Nism Xxi Paper

NISM SERIES XXI A - PORTFOLIO
MANAGEMENT SERVICES
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NISM SERIES XXI A – PORTFOLIO MANAGEMENT SERVICES
CASE STUDIES
NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors Certification
(The short notes based on NISM book are after the case studies)
V. IMP CASE STUDIES BASED Q&As
1. Mr. Gaurav is the portfolio manager of Mr. Anil. He has received Rs. 75 Lakhs from Mr.
Anil with instructions to invest this amount equally in stocks of 4 companies – M, N, O and P.
At the time of investment, the price of these stocks was Rs. 100, Rs. 300, Rs. 200 and Rs. 1000
respectively. In the financial year, the stocks M, N, O and P paid a dividend of Rs.4, Rs. 15, Rs.
9 and Rs. 25 respectively.
Mr. Anil wanted to liquidate his investment at the end of the financial year and so Mr. Gaurav
sold these stocks at Rs. 125, Rs. 375, Rs. 230 and Rs. 750 respectively.
Answer the following questions based on the above data.

Q 1.1 What return was generated on the investment in stock P ?
a. 16.5%
b. – 16.5%
c. – 22.5%
d. 22.5%
Answer – c -22.5%
Answer Explanation :
The purchase price for stock P was Rs. Rs 1000
The dividend received was Rs.25
The sale price was Rs. 750
Returns can be calculates as : (Amount Received – Amount Invested )/ Amount invested
The amount received is Rs 750 and Rs 25 (Dividend) = Rs 775
Returns = 775 – 1000 /1000
= - 225/1000 = -22.5%
Therefore, as there was a loss, the returns are negative (-22.5%)
CASE STUDIES
Q 1.2 – Calculate the number of shares which Mr. Gaurav purchased of Company N at the
beginning of the year?
a. 5680
b. 6800
c. 5100
d. 6250
Answer – d – 6250
Answer Explanation – Mr. Anil wanted to invest Rs 75 lakhs in 4 stocks equally.
Therefore for each stock, the investment amount is 75 lakhs / 4 = 18,75,000

The price of stock of company N = Rs 300
Shares purchased = 18,75,000 / 300 = 6250

CASE STUDIES
Q 1.3 Calculate the portfolio return on the Rs 75 lakhs invested after disinvestment.
a. 14%
b. 16.5%
c. 21.4%
d. 15%

Answer – a 14%
Answer Explanation –
AMOUMT SHARES
PURCHASE SALE
STOCK INVESTED PURCHASE SALE VALUE DIVIDEND RECEIVED
PRICE PRICE
(Rs) D
M 18,75,000 100 18750 125 23,43,750 18750 X 4 = 75000
N 18,75,000 300 6250 375 23,43,750 6250 X 15 = 93750
O 18,75,000 200 9375 230 21,56,250 9375 X 9 = 84375
P 18,75,000 1000 1875 750 14,06,250 1875 X 25 = 46875
75,00,000 82,50,000 3,00,000
(Note : 1. Shares purchased = Amount Invested/Purchase Price 2. Sale Value = Sale Price X
Shares purchased. 3. Dividend Received = Shares Purchased X Dividend per share)
Total receipt = Sale Value + Dividend Received

= 82,50,000 + 3,00,000 = Rs 85,50,000
Returns = Amount Received – Amount invested / Amount invested
= 85,50,000 – 75,00,000 / 75,00,000 = 1050000/7500000
= 0.14 = 14%
CASE STUDIES
Q 1.4 The return received on this portfolio investment can be termed as _______ .
a. Annual Return
b. Annualized Return
c. Holding Period Return
d. All of the above
Answer - c – Holding Period Return
Ans Expl - In this question, the dates of purchase and sale are not mentioned. So we have to
calculate the return for the holding period.
Holding period return is most straightforward rate of return is the holding-period-return
(HPR), popularly known as total return or point-to-point return. It equals the income
generated by an investment plus the change in value of the investment during the period the
investment is held, over the beginning value of the investment, expressed as a percentage
per annum.
CASE STUDIES
Q 1.5 – What portfolio weights are to be used while calculating the total portfolio returns as
calculated in the question 1.3 above?
a. 1: 2.5 : 3 : 5
b. 1:1:1:1
c. 2:3:1:4
d. 1.65 : 2.45 : 3 : 2
Answer – b – 1 : 1 : 1 : 1
Answer Explanation: Since the mandate is to invest equal amount in each stock, the
weightage of each stock in portfolio will also be same.
CASE STUDIES
Q2. You are provided with the expected return and standard deviation on the following four
assets :
Expected Mean
Return Standard Deviation
Treasury Bond A 5% 0
Asset B 10% 10%
Asset C 12% 15%
Asset D 7% 17%
Based on this data, please answer the following questions :
Q 2.1 If you are a portfolio manager and could invest in only one of the three assets i.e. A, B
or C, which one would you pick?
a. A
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c. C
d. Any of them depending upon the risk profile of the investor and investment objectives
Answer – d - Any of them depending upon the risk profile of the investor and investment
objectives
Answer Explanation - Choosing an asset for investment depends on the investment objective
of the investor and his/her risk profile
CASE STUDIES
Q 2.2 Which of the three assets i.e. B, C & D has the highest Sharpe Ratio?
a. D
b. B
c. C
d. B and C
Answer – B
Sharpe Ratio = Return – Risk Free Return / Standard Deviation
Sharpe Ratio for Asset B = 10 – 5 / 10 = 0.50
This suggests that Asset B has generated 0.50 percentage point of return above the risk free
return for each percentage point of standard deviation.
Similarly, Sharpe Ratio for Asset C is 12-5/15 = 0.46

and for Asset D is 7-5/17 = 0.11
Thus, Asset B has the best Sharpe Ratio

CASE STUDIES
Q 2.3 - If you could combine any of the other three assets with Asset A, which one would you
choose?
a. A with C
b. A with D
c. A with B
d. Any of the above
Answer – c – A with B
Answer Explanation - We will choose the fund which has the highest Risk Adjusted Return
Ratio ie. Sharpe Ratio
As calculated above, Asset B has the best Sharpe Ratio.
CASE STUDIES
Q 2.4 - Within the framework of portfolio theory, would you automatically rule out asset D
by dominance, if you could combine it with asset B&C ?
a. Yes, as D has highest standard deviation

b. Yes, as D has the lowest Sharpe ratio
c. Yes, as D has lowest return
d. No, information on correlation would be needed before any decision can be made
Answer – d - No, information on correlation would be needed before any decision can be
made
The Portfolio Theory holds that the assets should be chosen on the basis of how they interact
with one another rather than how they perform in isolation.
Based on statistical measures such as variance and correlation a single investment's

performance is less important than how it impacts the entire portfolio.
Therefore, information on correlation would be needed before any decision can be made
CASE STUDIES
Q 2.5 - In what proportion would you combine asset B & C, if you can invest in both of them
along with asset A.
a. Combining B with C will be suboptimal

