1.

Introduction:
Portfolio management in our country is still at its initial stage where only few financial
institutions including foreign banks, Indian banks and UTI that provide this facility. To
maximize the returns from any investment decision, it is important to study the
adequate analysis techniques, which would allow investor to gain maximum
advantage in the market. Two such techniques are classified as fundamental analysis
and technical analysis.
Fundamental analysis is an analytical and methodical approach to measure the
future dividends and share price which involves analysis of any entity in terms of price
movement. The main task in fundamental analysis is to explore and interpret the
financial statements of the organisations. By analysing this, the company’s future
performance can be judged by the fundamental analysts.
Technical analysis refers to a method of analysing the securities of an organisation
by assessing the data generated in the market which is based on past prices and
volume of securities. Technical analysis uses charts and other tools for determining
the patterns of behaviour of a security in order to predict its future movement.
Concept & Application:
Fundamental analysis is further classified into three types and they are economy
analysis, industry analysis & company analysis.

The Economy
Analysis
Fundamental
Analysis

The Industry Analysis

The Company
Analysis

Fig. a) Types of Analysis in Fundamental Analysis

 Economy Analysis: Performance of a company is directly related to the
economy’s performance of the country in which it operates. When the economy
is soaring high, the income rises, demands for item increases, and thus, it
benefits to both industry and the company. If there is a downfall in the economy,
it adversely affects the performance of the company. Such analysis helps in
forecasting corporate earnings and payment of dividends and interest of the
investor.
  Industry Analysis: Industry analysis involves demand of assets in the market,
pricing of assets, cost of the asset for the organisation & impact of the
economics and financial aspects of the market on the assets’ performance.
 Company Analysis: Company analysis is conducted using the publicly
disclosed and audited financial statements of a company for a period not less
than three years. These statements include Balance sheet, Cash flow
statement, profit/loss statement, and statement of Profit distribution.
b) Technical Analysis: In technical analysis, the analyst studies the supply and
demand of securities to find patterns and use the patterns to predict the future
movement of the securities. This technique tries to predict the future movements of
the market by studying the market and finding patterns. Hence, technical analysis is
statistical in nature. Technical analysis involves stock price, stock volume, price charts,
line chart, Bar chart & Candle Stick chart.
Following are the major underlying assumptions of technical analysis:
 Everything is discounted in the market.
 There is a pattern in price movement.
 Past trends repeat themselves.
Difference between Fundamental Analysis and Technical Analysis:
Fundamental Analysis Technical Analysis

 Fundamental analysis considers  On the other hand, technical

assets, liabilities, revenues,
expenses, industry prospects &
general market conditions of the
company to predict stock prices.
 It analyses securities by
measuring the intrinsic value of a
stock.
 It focuses on the analysis of
overall financial performance of a
company to predict stock prices in
the future.
 Balance sheet, income statement,
cash flow statement, earnings per
share that the fundamental
analysts use are not published on
a daily basis. Thus, part of the
reason that the fundamental
analysts use a long-term
timeframe, is therefore due to the
fact that the data they use to
analyze a stock is generated
analysis takes into account the
statistical information of previous
price movements of stocks of a
company to find pattern in past
price movements and predict
future stock price on the basis of
this pattern.
 It analyses securities by studying
statistics produced by market
activities.
 It focuses on the analysis of the
trend of past stock prices rather
than the financial condition of a
company.
 In contrast, the price and volume
data that the technical analysts
use are generated on a
continuous basis.It is done for a
short time which may take a time
frame of weeks and days or even
minutes. Hence, it is a short term
approach.
 much more slowly than the price
and volume data used by
technical analysts.

 Investors buy assets so that they  While traders buy assets so that
believe can increase in value they believe they can sell it to
because fundamental analysis is somebody else at a higher price.
used to make an investment.

 As discussed above, a  As discussed above, a technical

fundamental analyst approaches analyst approaches security from
security from the financial the data shown in the form of price
statement of the company. charts which includes line chart,
bar charts & Candle Stick chart.

Conclusion:
Now, if you ask some investors whether fundamental analysis is better or technical
analysis is better, most probably they will answer the combination of both. This is
because both the approaches have same objective i.e. to predict the future trends of
stock in the market. The fundamental analyst studies the causes of market
movements, while the technical analyst studies the effect of market movements. The
fundamental analyst needs to know why the prices have moved. On the other hand,
the technical analyst guy attempts to measure the projected effect of the price
movements. Although, fundamental analysis and technical analysis may seem to be
poles apart, but many market investors and traders have achieved some success by
combining the two techniques.
Martin Schwartz, a successful Wall Street trader, gained reputation and wealth due
to Technical Analysis. Whereas, Jim Rogers, a popular investor owes his success to
fundamental analysis. Both of them may disagree on many concepts. But they will
surely agree that emotional control is the most important path to follow. Whether you
opt for Fundamental or technical analysis, always remember these two quotes of
Warren Buffet. I truly believe they have got a very strong meaning.
“Be fearful when others are greedy and be greedy when others are fearful.
The market is there to serve you and not to instruct you.”
2.
Solution:
Coefficient of Correlation =
ρ = 0.15
Portfolio risk & return analysis is given by formula,

E(R) = w1R1 + w2R2 + …+ wnRn

Standard deviation is given by formula,

σ2 = ∑n
i=1 ∑nj=1 wiwjσij
Mr. Alok invest his fund in two conditions given in the problem. The formula in this
case for two portfolio asset is

σ2 = w12 σ12 + w22 σ22 + 2w1w2 Cov(1,2)

