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SEM-3 FINANCE Winter 2016

MF0010 & SECURITY ANALYSIS AND PORTFOLIO

Q1. Financial markets bring the providers and users in direct contact without any
intermediary. Financial markets permits the businesses and governments to raise the funds
needed by sale of securities. Describe the money market/capital market features and its
composition.
(Money market- features and composition-5 marks, Capital market-features and composition-5
marks) 10 marks

Answer:

Money Market
The money market consists of financial institutions and dealers in money or credit who wish to either
borrow or lend. Participants borrow and lend for short periods, typically up to thirteen months.
Money market trades in short-term financial instruments commonly called "paper". This contrasts
with the capital market for longer-term funding, which is supplied by bonds and equity.

Q2. Risk is the likelihood that your investment will either earn money or lose money. Explain
the factors that affect risk. Mr. Rahul invests in equity shares of Wipro. Its anticipated returns
and associated probabilities are given below:

Return -15 -10 5 10 15 20 30


Probability 0.05 0.10 0.15 0.25 0.30 0.10 0.05
You are required to calculate the expected ROR and risk in terms of standard deviation.
(Explanation of all the 4 factors that affect risk-4 marks, Calculation of expected ROR and risk
in terms of standard deviation-6 marks) 10 marks
Answer:
Factors that affect risk
Some common risk factors are:
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

Q3. Explain the business cycle and leading coincidental & lagging indicators. Analyze the issues
in fundamental analysis
(Explanation of business cycle-leading coincidental and lagging indicators-6 marks, Analysis
and explanation of the issues in fundamental analysis all the four points-4 marks) 10 marks

Answer:

Business cycle and leading coincidental and lagging indicators


All economies experience recurrent periods of expansion and contraction. This recurring pattern of
recession and recovery is called the business cycle. The business cycle consists of expansionary and
recessionary periods. When business activity reaches a high point, it peaks; a low point on the cycle is
a trough. Troughs

Q4. Discuss the implications of EMH for security analysis and portfolio
management.
(Implications for active and passive investment-5 marks, Implications for investors and
companies-5 marks) 10 marks
Answer:

Implications for active and passive investment


Proponents of the efficient market hypothesis often advocate passive as opposed to active investment
strategies. Active management is the art of stock-picking and market-timing. The policy of passive
investors is to buy and hold a broad-based market index. Passive investors spend neither on market
research nor on

Q5. Explain about the interest rate risk and the two components in it.

An investor is considering the purchase of a share of XYZ Ltd. If his required rate of return is
10%, the year-end expected dividend is Rs. 5 and year-end price is expected to be Rs. 24,
Compute the value of the share.
(Introduction of interest rate risk-2 marks, Explanation of two components of interest rate risk-
4 marks, Calculation of value of the share-4 marks) 10 marks

Answer:

Interest Rate Risk: With the passage of time, interest rate changes in the market. The cash flows
from a bond (coupon payments and principal repayment) however, remain fixed. As a result, the
value of a bond fluctuates. Thus interest rate risk arises because the changes in the market interest
rates affect the value of the bond. The return on a bond comes from coupons payments, the interest
earned

Q6. Elucidate the risk and returns of foreign investing. Analyze international listing.
(Explanation of all the points in risks and returns from foreign investing-7 marks, Introduction
of international listing-3 marks)10 marks
Answer:

Risks and Returns from Foreign Investing


International investing provides superior returns adjusted for risk. Allocating some portion of one's
portfolio to foreign assets provides better risk adjusted reruns than a portfolio of domestic assets
alone. International equities also offer access to a broader spectrum of economies and opportunities
that can provide for further diversification benefits. Some of the best performing companies in the
world like

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