b. Depending upon the investment objective
c. More than 50 % of asset C as it has higher return
d. More than 50 % of asset B as it has lower standard deviation
Answer – b - Depending upon the investment objective
Answer Explanation - Asset allocation and the percentage of various assets in the holding
depends on the investment objective.
Investment objectives can be defined as investors’ goals expressed in terms of risk, return
and liquidity preferences
CASE STUDIES
Q 3 – An investor has given Rs. 20 Lakhs to a portfolio manager which is to be invested equally
in the equity shares and bonds of a company called Sunshine Metals Ltd.
Sunshine Metals Ltd. has 1 crore outstanding equity shares and these shares are trading at
Rs. 120 in the stock markets. The company reported a PAT of Rs. 8 crores. The average PE
Ratio of firms comparable to Sunshine Metals is 22.
Sunshine Metals has also issued bonds of face value Rs 100. The annual coupon payable is
15%. The balance term to maturity is 5 years and it is currently trading at Rs 96. The required
rate of return of the investor is 15% (Present value Interest Factor for Annuity at 15% for 5
years = 3.3522; Present Value Interest Factor at 15% for 5 years = 0.4972)
The equity investment reaches its intrinsic value at the end of 2 years. The price of the bond
at the end of 2 years is Rs 98
Coupon amount received during the investment period is to be used and not reinvested.
Answer the following questions based on the above data -
Q 3.1 - Calculate the annual return generated on the equity investment of Sunshine Metals
Ltd? ( Simple average return is to be used)
a. 23.30%
b. 21.50%
c. 18.75%
d. 24.00%
CASE STUDIES
Answer - a - 23.30%
To calculate the return generated on equity investments, we should know what is the price
of equity at the end of 2 years.
For the company to reach its intrinsic value, the value of the share should trade at a PE similar
to that of the comparable firm.
EPS = Profit / No. of Shares = 8 crores / 1 crore = 8
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PE Ratio = Market Price / Earning Per Share (EPS)
So 22 = Market Price / 8
Market Price = 22 x 8 = Rs. 176
Therefore the market price should be Rs 176

In two years the price has reached from Rs. 120 to Rs. 176 = Rs 56 Profit
So simple return = Net Return / Amount invested x 100

= 56/120 x 100 = 46.60%
46.60 % return in two years, So simple average return for each year = 46.60/2 = 23.30%
annual return.
CASE STUDIES
Q 3.2 – Calculate the annual return generated on the bond investment. (Use Simple Average
Return)
a. 17.60%
b. 13.85%
c. 16.45%
d. 19.30%
Answer – c – 16.45%
.
The Amount received will be the bonds face value + the interest for 5 years
The interest is 15% on Rs 100 for 5 years = 15 x 5 = Rs 75
The face value is Rs 100
So the total amount received will be Rs 100 + Rs 75 = Rs 175

The amount invested is Rs 96 (The price at which the bonds will be purchased from market)
Return generated = Amount Received – Amount Invested / Amount Invested
= (175 – 96)/96
= 79/96 = 0.8229 or 82.29%
This return is for 5 years.

Annual Return will be 82.29/5 = 16.45%
CASE STUDIES
Q 3.3 – Calculate the value of portfolio at the end of 2 years. (Round off the figures)
a. Rs 34,54,456
b. Rs 24,87,376
c. Rs 28,33,355
d. Rs 31,14,230
Answer – b - Rs 24,87,376
Rs. 10 lakhs has been invested in equity at Rs 120 per share.
So 10,00,000 / 120 = 8333 shares have been purchased
The price of equity shares will be become Rs 176 after two years (as calculated above Q3.1)
Rs 176 x 8333 = Rs 14,66,608 is the value of equity shares
Rs. 10 lakhs has been invested in bonds at Rs 96 per bond.

So 10,000,00 / 96 = 10416 bonds were purchased
Value of bonds after two years = Rs 98 (as given in the question)
Rs 98 x 10416 = Rs 10,20,768 will be the value of bonds
Total value = 1466608 + 1020768 = Rs 24,87,376

CASE STUDIES
Q 3.4 – What will be the proportion of Debt and Equity after 2 years if the portfolio manager
does not do any rebalancing in this period?
a. The proportion of 50% Equity and 50% Debt will not change
b. The weight of debt will increase at the end of 2 years
c. The weight of equity will increase at the end of 2 years
d. This cannot be determined as more data will be required
Answer - c - The weight of equity will increase at the end of 2 years
Answer Explanation – As calculated in Q 2.3 above, Rs 10 lakhs invested in equities have

become Rs. 14,66,608 where as the value of Rs. 10 lakhs invested in debt has only increased
to Rs. 10,20,768.
Therefore, the weight of equities have increased
CASE STUDIES
Continued ..
An investor has given Rs. 20 Lakhs to a portfolio manager which is to be invested equally in
the equity shares and bonds of a company called Sunshine Metals Ltd.
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for the investor?
a. The risk for the investor has increased as the weight of equity in the portfolio has
increased
b. The risk for the investor has decreased as the weight of equity in the portfolio has
increased
c. The risk for the investor has increased as the weight of debt in the portfolio has
increased
d. The risk for the investor has decreased as the weight of debt in the portfolio has
increased
Answer – a - The risk for the investor has increased as the weight of equity in the portfolio
has increased
Answer Explanation – As the weight of equity is going to be more, it will increase the overall
risk of the portfolio as generally, equity is more risky than debt.
CASE STUDIES
Q 3.6 Calculate the Intrinsic Value of the equity share.
a. 149
b. 157
c. 162
d. 176
Answer – d – 176
Answer Explanation -
There are various ways in which the Intrinsic Value of a share can be calculated and one of
them is :
Intrinsic Value of a share = Earnings Per Share (EPS) X Price Earning Ratio (PE Ratio)
For the above sum, the EPS is 8 (As calculate in Q 3.1 above)
PE Ratio is 22
= 8 X 22 = 176
CASE STUDIES
Q 3.7 Calculate the fair value of the bond.
a. 98
b. 96.80
c. 97.50
d. 100
Ans – d- 100
Answer Explanation - We know that the face value is 100 and coupon of 15% means that
the coupon amount is 15.
Present Value interest factor for annuity for 5 Years i.e. PV factor for interest in all coupons
in those 5 years is 3.3522
And Present Value interest factor i.e. PV factor for maturity amount is 0.4972
So Value of Bond = (Present Value interest factor for annuity * Coupon Amount) + (Present
Value of interest factor * Maturity Amount)
= (3.3522*15 + 0.4972*100) = 50.28 + 49.72 = 100
CASE STUDIES
Continued …
An investor has given Rs. 20 Lakhs to a portfolio manager which is to be invested equally in
the equity shares and bonds of a company called Sunshine Metals Ltd.
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current market price. expires in 2 mo
a. Rs. 5.45 crore

b. Rs. 5.80 crore
c. Rs. 4.25 crore
d. Rs. 4.70 crore
Answer – a – Rs. 5.45 crore
Ans Explanation – Firms similar to Sunshine Metals Ltd have a PE Ratio of 22

