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MB0010-Security Analysis and Portfolio Management-Set-1

MB0010-Security Analysis and Portfolio Management-Set-1

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Published by Pankaj Chourey

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Published by: Pankaj Chourey on Jun 14, 2011
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Sikkim Manipal University - MBA - MF0010
 
Security Analysis and Portfolio Management
===========================================================
 Semester: 3 - Assignment Set: 1=======================================================
===========================================================
PANKAJ CHOUREY Reg. No. 521036344 Page 1 of 21
Question-01: Frame the investment process for a person of your age group.
Answer:
As investors, we would all like to beat the market handily, and we would all like topick "great" investments on instinct. However, while intuition is undoubtedly a part ofthe process of investing, it is just part of the process. As investors, it is not surprisingthat we focus so much of our energy and efforts on investment philosophies andstrategies, and so little on the investment process. It is far more interesting to readabout how Peter Lynch picks stocks and what makes Warren Buffett a valuableinvestor, than it is to talk about the steps involved in creating a portfolio or inexecuting trades. Though it does not get sufficient attention, understanding theinvestment process is critical for every investor for several reasons:1.
 
The investment process outlines the steps in creating a portfolio, and emphasizesthe sequence of actions involved from understanding the investors risk preferencesto asset allocation and selection to performance evaluation. By emphasizing thesequence, it provides for an orderly way in which an investor can create his or herown portfolio or a portfolio for someone else.2.
 
The investment process provides a structure that allows investors to see the sourceof different investment strategies and philosophies. By so doing, it allows investorsto take the hundreds of strategies that they see described in the common press andin investment newsletters and to trace them to their common roots.3.
 
The investment process emphasizes the different components that are needed foran investment strategy to by successful, and by so doing explain why so manystrategies that look good on paper never work for those who use them.The best way of describing this book is by noting what it does not do. It does notemphasize individual investors or push an investment philosophy. It does not focusheavily on coming up with strategies that beat the market, though there is reference tosome of them in the course of the book. Instead, it talks about the process of investingand how this process is the same no matter what investment philosophy one mighthave.The book is built around the investment process. The process always starts with theinvestor and understanding his or her needs and preferences. For a portfolio manager,the investor is a client, and the first and often most significant part of the investmentprocess is understanding the clients needs, the clients tax status and mostimportantly, his or her risk preferences. For an individual investor constructing his orher own portfolio, this may seem simpler, but understanding ones own needs andpreferences is just as important a first step as it is for the portfolio manager.
 
 
Sikkim Manipal University - MBA - MF0010
 
Security Analysis and Portfolio Management
===========================================================
 Semester: 3 - Assignment Set: 1=======================================================
===========================================================
PANKAJ CHOUREY Reg. No. 521036344 Page 2 of 21
The next part of the process is the actual construction of the portfolio, which we divideinto three sub-parts. The first of these is the decision on how to allocate the portfolioacross different asset classes defined broadly as equities, fixed income securities andreal assets (such as real estate, commodities and other assets). This asset allocationdecision can also be framed in terms of investments in domestic assets versus foreignassets, and the factors driving this decision. The second component is the assetselection decision, where individual assets are picked within each asset class to makeup the portfolio. In practical terms, this is the step where the stocks that make up theequity component, the bonds that make up the fixed income component and the realassets that make up the real asset component are picked. The final component isexecution, where the portfolio is actually put together, where investors have to tradeoff transactions cost against transactions speed. While the importance of execution willvary across investment strategies, there are many investors who have failed at thisstage in the process.The final part of the process, and often the most painful one for professional moneymanagers, is the performance evaluation. Investing is after all focused on one objectiveand one objective alone, which is to make the most money you can, given the riskconstraints you operate under. Investors are not forgiving of failure and unwilling toaccept even the best of excuses, and loyalty to money managers is not a commonlyfound trait. By the same token, performance evaluation is just as important to theindividual investor who constructs his or her own portfolio, since the feedback from itshould largely determine how that investor approaches investing in the future.These parts of the process are summarized in Figure 1, and we will return to thisfigure to emphasize the steps in the process as we move through the book. The book isbuilt around the same structure. It begins with a chapter that provides an overview ofinvestment management as a business. The first major section is on understandingclient needs and preferences, where we look at not only how to think about risk ininvesting but also at how to measure an investors willingness to take risk. The secondsection looks at the asset allocation decision, while the third section examines differentapproaches to selecting assets. The fourth section takes a brief look at the executiondecision, and the fifth section develops different approaches to evaluating performance.
 
 
Sikkim Manipal University - MBA - MF0010
 
Security Analysis and Portfolio Management
===========================================================
 Semester: 3 - Assignment Set: 1=======================================================
===========================================================
PANKAJ CHOUREY Reg. No. 521036344 Page 3 of 21
Question 2: From the website of BSE India, explain how the BSE Sensex is calculated.
Answer:
Introduction
 SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted" methodology of 30 component stocks representing large, well-establishedand financially sound companies across key sectors. The base year of SENSEX wastaken as 1978-79. SENSEX today is widely reported in both domestic and internationalmarkets through print as well as electronic media. It is scientifically designed and isbased on globally accepted construction and review methodology. Since September 1,2003, SENSEX is being calculated on a free-float market capitalization methodology.

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