QUESTION BANK SECURITY ANALYSIS & PORTFOLIO MANAGEMENT Third Semester MBA – Master of Business Administration University of Madras Prepared

by: N Rakesh, Chennai

Investment / Financial system
          Define investment. What are its dimensions. Describe the different objectives of financial investment What are the characteristics of investment. Explain briefly the expectations of individual investors Discuss the problems faced by the Indian investors. Explain the function of Financial system. Differentiate between capital and money market securities. Explain briefly the institutional arrangements for security investment in India. Discuss the important weaknesses of the Indian capital market. Discuss the recent developments in Indian Capital Markets.

SEBI
    Briefly explain the various regulations of SEBI concerning about the capital markets. What are the steps taken by SEBI in the primary market to protect the investors. What are the objectives and functions of SEBI. Explain the organization of SEBI What are the reforms in the secondary market introduced by SEBI.

Stock Exchange / Primary Market
           Discuss the most important economic functions of a stock exchange. Explain the concept of ‘Stop Order’ with a suitable example What is primary market Describe the concept of ‘Average Up/Down’ in purchasing of equity shares in the secondary market How is IPO made through stock exchange on line system. What is listing. List out the various types of speculations at Stock exchange. Explain the recent trends in NSE. What are the main institutional agencies in the primary capital market. What are the main features of Money market Comment upon the role of Bombay Stock exchange in Indian stockmarket.

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Time Value of Money
 What is the aggregate present value of Rs.500 received as interest at the end of each of the next 3 years assuming a discount rate of 10%.

Valuation of Bonds
   What are fixed income securities. Explain their characteristics What are the various types of debentures. A bond having a face value of Rs.1000 has a coupon rate of 12.5%. The bond is redeemable on 31st December 2005. The selling price on 31st December 2002 is Rs.806. Find out the return earned by X who purchases and keeps it upto maturity Explain the strategies followed by passive bond investors and active bond investors. Calculate the value of a bond having a par value of Rs.1000, coupon rate of 12% and maturity period of 8 years. The required yield is 10%. What are the various types of corporate bonds. What is meant by yield to maturity. What do you mean by Bond immunization. How are debt ratings useful. What role do they play in the securities market. A debenture holder is to receive an annual interest of Rs.100 for perpetuity on his debentures of Rs.1000. Calculate the value of the debenture if the required rate of returns is (a) 10% (b) 15% and (c) 8%. Explain the bond price theorem. A bond has a par value of Rs.100 and carries a 9 percent per annum coupon payment. The yield to maturity is 7 percent and the maturity period is 5 years. Compute the duration and volatility of the bond. Identify the major factors that serve as ingredients in setting ratings for bonds A bond is available at a price of 102. The bond has a coupon of 15 percent and matures in 20 years. The bond is callable in five years at 111. a. What is the yield-to-maturity on this bond b. What is the yield-to-call on the bond. c. Which would you place more importance on if you were to take a decision on buying the bond.

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Risk/Return
       Define risk. What are the different kinds of risks in corporate investment. How does the systematic risk affect the individual stock return. What is standard deviation. What are its important features. What is Risk free asset. Distinguish between Systematic risk and Unsystematic risk. Explain Interest Rate risk and Inflation risk. What is Total Return over a period. Illustrate with example.

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The return on the equity stock of X Ltd and the market portfolio over a 10 year period are given below: 1 15 12 2 -6 1 3 18 14 4 30 24 5 12 16 6 25 30 7 2 -3 8 20 24 9 18 15 10 24 22

Year X Ltd Market Return   

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How will you calculate the Beta of a stock. How risk is assessed using a probability distribution? Illustrate your answer. Calculate the expected return and risk for the securities A and B given Years Expected returns (%) A B 1 10 14 2 12 9 3 7 10 Why standard deviation is a better measure of risk Calculate the expected return and risk for the securities A and B given State of economy Probability Expected returns (%) A B Recession 0.20 -18 -4 Boom 0.45 +20 +10 Stagnant 0.35 +18 +25

Equity and Earnings
   Specify the characteristic features of equity stocks. Define EPS. Explain how it is used in evaluating equity shares Calculate the Earning per share from the following data EBIT = Rs.5,00,000 Rs.10 lakhs debentures of 10% interest Rs.5 lakhs preference shares of 12% dividend 10,000 equity shares of Rs.10 each Corporate income tax is 50%. What are the advantages of P/E ratio. What are the distinctive advantages of P/E ratio model over the discounting model

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Dividend Valuation
  Explain the Dividend capitalization model share valuation with growth. Explain dividend valuation model of an equity share under zero growth, constant growth and multiple growth

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Investors in ABC were paid Rs.2.40 as dividend per share last year on their equity and these are expected to grow indefinitely at 8% rate. What is the value of the equity if the investors require an 12% return Van products currently pays a dividend of Rs.2 per share and their dividend is expected to grow at a 15% annual rate for 3 years then at a 12% rate for the next 3 years. After it is expected to grow at 5% forever. What value would you place on the equity if the required rate of return were 9%.