So if Sunshine Metals also had a PE of 22, we substitute this in the PE formula :
PE = Market Price / EPS
22 = 120 / EPS
EPS = 120/22 = 5.45
Profit After Tax = EPS X No. of shares
= 5.45 x 1 cr = Rs. 5.45 crore
CASE STUDIES
Q 3.9 Justify if the portfolio manager should invest in the two securities (Equity and bond of
Sunshine Metals) or should not invest?
a. Yes, the portfolio manager should invest in the two securities as the intrinsic / fair
values are higher than market values
b. Yes, the portfolio manager should invest in the two securities as the market values are
higher than intrinsic / fair values
c. No, the portfolio manager should not invest in the two securities as the intrinsic / fair
values are higher than market values
d. No, the portfolio manager should not invest in the two securities as the market values
are higher than intrinsic / fair values
Answer – a - Yes, the portfolio manager should invest in the two securities as the intrinsic /
fair values are higher than market values
The current PE ratio of the firm = Market Price / EPS
= 120/8 = 15
As we can see, Sunshine Metals is available at a PE of 15 (compared to the comparable firm
which has a PE of 22) Thus the company is available at a price less than its fair price.
Similarly, we calculate the value of bond in the above question which is Rs. 100 and the bond
it available at Rs 96. This also implies that the bond is undervalued.
CASE STUDIES
Q 3.10 - Justify if the portfolio manager should invest in the bond of Sunshine Metals or
should not invest?
a. Yes, the portfolio manager should invest in the bond of Sunshine Metals as the current
market price is lesser than the face value
b. Yes, the portfolio manager should invest in the bond of Sunshine Metals as the current
market price is lesser than the redemption value of the bond
c. Yes, the portfolio manager should invest in the bond of Sunshine Metals as the current
market price is lesser than the fair value of the bond
d. No, the portfolio manager should not invest in the bond of Sunshine Metals as the
current market price is lesser than the fair value of the bond
Ans – c - Yes, the portfolio manager should invest in the bond of Sunshine Metals as the
current market price is lesser than the fair value of the bond
Answer Explanation - We calculated the fair value of bond in the above question which is Rs.
100 and the bond it available at Rs 96. This implies that the bond is undervalued and thus can
be bought
CASE STUDIES
Q 4 – Mr. Sharma is a high networth individual and is interested in investing Rs. 2 crore with
Alpha Investments, a portfolio manager. Both of them signed an agreement and decided the
terms on how the funds will be managed. Mr. Sharma gave full freedom to Alpha investments
to invest funds in sectors and stocks with a desired hurdle rate. To check the performance, a
benchmark was also chosen for comparison. The hurdle rate agreed was benchmark return
+ 2%.
After some months, Alpha Investments suggested that some of the funds should be invested
in very promising unlisted shares and these can give good returns. Mr. Sharma was not
convinced about this as he was unclear is SEBI allowed the same and so he asked Alpha
Investment to not to do the investments in unlisted shares.
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the portfolio
manager. Mr. Sharma found that interest income was deducted from the returns generated.
On further investigating into this, he found that the portfolio manager had borrowed funds
and leveraged the investments to generate higher returns. He also found that an expense for
investment advisory charges was debited to his account. Alpha Investments had also charged
performance fees on the excess return generated on the benchmark.
CASE STUDIES
Q 4.1 – Mr. Sharma refused investments in unlisted shares. Was he correct in this decision or
did he lose a good investment opportunity?
a. No, Mr. Sharma was wrong and he lost a good investment opportunity
b. Yes, Mr. Sharma was correct as performance of unlisted shares cannot be compared
to the selected benchmark
c. Yes, Mr. Sharma was correct as this was not approved in the original agreement
d. Yes, Mr. Sharma was correct as discretionary portfolio managers cannot invest in
unlisted shares
Answer – d - Yes, Mr. Sharma was correct as discretionary portfolio managers cannot invest
in unlisted shares
Answer Explanation - The investor has chosen ‘discretionary portfolio management services’
as he has given full freedom to the portfolio manager to invest the funds as per his discretion.
As per SEBI rules - The discretionary portfolio manager shall invest funds of his clients in the
securities listed or traded on a recognized stock exchange, money market instruments, units
of Mutual Funds and other securities as specified by SEBI from time to time, on behalf of their
clients.
This the discretionary portfolio manager cannot invest in unlisted securities.
(The portfolio manager offering non-discretionary or advisory services to clients may invest
or provide advice for investment up to 25% of the assets under management of such clients
in unlisted securities, in addition to the securities permitted for discretionary portfolio
management)
CASE STUDIES
Q 4.2 – Mr. Sharma should look at which of the following characteristics while approving a
benchmark for comparison and evaluation?
a. The benchmark should be investible

b. The benchmark should have risk return profile which is similar to the portfolio created
by the portfolio manager
c. The benchmark should clearly define the weights of the constituents in the benchmark
d. All of the above
Answer – d – All of the above
Answer Explanation - A good benchmark should be able to satisfy the following criteria:
• The identity of constituents and their weights in the benchmark are clearly defined. • The
benchmark is investable, in other words it is possible to have a passive exposure to the same.
• The benchmark is consistent with the portfolio’s investment approach. For example, if the
portfolio’s investment approach is to invest in blue-chip stocks, the benchmark should also
consist of blue-chip stocks. If the investment style of the portfolio is value investing, the
benchmark should be of the same orientation. • The benchmark is having the same risk-
return profile as the portfolio. • The performance of the benchmark is measurable
CASE STUDIES
Q 4.3 – With respect to the interest expenses charged by the portfolio manager, can Mr.
Sharma refuse to pay the same?
a. No, Mr. Sharma will have to pay the interest expenses as the returns generated were
higher than the hurdle rate
b. No, Mr. Sharma will have to pay the interest expenses as the original agreement was
of discretionary style management
c. Yes, Mr. Sharma can refuse the payment of interest expenses as SEBI rules does not
approve of leverage of the portfolio or borrowing of funds
d. Yes, Mr. Sharma can refuse the payment of interest expenses as the intention of the
portfolio manager was to increase his performance fees by charging the interest
expenses to the investor
Answer – c - Yes, Mr. Sharma can refuse the payment of interest expenses as SEBI rules does
not approve of leverage of the portfolio
Answer Explanation - As per SEBI - General Responsibilities of a Portfolio Manager :

