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Master of Business Administration- MBA Semester 3 MF0010 Security Analysis and Portfolio Management- 4 Credits (Book ID: B 1208)

Assignment Set -1 (60 marks) Q1. Explain the meaning of investment and security. Describe the investment process. Answer. Investment = An investment is a sacrifice of current money or other resources for future benefit. it denotes conversion of cash or money into a monetary asset or claim on future money for a return. The two factors that determones investment decisions are return ans risk which are dealt in susequent units. Investing is committing your funds to one or more assets that will be held over some future time period. When you invest your money ina fixed deposit, stock ot mutual fund you do so, because you think its value will appreciate over a period of time. Security = Securities are financial assets in various categories with different characteristics. Securities take the form of shares, bonds, debentures, money market instruments, derivatives etc. Securities Contract Regulation Act has defined the security as 'Inclusive of shares, scripts, stociks, bonds, debenture stock or any other marketable instruments of a like nature in or any other semi-government body etc'. it includes all rights and interest in them including warrants and loyalty coupons. Investment Process = The Investment process describes the decisions with regard to what securities to invest in while constructing a port folio, how extensive the investment should be, and when the investment should be made. This is a procedure involving the following five steps: i. Set investment Policy ii. Perform Security analysis iii. Construct a portfolio iv. Evaluate the performance of Portfolio v. Revise the Portfolio Set Investment policy = This initial step determines the investors objectives and the amount of his investable wealth. This step concludes with the asset allocation decision, identification of potential categories of financial assets. Asset allocation involves diving an investment among different categories such as stocks, bonds, cash. Performing Security Analysis = Security analysis involves examining a number of individual securities within the broad categories of financial assets. It is to identify those securities that currently appear to be mispriced. Security analysis is done either using Fundamental ot Technical analysis.

Construct a portfolio = This step identifies those specific assets in which to invest, as well as determining the proportion of the investors wealth to put into each one. Evaluate the performance of Portfolio = This step involves determining periodically how the portfolio has performed over some time period. Revise the Portfolio = This step is the repetition of the three previous steps, as objectives might change and previously held portfolio might not be the optimal one.

Q2. Write about the secondary markets? Explain the role of financial intermediaries. Answer. Secondary market is a market where already existing (pre-issued) securities are traded amongst investors. Secondary market is resale market, where the securities trade once the securities have been put out among the public. Secondary market could be either auction or dealer market. An auction market is one in which investors trade directly with each other. A dealer market is one where dealers post bid rates and offer rates at which public investors can trade. While stock exchange is the part of an auction market, over the counter is a part of the dealer market. The financial intermediaries are intermediate between the providers and users of financial capital. The financial intermediaries raise funds by taking deposits and/ or issuing securities. They then use these raised funds to acquire financial assets by making loans and / or purchasing securities. This set of activity is known as financial intermediation. The reasons why intermediaries such as banks exist are related to the various market imperfections, in particular, imperfect information. These make financial institutions such as banks key channels for intermediating between savers and borrowers. Financial institutions such as banks and insurance companies are important sources of financing for businesses. They enable flow of capital from the people and institutions to the businesses and individuals who need financing. Financial institutions provide payment mechanism for the economy and offer risk pooling, loans and deposits, and other services to their customers. i. Financial intermediaries take in the savings of investors and convert them into stocks and bonds. The money generated from stocks and bonds are finally used by firms to make investments. Financial intermediaries allow individual small savers to access large investment projects through the mechanism of fund pooling. Financial intermediaries help diversify risk for small investors. Large projects carry large risks. Long term projects require long term investment. Most small investors cannot efford to invest in the long term. Financial intermediaries make this possible.

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Q3. Explain the meaning of Risk. Describe what the factors that affect risk are. Answer: Risk is the degree of uncertainty about your expected return from an investment, including the possibility that some or all of your investment may be lost. Thus risk includes not only the bad outcomes but also good outcomes. Indeed downside and upside risks are considered while measuring risk. One fundamental rule applies to all investments. The smaller the risk, the smaller is your potential return. The higher the risk, the higher is the potential reward. How much risk one should take depends to large extent on your investment objective. Factors that affect Risk: i. Business Risk: This is the possibility that the company holding your money will not pay the interest or dividend due, or the principal amount, when your bond matures. Inflation Risk: Inflation risk is the chance that the purchasing power of the invested rupees will decline. This is the risk that the rupee you get when you sell your asset will buy less than the rupee you originally invested in the asset. Interest rate risk: the variability in a securitys return resulting from changes in the level of interest rates is referred to as interest rate risk. This is the possibility that a fixed debt instrument, such as bond, will decline in value due to a rise in interest rates. Market risk: Market risk is the variability in a securitys returns resulting from fluctuations in the aggregate market (such as the stock market). This is the risk that the unit price or value of your investment will decrease because of as decline in market.