 Case 1: If Mr Alok decides to invest 50% of his fund in A and rest 50% in B

50 12 50 20
Er = × + ×
100 100 100 100

Er = 0.16 = 16%

σ2 = (0.50)2 × (10)2 + (0.50)2 × (18)2 + 2 × 0.50 × 0.50 × 0.15 × 10% × 18%

= 25 + 81 + 13.5
= 119.50
σ = 10.93%
 Case 2: Mr Alok decides to invest 75% of his fund in A and rest 25% in B

75 12 25 20
Er = × + ×
100 100 100 100

Er = 0.14 = 14%

σ2 = (0.75)2 × (10)2 + (0.25)2 × (18)2 + 2 × 0.75 × 0.25 × 0.15 × 10% × 18%

= 56.25 + 20.25 + 10.125
= 86.625
σ = 9.31%
3.
a.
The study of investments is important as almost everyone who owns wealth in some
form, would be faced with investment decisions sometime in their lives. Investment
refers to the process of deploying money, finances or funds with the expectation of
getting returns in due course of time. Investment is the use of money or capital to
purchase financial instruments or other assets for gaining profitable returns in the form
of interest, income, or appreciation of the value of the instrument. It requires some
analysis or thought to invest money in a vehicle, instrument or asset, such as property,
commodity, stock, bond & other financial derivatives.
Following are the five market security instrument we would like to invest in
 Bonds: A bond is a debt security, in which an issuer owes the holders a debt
and is obliged to repay the principal and interest. Bonds markets, unlike stock
markets do not have a centralised exchange or trading system. Bond holders
are in core lenders to the issuer. Bonds are issued by public sector authorities,
credit institutions, companies and supranational institutions.
 Stocks: A stock capital is raised by a corporation or joint stock company
through the issuance and distribution of shares. Stock markets have a
centralised exchange or trading system. The stock holders own a part of the
issuing company. Stocks are issued by corporations or joint stock companies.
 Derivatives: Derivatives can be referred to as a financial instrument whose
value is derived from the value of one or more basic variables, called bases in
a predetermined manner. For example, wheat farmers may wish to sell their
harvest at a future date to eliminate the risk of a change in prices in the present.
The price of a derivative is determined by the spot price of the wheat. Some
commonly used derivatives are forwards, futures, options & swaps.
 Money Market Security Instruments: One of the most reliable and highly
liquid assets, money market securities are short term bonds issued by
governments or large financial corporations which include treasury bills,
commercial papers, purchase agreements & negotiable certificates. Treasury
bills are short term securities having a face value ranging from $1000 to $1
million with a maturity period of three, six or 12 months. Commercial papers are
short-term promissory note issued by organisations and are considered to be
the safest option for investment. Purchase agreement is an agreement wherein
a security is sold on the condition that it will be repurchased by the seller in the
future after a pre-defined period of time. Negotiable Certificates are the
certificate of deposits that are issued by commercial banks with a face value of
$100,000 or more and 14 days to one year maturity period.
 Mutual Funds: Mutual funds are another form of indirect investments. It is an
alternative route of buying equity shares or fixed income securities through
various schemes floated by mutual funds companies. Fixed income securities
are the securities in which individual gets a guaranteed income on the invested
amount but at a low rate of interest. Usually there exists three types of mutual
fund schemes and they are,
 1) Debt schemes
2) Equity schemes &
3) Balance schemes

b.
Most of us understand that a portfolio should contain all types of assets – i.e. it should
not be concentrated on a specific type of asset – It should be diversified. This will not
only reduce the risks associated with each type of security but also increase the overall
returns on the portfolio. There are various strategies of portfolio construction and
investment. There are always investment-related worries to occupy our minds.
Sometimes for investors, this means worrying about high-risk investments that they’ve
made. Several major factors impact the investment decision of a person and they are,
 Education about Investment: An investor must be educated or must have
some knowledge about investment and how it can help him utilise the money
& finances effectively. The investor must also have the habit of saving money,
as a reckless and spendthrift person will not be able to invest wisely. Create a
strategy that is built upon analysing the quality and diversification of your
investments (and cutting risk), and the structure and balance of your portfolio.
 Risk Tolerance of the Investor: It is important to understand the amount of
risk that an investor can bear as all investment schemes carry some form of
risk with them. If your capital gets wiped out it should not affect your financial
stability and wealth status. That is how you will get started on understanding
your risk appetite.
a) Generally, it is found that older people, lower income group people will have
lower risk appetite as the earning power is less,
b) There can be exceptions to the above rule when the person has savings
earmarked for investment or inheritance allows the person to invest in more
risky assets
c) People with a longer working age left should look at equities as it will give a
long-term benefit of accumulation and the number of economic cycles will
give more benefit of capital appreciation.

 Market dynamics: The condition of market of the particular portfolio helps in

deciding whether it will be profitable to invest or not. For example, the real
estate market in India is at a low point for the past few years and is not able to
generate the returns as expected by the investors.
 Status of the Investor: Factors such as number of dependents, the disposable
income for investment, tax liability, etc. affect an investor’s decision. For
example, a person with dependents such as parents, wife and children would
prefer to invest his money for purchasing insurance policies.
 Time Horizon: How long the investor wants to keep his money invested also
affects investment decision. The longer the time horizon, the greater are the
returns that an individual can expect as the risk element reduces with time. If a
goal has to say 3 years left to arrive, it makes sense to put the capital in bonds
or income funds to ensure the capital safety. 3 years might be a short period to
earn a substantial return from the equity market. But one might be able to find
a diversified mutual fund which can not only sustain the capital in a good market
but also give good returns.