The portfolio manager shall not borrow funds or securities on behalf of the client.
CASE STUDIES
Q 4.4 – With respect to Investment Advisory Charges, should Mr. Sharma accept the same or
refuse?
a. Yes, Mr. Sharma has to accept the Investment Advisory Charges as the returns
generated were higher than the hurdle rate
b. Yes, Mr. Sharma has to accept the Investment Advisory Charges as it was a
discretionary portfolio management agreement
c. No, Mr. Sharma should not accept the Investment Advisory Charges as no permission
was taken by the portfolio manager regarding seeking advice of another fund manager
d. No, Mr. Sharma should not accept the Investment Advisory Charges as SEBI does not
approve investment of client’s funds based on another fund managers advice
Answer – b - Yes, Mr. Sharma has to accept the Investment Advisory Charges as it was a
discretionary portfolio management agreement
Answer Explanation - The portfolio manager can charge an agreed Investment management
and advisory fee from the clients for rendering portfolio management services. The exact
nature of these fees and expenses would form part of the client agreement.
CASE STUDIES
Q 4.5 – Mr. Sharma is of the view that performance fees should be calculated on the excess
returns over the hurdle rate and not on the excess return over benchmark returns. Is he right
or wrong?
a. Mr. Sharma is right as the hurdle rate is part of the agreement between him and the
portfolio manager
b. Mr. Sharma is wrong as the benchmark is already agreed upon and so he does not have
the right to question the fee levied
c. Mr. Sharma is wrong as in a discretionary portfolio management style, the portfolio
manager can calculate the performance fees as per his choice
d. Mr. Sharma is wrong as the portfolio manager can calculate the fees in both ways and
charge whichever is higher
Answer – a- Mr. Sharma is right as the hurdle rate is part of the agreement between him and
the portfolio manager
Answer Explanation - Profit sharing/performance related fees are usually charged by

portfolio managers upon exceeding a hurdle rate or benchmark as specified in the
agreement.
Since the hurdle rate was decided in the contract, the performance fee will be based on the
returns in excess of the hurdle mark.
CASE STUDIES
Q 5 - You are an PMS distributor. You are comparing the performance of various funds. The
following table gives you the performance of two funds. Comment on their performance by
ranking them on various risk and return measures and ratios. The yield on government bond
is 5 percent.
Large Cap Large Cap

Fund A Fund B
CAGR - GMR 9.97% 9.39%
Standard Deviation 10.26% 14.89%
Beta 1.05 0.29
Semi Standard
Deviation 7.53% 11.46%
Tracking Error 3.17% 16.07%
Information Ratio 48.24% 21.39%
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Q 5.1 –Acrobat
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Ratio of Fund
a. 0.4844
b. 0.2948
c. 0.4048
d. 0.5467
Answer – a - 0.4844
SHARPE RATIO = Return of portfolio – Risk Free Return / Standard Deviation of return of
portfolio
Sharpe Ratio for Fund A = 9.97 – 5 / 10.26 = 0.4844

CASE STUDIES
Q 5.2 - Rank the funds on the basis of Sharpe Ratio:
a. Rank 1 – Fund A & Rank 2 – Fund B

b. Rank 1 – Fund B & Rank 2 – Fund A
c. Both the funds have generated the same risk-adjusted return
d. Cannot calculate the Sharpe Ratio with the given information
Answer – a - Rank 1 – Fund A & Rank 2 – Fund B
SHARPE RATIO = Return of portfolio – Risk Free Return / Standard Deviation of return of
portfolio
Sharpe Ratio for Fund A = 9.97 – 5 / 10.26 = 0.484
Sharpe Ratio for Fund B = 9.39 – 5 / 14.89 = 0.294
This suggests that Fund A has generated 0.484 and Fund B has generated 0.294 percentage
point of return above the risk free return for each percentage point of Standard Deviation.
So as per Sharpe Ratio, Fund A has performed better than Fund B

CASE STUDIES
Q 5.3 - Calculate the Treynor Ratio of Fund A
a. 0.0467
b. 0.0948
c. 0.0048
d. 0.0473
Answer – d – 0.0473
TREYNOR RATIO = Return of portfolio – Risk Free Return / Portfolio Beta
= 9.97 – 5 / 1.05
= 4.97/1.05 = 4.733 or .04733%

CASE STUDIES
Q 5.4 - Calculate Sortino ratio for Fund A.
a. 0.09867
b. 0.6600
c. 0.9845
d. Cannot calculate Sortino Ratio with the given information
Answer – b – 0.6600
Sortino Ratio = (Rp – Rf)/ Semi Standard deviation of the portfolio
Rp = Return of the portfolio, Rf = Risk-free rate
= 9.97 – 5 / 7.53 = 0.6600

CASE STUDIES
Q 5.5 - Calculate the Alpha for Fund A.
a. 0.01529208
b. 0.00029208
c. 0.00529208
d. 0.09529208
Answer – a- 0.01529208
Information Ratio = Alpha / Tracking Error

48.24% = Alpha/3.17%
Alpha = 48.24 % x 3.17 %
Alpha = 0.01529
CASE STUDIES
Q 6 – Ms Reena was bullish on the equity markets. She gave Rs 200 lakhs to her portfolio
manager to be invested equally in equity shares of 4 companies (Rs. 50 lakhs each). The
names of the companies were WW, XX, YY and ZZ and the prices at the time of investment
were Rs. 100, Rs. 50, Rs. 20 and Rs. 200 respectively.
During the course of the year, dividend was paid by the companies as under :
WW – Rs 2
XX – Rs 1
YY – Rs 0.40
ZZ – Rs 4
After a year, Ms Reena instructed the portfolio manager to sell off the shares and the shares
were sold at the following prices :
WW – Rs 110
XX – Rs 70
YY – Rs 40
ZZ – Rs 160
Ms. Reena expected 50% return on her total investments.
Answer the following questions on the assumption that there is no income tax on dividends
and Capital Gains are taxed at 10%
CASE STUDIES
Q 6.1 From the four companies in which investment was done, which company has given the
desired return?
a. WW
b. XX
c. YY
d. ZZ
Answer – c - YY
Answer Explanation – Ms. Reena is expecting 50% return. Only share YY which has risen from
Rs 20 to Rs 40 has given a return over 50%.
Share WW, XX and ZZ have given a return below 50%.

CASE STUDIES
Q 6.2 Calculate the tax adjusted return on company ZZ’s stock?
a. 09%
b. 12%
c. -16%
d. -18%
Answer – d - 18%
Answer Explanation - Stock ZZ has fallen from Rs 200 to Rs 160.

So there is a loss of Rs 40.
It has paid a dividend of Rs 4, so the net loss is Rs 40 – 4 = Rs 36
On Rs 200, the loss is Rs 36, So on 100, the loss will be :
36/200 x 100 = 18% Loss

CASE STUDIES
Q 6.3 Calculate the capital gain earned by the investor on the entire portfolio.
a. Rs. 49,50,000
b. Rs. 65,00,000
c. Rs. 73,00,000
d. Rs. 57,80,500
Answer – b – Rs 65,00,000
NO. OF
SHARES
BOUGHT SALE
PURCHASE IN RS 50 PRICE
STOCK PRICE (Rs) LACS (Rs) PROFIT/LOSS (Rs)
WW 100 50000 110 50000 X 10 = 5,00,000

XX 50 100000 70 100000 X 20 = 20,00,000
YY 20 250000 40 250000 X 20 = 50,00,000
25000 X 40 = (10,00,000)
ZZ 200 25000 160 Loss
NetProfit = Rs. 65,00,000
(Note – Dividend is not considered while calculating capital gains)

