MID TERM NOTES

1. Portfolio management?

Which is a combination of various financial assets like stocks, bonds, and more. The aim of a
portfolio is to reduce risk through diversification and maximize returns. Portfolio
management involves selecting and adjusting the mix of securities in a portfolio to achieve
the investor's objectives, considering factors like safety, liquidity, and profitability. Timing is
crucial in portfolio management, and it's about making decisions to balance risk and
performance.

In summary, portfolio management is the art and science of optimizing an investment mix to
meet specific goals while considering various trade-offs and market conditions. It's often
handled by professionals, especially for high net-worth individuals, due to its complexity and
the need for financial expertise in selecting the right securities. This service has become
more popular with the growth of the capital market.

2. Investment – objective and meaning

Investment: -
which is a combination of various financial assets like stocks, bonds, and more. The
aim of a portfolio is to reduce risk through diversification and maximize returns. Portfolio
management involves selecting and adjusting the mix of securities in a portfolio to achieve
the investor's objectives, considering factors like safety, liquidity, and profitability. Timing is
crucial in portfolio management, and it's about making decisions to balance risk and
performance.

OBJECTIVES: -

Main Objectives of Investments:

1. Maximization of Return: One of the primary goals of investing is to generate the highest
possible returns on your invested capital. This typically involves seeking opportunities that
offer the potential for significant gains. Investors often aim to grow their wealth over time
through capital appreciation or income generation from their investments.

2. Minimization of Risk: While seeking returns, investors also strive to minimize the associated
risks. Risk management involves making prudent investment choices to reduce the likelihood
of losses. Diversification, asset allocation, and thorough research are strategies used to
mitigate risk.

Subsidiary Objectives of Investments:

3. Maintaining Liquidity: Liquidity is the ability to quickly convert an investment into cash
without significant loss in value. Maintaining liquidity allows investors to cover unexpected
expenses or seize new investment opportunities. Balancing liquidity needs with longer-term
investments is essential.

4. Hedging Against Inflation: Inflation erodes the purchasing power of money over time.
Investors aim to protect their wealth by choosing investments that have the potential to
 outpace inflation. This may involve investing in assets like stocks, real estate, or commodities
that historically offer good inflation protection.

5. Increasing Safety: Ensuring the safety of invested capital is crucial, especially for conservative
investors. Safety often involves choosing lower-risk investments, such as government bonds
or blue-chip stocks. It also includes thorough due diligence and risk assessment before
investing.

6. Saving Tax: Tax-efficient investing is a strategy to legally minimize the tax liability associated
with investment gains. Investors often use tax-advantaged accounts like IRAs or 401(k)s and
consider tax-efficient investment vehicles to optimize after-tax returns.

3. Difference between investment and speculation

Aspect Investor Speculator

Planning Horizon Relatively longer planning horizon. Very short planning horizon.

Risk Disposition Not willing to assume high risk. Willing to assume high risk.
Return Expectation Seeks modest returns. Looks for high returns.

Basis for Decisions Emphasizes fundamental factors. Relies on tips, charts, psychology.

Leverage Typically uses own funds. Often resorts to borrowings.

4. Short term and long-term perspective of investment

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5. Types of risk – a. credit and b. market risk

A. Market Risk: Market risk is when the prices of financial things like stocks and
currencies change, and you might lose money because of it. For instance, if the value
of your money goes down compared to money from other countries, it can affect
your debts and how competitive your products are globally.

• Interest Rate Risk: This is when the value of an investment drops because interest rates go
up.
• Equity Price Risk: It's about the risk of stock prices going up and down a lot.
• Foreign Exchange Risk: This risk happens because money exchange rates can change.
• Commodity Price Risk: It's the risk of stuff like oil prices changing unexpectedly.

B. Credit Risk: Credit risk is when someone you lent money to can't pay it back. Lenders
worry about not getting back the money they lent.
• Concentration Risk: This is a part of credit risk and means putting too much money into one
person or group. If they can't pay you back, you might lose a lot of money, which could hurt
your business.

6. Beta

Beta is like a number that tells us how much a stock's price goes up and down compared to
the whole stock market. If it's less than 1, it means the stock moves less than the market.
Higher beta stocks are riskier but might give more returns, while lower beta stocks are safer
but offer fewer returns.

Covariance is how stocks move together. If it's positive, they usually move in the same
direction. If it's negative, they move in opposite directions.

Variance tells us how much a stock's price moves compared to its usual. It helps measure
how unpredictable a stock is.

7. Rest our sums