Fundamental Analysis
             Define ‘fundamental analysis’. Bring out its relevance for equity investment ‘Economic forecasting is the heart of the economy analysis’. Comment and briefly explain various techniques of economic forecasting Discuss the key macro economic variables and their impact on stock market. Explain briefly the basic valuation model of a security Explain the utility of the economic analysis and state the economic factors considered for this analysis. How can industries be classified. Describe the industrial life cycle. What are its implications for the investor. How Debt and Equity ratio affect EPS? Explain by giving an example What is meant by fundamental analysis. What are the various factors that are considered in such an analysis. Discuss the market-share/net-income margin approach to company earnings analysis What are the obstacles in the way of successful fundamental analysis. Briefly explain. What are the obstacles in the way of an equity analyst. What are the various factors that are to be considered in Company Analysis.

Dividend policy
 Given earning per share as Rs.5 (EPS); Cost of capital 12%, what will be the market price under Walter’s model if internal rate of return on investment is 20% (IRR)? Dividend is Rs.3 (D) What are the implications of the Walter model. What are the advantages of a bonus share over a cash dividend. Compare bonus issue and stock split. As per the Walter’s model what would be the market price of the shares of the following: Kc= 0.10, EPS Rs.10, r = 15, Dividend is Rs.5 Discuss clearly the factors that affect dividend decision. The following information is available for A Ltd. Earnings per share is Rs.40. Rate of return on investment 18%. Rate of return required by share holders is 15%. What will be the price per share as per Walter model if the payout ratio is 40%, 50% and 60%.

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“In a world of perfect capital markets and the absence of taxation, dividend payout would be a matter of irrelevance even with uncertainty: - Discuss. As per the Gordon model, what would be the market price of the following? EPs Rs.20, Retention rate 0.8, ke = 0.19, r = 0.12 What is stable dividend policy.

Technical Analysis
       Discuss the concept of technical analysis What do you understand by ‘Relative Strength Analysis’ What is Relative Strength Index. Explain briefly What is ROC? ‘Technical Analysis is useful to predicting individual share price as well as the direction of the market as a whole’. Elaborate and illustrate. How does technical analysis differ from the fundamental analysis Explain the following technical indicators: o New highs and lows o Volume o Short interest ratio o Mutual fund liquidity Explain the various types of Gaps. Explain the Elliot wave theory of investing. What do you understand by Breadth analysis What are the tools of Technical Analysis Explain the Graham and Dodd’s investor ratio.

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Efficient Market Theory
   What is an efficient market. What is random walk theory. Describe the types of tests that have been commonly employed to verify the weak form of efficient market hypothesis.

Derivatives
        Define derivatives What are the advantages of derivative markets What are the various types of options. Differentiate between forwards and futures Discuss the key factors that have a bearing on the value of a call option What are the key factors that have a bearing on the value of a put option. Briefly explain. Distinguish between a put and call option with examples. What do you mean by butterfly spread strategy in options.

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Portfolio Management
  What are the basic assumptions in Capital Asset Pricing Model. State the formula for Capital Asset Pricing Model (CAPM). Assuming beta of 1.2, risk free return of 4% and the expected market return of 12%, calculate the required return of an investment under CAPM. What are the assumptions made under Markowitz theory of portfolio analysis Describe the procedure developed by Markowitz for choosing the optimal portfolio of risky assets. What is meant by Active strategies in equity selection techniques? Discuss the various approaches of this technique Explain the important steps in portfolio management. What are Rosenberg’s six indexes of risk in predicting a stock’s beta What are the constraints in portfolio revision? Explain briefly. Discuss the Capital Asset Pricing Model. What is meant by portfolio management? Discuss the elements of portfolio management. What are the basic principles to be applied to all portfolio decisions? Briefly explain. Briefly describe the three basic policies with respect to portfolio rebalancing. Describe the key vectors of active portfolio strategy. What are formula plans. How do they help in portfolio revision. What do you mean by SML How does the risk profile of an investor affect portfolio selection Discuss on the unsystematic risks of investments in portfolios. Explain the basic assumptions of Markowitz efficient frontier theory. Calculate the expected returns to a portfolio composed of the following securities. Security Expected Returns Proportion A 10% 20% B 15% 20% C 20% 60% Stocks X and Y display the following returns over the past two years. Years Stock X Stock Y Return (%) Return (%) 2005 10 18 2006 16 12 a) What is the standard deviation of each stock b) What is the covariance of stocks X and Y c) Determine the correlation coefficient of stocks X and Y d) What is the expected return and risk of a portfolio made up of 40 percent X and 60 percent Y.

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Measurement of Portfolio Management / Mutual Funds
 How do you judge a mutual fund’s performance through Sharpe and Treynor’s methods. Page 6 of 7

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Explain the objectives of mutual funds. What are the differences between open-end and closed-end mutual funds. What is meant by mutual fund? What are the advantages of professionally managed portfolio. What are the types of Mutual funds. What are the advantages of investing in mutual funds. Discuss the role of Unit Trust of India.

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