CASE STUDIES
Q 6.4 Identify the TRUE statement with respect to tax treatment on Capital Gains.
a. Tax on capital gains will be deducted by the portfolio manager at the source
b. Tax on capital gains will be deducted by the company whose shares are bought and
sold, at the source
c. Tax on capital gains will be paid by the investor (Ms. Reena)
d. Tax on capital gains will be paid by the portfolio manager and later collected from the
investor (Ms. Reena)
Answer – c - Tax on capital gains will be paid by the investor (Ms. Reena)
Answer Explanation - In case of PMS, the investor is investing in the underlying securities
through the PMS, and not investing in the PMS per se. So, the capital gains tax is paid by the
investor.
CASE STUDIES
Q 6.5 – If dividends are exempted from Income Tax in the hands of investor, then which tax
might have been levied before the dividends are distributed to the share holders?
a. Dividend Distribution Tax

b. Corporate Tax
c. Income Tax
d. Repatriation Tax
Answer – a – Dividend Distribution Tax
Answer Explanation - Up to Assessment Year 2020-21, domestic companies and mutual funds
were liable to pay Dividend Distribution Tax (DDT) on the dividend. Therefore, shareholders
or unit- holders were exempt from paying tax on the dividend income.
CASE STUDIES
Q 7 - You are provided with following information about ten funds.
Tracking
Funds AUM (Rs. Cr) Benchmark Alpha Error
1 112354 Sensex 0.21 0.0124
2 10980 Sensex 0.56 0.0098
3 5670 Sensex 0.76 0.0087
4 12050 Sensex 0.98 0.1245
5 680 Nifty 50 0.29 0.0012
6 1180 Nifty 50 0.54 0.0211
7 1250 Nifty 50 0.43 0.2341
8 13400 Nifty 50 0.98 0.4598
9 9870 Nifty 50 0.35 0.5431
10 2400 Nifty 50 0.26 0.0012
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Q 7.1 - Acrobat
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performed the best?
a. Fund no. 8 and 4 as they have generated the highest alpha

b. Fund no. 5 & 10 as they have the lowest tracking error
c. Fund no. 9 as it has the highest tracking error
d. Fund no. 8 as it has the highest AUM
Answer – b - Fund no. 5 & 10 as they have the lowest tracking error
Answer Explanation - Index funds are passive funds and are benchmarked against indices like
NIFTY/SENSEX. The funds which have the lowest tracking error will be considered to be the
best performer.
In the above data, Fund 5 and Fund 10 have the lowest tracking error and will be considered
as best performers.
CASE STUDIES
Q 7.2 - Calculate the information Ratio for Fund no. 1.
a. 0.002604
b. 0.5904
c. 16.93
d. Insufficient information
Answer – c – 16.93
Answer Explanation:
Information Ratio = Alpha / Tracking Error

= .21/.0124
= 16.93
CASE STUDIES
Q 7.3 - How would you rank these funds on performance if they are passively managed?
a. On the basis of Alpha

b. On the basis of information ratio
c. On the basis of Tracking error
d. On the basis on AUM
Answer – c - On the basis of Tracking error
Answer Explanation - Tracking error is the standard deviation of the difference between the
portfolio and its target benchmark portfolio total return.
As the funds are passively managed and are benchmarked against NIFTY/SENSEX, their aim
will be to give returns similar to the benchmark. Their performance will be judged on the
basis of tracking error ie. how much they have deviated from the benchmark.
CASE STUDIES
Q 7.4 - Which of the ten funds have generated highest “beta adjusted excess return”?
a. Fund No. 8 and 4

b. Fund No. 9
c. Fund No. 8
d. Fund No. 4
Answer – a – Fund No. 8 and 4
Answer Explanation - Beta Adjusted Excess return, also known as Alpha, is a measure of how
much a fund has under or outperformed the benchmark against which it is compared.
In the above case study, Fund 4 and Fund 8 has the best Alpha of 0.98.
CASE STUDIES
Q 7.5 - What is the best way of ranking these funds for performance if they are actively
managed?
a. On the basis on AUM

b. On the basis of Tracking error
c. On the basis of Alpha
d. On the basis of information ratio
Answer – d - On the basis of information ratio
Answer Explanation - The information ratio (IR) is a measurement of portfolio returns beyond
the returns of a benchmark, usually an index, compared to the volatility of those returns. The
benchmark used is typically an index that represents the market or a particular sector or
industry.
The IR is often used as a measure of a portfolio manager's level of skill and ability to generate
excess returns relative to a benchmark, but it also attempts to identify the consistency of the
performance by incorporating a tracking error, or standard deviation component into the
calculation
Information ratio shows the consistency of the fund manager in generating superior risk
adjusted performance. A higher information ratio shows that fund manager has outshined
other fund managers and has delivered consistent returns over a specified period.
CASE STUDIES
Q 8. Mrs. Roy has given Rs 1 crore to XYZ Portfolio managers for investments. As per the
agreement between them, Mrs. Roy has given complete freedom to the portfolio managers
to invest the funds as per their discretion. The agreement was for 3 years.
When XYZ Portfolio Managers gave their annual performance report to Mrs. Roy, she found
that various expenses like fixed management fee, depository fee, transfer agent fee,
brokerage, fund accounting fees, other incidental expenses were charged to fund account of
Mrs. Roy.
On the performance front, the value of portfolio grew to Rs 1.4 crore in the first year. It
reduced to Rs 1.15 crore in the second year and in the third year the value was Rs 1.55 crore.
The hurdle rate agreed between Mrs. Roy and XYZ Portfolio Managers was 25%. A
performance fee was charged by the portfolio managers in the third year by computing the
fees on Rs. 1.15 crore as base fund value and applying the hurdle on it.
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Q 8.1 –Acrobat PDF
Which expenses reader
should Mrs. Roy to
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expensesexpires
which in 2 mo
are booked by the portfolio managers?
a. Stamp Duty
b. Transfer agent fees
c. Courier expenses
d. Notary Charges
Answer – b – Transfer agent fees
Answer Explanation - Out of Pocket and Other Incidental Expenses: Charges in connection
with day to day operations like courier expenses, stamp duty, document franking charges,
notary charges, service tax, other statutory levies, postal and telephone expenses, opening
of bank, trading and demat accounts and any other out of pocket expenses incurred by the
portfolio manager, on behalf of the client.
Transfer agent fee is not included in incidental charges.
CASE STUDIES
Q 8.2 – Can Mrs. Roy contest the method of calculation of the performance fee by the
portfolio managers. If yes, then what should be the base net fund value for the calculation in
the third year?
a. Yes, she can contest as per the High Water Mark principle. The net fund value for the
third year should be 1.75 crore
b. Yes, she can contest because Rs 1.55 crore is less than what Rs 1 crore should have
grown in 3 years. The net fund value for third year should be Rs 1.75 crore
c. No, she cannot contest as the agreement was for discretionary portfolio management
and in this the portfolio manager can decide the performance fees
d. No, she cannot contest because the previous year net fund value is considered to be a
fresh investment for a renewed contract with the portfolio manager
Answer – a - Yes, she can contest as per the High Water Mark principle. The net fund value
for the third year should be 1.75 crore
High Water Mark is the highest value that the portfolio/account has reached. The portfolio
manager charges performance based fee only on increase in portfolio value in excess of the
previously achieved high water mark.
The High Water Mark in this case is Rs 1.40 crore as this was the highest value achieved
before the third year. The Hurdle rate is 25% of Rs 1.40 crore = Rs 35 lakhs.
Rs 1.40 crore + Rs 35 lakhs = Rs 1.75 crore will be the net fund value for the third year.
CASE STUDIES
Q 8.3 – What is the upper limit that Mrs. Roy can apply on the entire operating expenses
charged by the portfolio manager?
a. 1% per year on the gross portfolio value excluding brokerage