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Q4. Briefly explain the variables that are analyzed in economy analysis. Answer: Economic analysis is done for two reasons: first, a companys growth prospects are, ultimately, dependant on the economy in which it operates: second, share price performance is generally ties to economic fundamentals, as most companies generally perform well when the economy is doing the same. Variables: i. ii. iii. iv. v. vi. Gross domestic product (GDP) growth rate. Exchange rates The balance of payments (BOP) The current account deficit Government policy (fiscal and monetary policy) Domestic Legislation (laws and regulations)

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Unemployment (the % of population that wants to work and is currently not working) Public attitude (consumer confidence) Inflation ( a general increase in the price of goods and services), interest rates Productivity (output per worker) Capacity utilization (output by the firm) etc.

GDP is the total income earned by a country. GDP growth rates shows how fast the economy is growing. Investors know that strong economic growth is good for companies and recessions or full-blown depressions cause share prices to decline, all other things being equal. Inflation is important for investors, as excessive inflation undermines consumer spending power (price increase) and so can cause economic stagnation. The Exchange rate affects the broad economy and companies in a number of ways. First, changes in the exchange rate affect the exports and imports. If exchange rate strengthens, exports are hit: if the exchange rate weakens, imports are affected. The BOP affects the exchange rate through supply and demand for the foreign currency. BOP reflects a countrys international monetary transactions for a specific time period. It consists of the current account and the capital account. The current account is an account of the trade in goods and services. The capital account is an account of the cross border transactions in financial assets. A current account deficit occurs when a country imports more goods and services than it exports. A capital account deficit occurs when the investments made in the country by foreigners is less than the investment in foreign countries made by local players. The levels of interest rates in the economy and the money supply also have a bearing on the performance of the businesses. An increase in money supply causes the interest rates to fall: a decrease causes the interest rates to rise.

Q5. Explain about technical indicators and how are they used? Answer: Technical indicators used by Technical analyst besides chart to assess prospects for market declines or advances. A technical indicator is a series of data points that are derived by applying a formula to the price data of a security. Price data includes any combination of the open, high, low or close over a period of time. Technical indicators can be classified in a number of ways. One classification divides them into three types: sentiment indicators, flow of funds indicators, and market structure indicators. Sentiment indicators are intended to measure the expectations of various groups of investors, for example, mutual fund investors, and corporate insiders.

Flow of funds indicators are intended to measure the potential for various investor groups to buy or sell stocks, in order to predict the price pressure from those actions. Market Structure indicators monitor price trends and cycles.

Q6. What are the implications of Efficient Market Hypothesis to fundamental and technical analysis? Answer: Technical analysis is a general term for a number of investing techniques that attempt to forecast securities prices by studying past prices and related statistics. Fundamental analysis focuses on the determinants of the underlying value of the stock or security, such as a firms current profitability and growth prospects. As both types of analysis are based on public information, neither should generate excess profits if markets are operating efficiently. Weak Form EMH states that the current prices fully reflect all security market information, including the historical sequence of prices, rates of return, trading volume data, and other market generated information. This implies that past rates of return and other market data should have no relationship with future rates of return. Technical analysis searches for profitable trading strategies based on recurring patterns in stock prices. A lot of pople do price charting and other forms of technical analysis in order to be able to predict future share prices. However examining recent trends in price and other market data in order to predict future price changes would be a waste of time if the market is weak form efficient. Investors cannot devise as investment strategy to yield abnormal profits on the basis of an analysis of past price patterns weak form efficiency denies that technical analysis can deliver profits athat are abnormal, I relative to the risk that is being borne. Under the weak form of EMH, technical analysis is useless. Technical analysis relies on sluggish response of stock prices to fundamental supply and demand factors. This possibility is diametrically opposed to the notion of an efficient market. Stock prices follow random walks, and past returns are entirely useless for predicting future returns. Semi strong form EMH states that the current security prices reflect all public information, including market and non market information. This implies that decisions made on new information after it becomes public should not lead to above average risk adjusted profits from those transactions. Implications of Semi strong form EMH: The Semi strong form tests focus on the question of whether it is worthwhile expensively acquiring and analyzing publicly available information. If semi strong efficiency is true it undermines the work of fundamental analysis whose trading rules cannot be applied to produce abnormal returns because all publicly available information is already reflected in the share price. An analysis of balance sheets, income statements, product line, announcements of dividend changes ot stock splits, or any other public information about a company will not yield abnormal profits. If the market is semi strong form efficient then information in Economic times, the wall street journal, other

periodicals, and even company annual reports is already fully reflected in prices, and therefore not useful for predicting future price changes.