.
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Approaches to Investment Decision Making

Fundamental Approach Psychological Approach Academic Approach Eclectic Approach

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Fundamental Approach

Most commonly advocated. There is an intrinsic value of a security and this depends upon the underlying fundamental factors. Intrinsic value is based on EIC analysis. At any given point of time, there are some securities for which the prevailing market price would differ from the intrinsic value. 7/21/12

Psychological Approach

Stock prices are guided by emotions rather than reason. Prices are influenced by the psychological mood of the investors. Investors use some form of technical analysis with a view to develop trading rules aimed at profit making. Based on certain persistent and recurring patterns of price 7/21/12 movements.

Academic Approach

Believes that stock markets are reasonable efficient in reacting quickly and rationally to the flow of information. Stock prices reflect intrinsic value very well. Prices behavior corresponds to random walk. Successive price changes are independent.
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There is a positive relationship

Eclectic Approach

Based on all the three different approaches. Fundamental approach is helpful in establishing basic standards and benchmarks. Technical analysis is useful in broadly gauging the prevailing mood of the investors. Despite many instances of misprices 7/21/12 securities, there appears to be a

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Sources of Investment Information

International Affairs National Affairs Industry Information Company Information Stock Market Information

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