b. 1% per year on the average daily AUM excluding brokerage
c. 0.5% per year on the average daily AUM excluding brokerage
d. 0.5% per year on the average daily AUM including brokerage
Answer – c - 0.5% per year on the average daily AUM excluding brokerage
Answer Explanation - As per SEBI circular - Operating expenses excluding brokerage, over and
above the fees charged for Portfolio Management Service, shall not exceed 0.50% per annum
of the client’s average daily Assets under Management (AUM).
CASE STUDIES
Q 9 - Calculate the Duration (in years) of a bond with face value of Rs. 1000 and which is
redeemed at par. This bond is paying a coupon of 12% p.a. semi-annually, YTM of a 10% p.a.
Settlement date 03/02/20 and maturity date 08/01/2028 and date of issuance 08/01/2018.
a. 3.74 years
b. 6.28 years
c. 4.22 years
d. 5.43 years
Answer – d – 5.43 years
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AnswerAcrobat
Explanation –PDF reader to view this PDFThis PDF expires in 2 mo
We have to use the ‘Duration’ formula in MS Excel to solve this problem.
In MS Excel, click on ‘Formulas’ , then ‘Financial’ then ‘Duration’ as under :
CASE STUDIES
We see the following window :

Substituting the values as under :
We get duration as 5.43 years

CASE STUDIES
Q10. Calculate the M-Square for the following data :
Portfolio Return = 30%

Risk free rate of return = 15%
Benchmark index return = 24%
Ratio of benchmark volatility to portfolio volatility is 0.75
a. 1.45%
b. 2.25%
c. – 1.80%
d. – 2.74%
Answer – b 2.25%
M Square formula = (Rp – Rf) x (Standard Deviation of market/Standard Deviation of
Portfolio) – (Rm – Rf)
Where Rp = Portfolio Return
Rf = Risk free return
Standard Deviation of market/Standard Deviation of Portfolio is the same as Benchmark
volatility to Portfolio volatility
Rm = Market or Benchmark return
Substituting we get :
(30-15) x 0.75 – (24-15)

= (15 x 0.75) – 9
= 11.25 – 9
= 2.25%
CASE STUDIES
Q11. What is the expected return of the three stock portfolio described below?
STOCK WEIGHT EXPECTED RETURN

RRR 25% 12%
SSS 50% 10%
TTT 25% 16%
a. 13.75%
b. 12%
c. 12.66%
d. 13.25%
Answer – b – 12%
Answer Explanation - Lets us assume Rs 100 has been invested in the three stocks.
As per the weights given, the amount invested in each stock is
RRR: Rs 25 (25%), SSS : Rs 50 (50%) and TTT : Rs 25(25%)
The expected return from RRR is 12% = 25 X 12% = Rs 3
SSS is 10% = 50 X 10% = Rs 5
TTT is 16% = 25 X 16% = Rs 4
Total return is Rs 3 + Rs 5 + Rs 4 = Rs 12 or 12% of Rs 100

CASE STUDIES
Q 12. Study the following data and answer the questions:
STANDARD
FUND BETA RETURN % Rf %
DEVIATION %
MM 1 5.02 17 6
NN 1.05 4.04 14 6
OO 0.89 3.02 10 6
Market 1 3.5 12 6
Q 12.1 Acrobat
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Sharpe reader
Measure forto
theview
MM fund.
this PDFThis PDF expires in 2 mo
a. 1.70
b. 2.19
c. 2.74
d. 4.49
Answer – b – 2.19
Sharpe Ratio = Return of portfolio – Risk free return / Standard Deviation

= 17 – 6 / 5.02 = 2.19
CASE STUDIES
Q 12.2 - Compute the Jensen Measure for the NN fund.
a. 1.70
b. 2.19
c. 2.74
d. 4.49
Answer – a – 1.70
Jensen Alpha = R – Rf – beta (Rm-Rf)
R represents the portfolio return. Rf represents the risk-free rate of return. Beta represents
the systematic risk of a portfolio. Rm represents the market return, per a benchmark.
Jensen Alpha = 14 – 6 – 1.05 (12-6)
= 14 – 6 – 1.05 (6)
= 14 – 6 – 6.3
= 1.70
CASE STUDIES
Q 13. Mr. Patel is an NRI and wants to invest Rs 1 crore with an Indian portfolio manager. The
KYC for both resident and NRI KYC was done by the portfolio manager and the agreement
was signed.
Mr. Patel wanted a 40% equity and 60% debt composition in his portfolio. As per the
agreement between Mr. Patel and the portfolio manager, monitoring of this proportion is to
be done every quarter, with 5% allowance. This means that even if equity composition fell to
35-45% range, there would be no rebalancing done.
In the first year there was no major movements in the markets. In the second year there was
a strong rally in the equity markets and the value of equity component of Mr. Patel’s portfolio
rose to Rs. 52 Lakhs. There was no change in the value of debt portfolio.
For rebalancing the portfolio, the portfolio manager had to sell Rs 12 lakhs of equity shares.
This sale was of shares whose original value at the time of investment was Rs. 40 Lakhs and
they had reached Rs. 52 Lakhs in the second year.
Costs : Capital Gains is at 10%, Mr. Patel is in the 25% tax bracket and transaction cost on sale
of equity shares is 0.5% of shares sold.
Answer the following questions -

CASE STUDIES
Q 13.1 – Calculate the Capital Gains tax to be paid by Mr. Patel. (Round off)
a. Rs. 25,800
b. Rs. 31,200
c. Rs. 27,700
d. Rs. 34,500
y Adobe
AnswerAcrobat PDF reader to view this PDFThis PDF expires in 2 mo
– c - Rs. 27,700
Shares sold were of value Rs. 12 Lakhs (Given)
In order to find the capital gain in this transaction, we first need to find the gain in this and
for this we need the original value of shares.
Now since shares worth 40 Lakhs become 52 Lakhs in value, we can cross multiply and find
out the original value of the shares sold.
Total Value Now/Total Invested = Shares worth 12 Lakhs Now/ Original cost of these shares
52,00,000/40,00,000 = 12,00,000 / Original cost of these shares
Original cost of these shares = (12,00,000*40,00,000)/52,00,000
Original cost of these shares was = Rs. 9,23,076
Gain on transaction = Shares Sold – Original Value of these shares
12,00,000 – 9,23,076 = Rs. 2,76,924
Tax on gain@10% on 2,76,924 = Rs. 27,692 (Rounded off to Rs 27,700)

CASE STUDIES
Q 13.2 – Calculate the cost of rebalancing for Mr. Patel and also calculate the Net fund value
once the capital gains and transaction costs are reduced from it.
a. The transaction cost of rebalancing for Mr. Patel was Rs 6000 and the Net Fund value
was Rs. 1,11,66,300
b. The transaction cost of rebalancing for Mr. Patel was Rs 6000 and the Net Fund value
was Rs. 1,13,50,300
c. The transaction cost of rebalancing for Mr. Patel was Rs 6000 and the Net Fund value
was Rs. 1,33,42,300
d. The transaction cost of rebalancing for Mr. Patel was Rs 5500 and the Net Fund value
was Rs. 1,00,00,000
Answer – a - The transaction cost of rebalancing for Mr. Patel was Rs 6000 and the Net Fund
value was Rs. 1,11,66,300
In the second year the Equity portion rose to Rs 52,00,000 and the Debt portion remained
same at Rs. 60,00,000
Therefore, the Total Value of Portfolio before rebalancing = 52,00,000 + 60,00,000 = Rs.
1,12,00,000
When rebalancing was done, a capital gain tax was incurred and also a transaction cost.
Capital Gain Tax = 27700 (Calculated in Question 13.1)
Rs 12,00,000 worth shares were sold.
The Transaction Cost on this sale = 0.5% of transaction Value = 0.5% * 1200000 = Rs. 6000
Value of portfolio = 11200000 – 27700 – 6000 = Rs. 1,11,66,300

CASE STUDIES
Q 13.3 – Assuming that Mr. Patel kept the required hurdle rate at 20%, find out if he achieved
it by the time rebalancing was done or did the rebalancing reduce the desired rate of return?
a. Yes, Mr. Patel did earn the desired return of 20% at the time of rebalancing but on a
pre-tax basis
b. Yes, Mr. Patel did earn the desired return of 20% but this was eroded due to
rebalancing
c. No, Mr. Patel was not able to get the desired return of 20% due to rebalancing
d. No, Mr. Patel did not earn the desired return (20%) at the time of rebalancing. Also
the rebalancing did not reduce the return

Answer – d - No, Mr. Patel did not earn the desired return (20%) at the time of rebalancing.
Also the rebalancing did not reduce the return
Let’s first calculate what amount the investor would make if he achieves his target hurdle
return rate of 20% p.a.
This will be Rs 1 core + 20% return each for first two years =
= [P (1 + i)n]
= 1,00,00,000 * ( 1 + 0.2)^2
= 1,00,00,000 * (1.2^2) = 1,44,00,000
[ (1.2^2) can be calculated in Scientific Calculator of your computer.
Type 1.2 , the x^y and then 2 = 1.44 ]
The actual value of portfolio at the end of year 2 is only Rs. 1,12,00,000 (52 Lakhs + 60
Lakhs) before rebalancing and even lower after rebalancing. So the portfolio did not
achieve the hurdle rate in either case.
CASE STUDIES
Q 13.4 Which of these documents did Mr. Patel produce for completion of successful KYC
verification in India?
a. Certified true copy of passport

b. Certified true copy of PIO card
c. Certified true copy of foreign address
d. All of the above
Answer – d – All of the above
Answer Explanation - NRIs have to be KYC compliant in order to make investments in India.
The following is the additional documentation, apart from proof of identity, proof of address
and PAN card, for NRIs and PIOs:
• Certified True Copy of Passport • Certified True Copy of the Overseas address • Permanent
address • A certified true copy of the PIO Card (for PIOs) • In case of Merchant Navy NRIs,
Mariner’s declaration or certified copy of CDC (Continuous Discharge Certificate) is to be
submitted.
CASE STUDIES
Q 13.5 Identify the conditions stipulated for Mr. Patel to open a NRI Demat and Trading
account.
a. Mr. Patel has to open a separate account for repatriable and non-repatriable securities
to be opened
b. NRIs have no restrictions with respect to securities they can trade
c. Joint account holding is not allowed by SEBI for NRI Demat accounts

Answer – a - Mr. Patel has to open a separate account for repatriable and non-repatriable
securities to be opened
Answer Explanation - NRIs can open a demat account with any Depository Participant in India.
NRI’s needs to mention the type (‘NRI’ as compared to ‘Resident’) and the sub-type
(‘Repatriable’ or ‘Non Repatriable’) in the account opening form.
NRI must open separate demat accounts for holding ‘repatriable’ and ‘non-repatriable’
securities.
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CASE STUDIES
NISM XXI A – PORTFOLIO MANAGEMENT SERVICES (PMS) DISTRIBUTORS EXAMINATION
SHORT NOTES BY PASS4SURE.IN
CHAPTER 1: INVESTMENTS
People have, broadly, two options to utilise their savings. They can either keep it with them until their
consumption requirements exceed their income, or, they can pass on their saving to those whose
requirements exceed their income with the condition of returning it back with some increment.
Saving versus Investment
Saving is just the difference between money earned and money spent.
Investment is the current commitment of savings with an expectation of receiving a higher amount of
committed savings. Investment involves some specific time period. It is the process of making the savings
work to generate return.
Investment versus Speculation
Investment and speculation activities are so intermingled that it is very difficult to distinguish and separate
them. An attempt can be made to distinguish between speculation and investment on the basis of criteria
like investment time horizon and the process of decision making.
CASE STUDIES
Investment Objectives
Investment objectives can be defined as investors’ goals expressed in terms of risk, return and liquidity
preferences. Some investors may have the tendency to express their goals solely on the basis of return.
The return objective may be simplified as follows:
Capital Preservation: It means minimizing or avoiding the chances of erosion in the principal amount of
investment. Highly risk averse investors pursue this investment goal, as his investment objective requires no
or minimal risk taking. Also, when funds are required for immediate short term, investors may state for
capital preservation as the investment objective.
Capital Appreciation: It is an appropriate investment objective for those who want their portfolio value to
grow over a period of time and are prepared to take risks. This may be an appropriate investment objective
for long term investors.
Current Income: It is an investment objective pursued when investor wants her portfolio to generate income
at regular interval by way of dividend, interest, rental income rather than appreciation in the value of the
portfolio. This investment objective is mostly pursued by people who are retired and want their portfolios
to generate income to meet their living expenses.
Estimating the required rate of return
Investment is the commitment of rupee for a period of time to earn a) pure time value of money for investors
postpone their current consumption b) compensation for expected inflation during the period of investment
for the change in the general price levels and c) risk premium for the uncertainty of future payments. The
price paid for the exchange between current and future consumption is the pure rate of interest.
It is the rate of return, the investor demands even if there is no inflation and no uncertainty associated with
future payments.
Required rate of return is the minimum rate of return investors expect when making investment decisions.
It is to be noted that required rate of return is not guaranteed return or assured return. It is also different
from expected or forecasted return. It is also different from realized return.
Real risk free rate is the basic rate of return or interest rate, assuming no inflation and no uncertainty about
future cashflows. It is the compensation paid for postponing the consumption.
The nominal risk-free rate of return is the rate of return, an investor is certain of receiving on the due date.
Investor is certain of the amount as well as the timing of the return.
CASE STUDIES
Types of risks
Business Risk is the Uncertainty of income flows caused by the nature of a firm’s business.
Financial risk relates to the means of financing assets – debt or equity. It is uncertainty caused by the use of
debt financing.
Liquidity is defined as ease of converting an asset into cash at close to its economic worth. The more difficult
the conversion, the more is liquidity risk.
Exchange rate risk is the uncertainty of return introduced by acquiring investments denominated in a
currency different from that of the investor.
Political risk is the uncertainty of returns caused by the possibility of a major change in the political or
economic environment in a country.
Geopolitics is influence of geography and politics on economics and relationships between countries.
Geopolitical risk is the risk associated with wars, terrorist acts, and tensions between states that affect the
normal and peaceful course of international relations.
Regulatory risk is the risk associated with uncertainty about the regulatory framework pertaining to
investments.
Relationship between risk and return

CASE STUDIES
Types of Investments
Equity
Equity Shares represent ownership in a company that entitles its holders a share in profits and the right to
vote on the company’s affairs. Equity shareholders are residual owners of firm’s profit after other contractual
claims on the firm are satisfied and have the ultimate control over how the firm is operated. Equity
Shareholders are residual claim holders. Investments in equity shares reward investors in two ways: dividend
and capital appreciation.
Fixed Income
Debt instruments, also called fixed income instruments, are contracts containing a promise to pay a stream
of cash flows during the term of the contract to the investors. The debt contract can be transferable, a
feature specified in the contract that permits its sale to another investor, or non-transferable, which
prohibits sale to another party.
y Adobe Acrobat
Government PDF
versus corporate debtreader
securities to view this PDFThis PDF expires in 2 mo
A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State
Governments. It acknowledges the Government’s debt obligation. Such securities are short term or long
term.
Corporate fixed income securities pay higher interest rates than the government securities due to default
risk. The difference between the yield on a government security and the corporate security for the same
maturity is called “credit spread”.
High yield versus investment grade
Higher rating denotes lower default risk and vice versa. The convention in the market is to classify bonds
with rating BBB and above as investment grade and bonds below the BBB as high yield or junk bonds. Many
institutional investors are prohibited from investing in junk bonds as they involve high default risk.
Money Market versus capital market
Money market securities have maturities of one year or less than one year. Treasury bills, commercial
papers, certificate of deposits up to one year maturity are referred as money market instruments.
Capital market is a place for long term fund mobilization. Securities with maturities greater than one year
are referred to as capital market securities. Stocks and bonds are capital market securities.
CASE STUDIES
Commodities
Commodities are subject to higher business cycle risk as their prices are determined by the demand and
supply of the end products in which they are consumed. Soft commodities historically have shown low
correlation to stocks and bonds. Hence, they provide benefits of risk diversification when held in a portfolio
along with stock and bonds.
Real Estate
Real estate is the largest asset class in the world. It has been a significant driver of economic growth. It offers
significant diversification opportunities. It has been historically viewed as good inflation hedge. Investors can
invest into real estate with capital appreciation as investment objective as well as to generate regular income
by way of rents. It is usually a long term investment. Real estate is classified into two sub-classes: commercial
real estate or residential real estate.
Structured Products
Structured products are customized and sophisticated investments. They provide investors risk-adjusted
exposure to traditional investments or to assets that are otherwise difficult to obtain. Structured products
greatly use derivatives to create desired risk exposures. Many structured products are designed to provide
risk-adjusted returns that are linked to equity market indices, sector indices, basket of stocks with some
particular theme, currencies, interest rates, commodity or a basket of commodities.
Distressed Securities
Distressed securities are the securities of the companies that are in financial distress or near bankruptcy.
Investors can make investments in the equity and debt securities of publicly traded companies. These may
be available at huge discounts, however investments in them require higher skills and greater experience in
business valuation than regular securities.
Channels for making investments
Investors can invest in any of the investment opportunities discussed above directly or through
intermediaries providing various managed portfolio solutions.
Direct investments
Direct investments are when investors buy the securities issued by companies and government bodies and
commodities like gold and silver. Investors can buy gold or silver directly from the sellers or dealers. In case
of financial securities, a few fee-based financial intermediaries aid investors buy or sell investments viz.
brokers, depositories, advisors etc., for fees or commission.
Registered Investment Advisers
Investors can take the advice from SEBI Registered Investment Adviser (RIAs). These advisers are paid fees
by the investors who hire them for investment advice. These advisers, like other fee-based professionals, are
only accountable to their investors. They are required to follow a strict code of conduct and offer advice in
CASE STUDIES
the investors’ best interests. Thus advisor can help investors create an optimum investment portfolio and
help them in making rational investment decisions.
Investments through managed portfolios
These investment vehicles are professionally managed. Through these managed portfolios they can avail the
professional expertise at much lower costs.
The following are examples of managed portfolio solutions available to investors in India:
• Mutual Funds
• Alternative Investment Funds
• Portfolio Managers
• Collective Investment Schemes
Mutual Fund
A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal.
Money collected through mutual fund is then invested in various investment opportunities such as shares,
debentures and other securities.
The following are the benefits of investing through mutual funds:
• Professional investment management
• Risk reduction through diversification
• Convenience
• Unit holders account administration and services
• Reduction in transaction costs
• Regulatory protection
• Product variety
Alternative Investment Fund
Alternative Investment Fund or AIF is a privately pooled investment vehicle which collects funds from
sophisticated investors, for investing it in accordance with a defined investment policy for the benefit of its
investors. These private investors are institutions and high net worth individuals who understand the
nuances of higher risk taking and complex investment arrangements. The minimum investment value in AIF
is one crore rupees. AIFs are categorized into three categories:
Category I AIF – is an AIF that invests in start-up or early stage ventures or social ventures or SMEs or
infrastructure or other sectors.
Category II AIF – is an AIF that does not fall in Category I and III and which does not undertake leverage or
borrowing other than to meet day-to-day operational requirements or as permitted in the regulations.
Category III AIF – is an AIF that which employs diverse or complex trading strategies and may employ leverage
including through investment in listed or unlisted derivatives.
CASE STUDIES
Portfolio Management Services
A portfolio manager is a body corporate who advises or directs or undertakes on behalf of the investors the
management or administration of a portfolio of securities. There are two types of portfolio management
services available. The discretionary portfolio manager individually and independently manages the funds of
each investor whereas the non-discretionary portfolio manager manages the funds in accordance with the
directions of the investors. The portfolio manager is required to accept minimum Rs. 50 lakhs or securities
having a minimum worth of Rs. 50 lakhs from the client while opening the account for the purpose of
rendering portfolio management service to the client.
CHAPTER 2: INTRODUCTION TO SECURITIES MARKETS
The securities market provides an institutional structure that enables a more efficient flow of capital in the
economy. If a household has some savings, such savings can be deployed to fund the capital requirement of
a business enterprise, through the securities markets.
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who have the money to invest. Security ownership allows investors to convert their savings into financial
assets which provide a return. Security issuance allows borrowers to raise money at a reasonable cost.
Primary and Secondary market
Primary Market: The primary market, also called the new issue market, is where issuers raise capital by
issuing securities to investors. Fresh securities are issued in this market. Various methods of issue in the
primary market are:
• Primary Issue
• Initial Public Offering (IPO)
• Further Public offer (FPO)
• Rights Issue
• Private Placement
• Preferential Issue
• Qualified Institutional Placements (QIP)
• Onshore and Offshore Offerings
• Offer For Sale (OFS)
• Employee Stock Ownership Plan (ESOP)
• Foreign Currency Convertible Bond (FCCB)
• Depository Reciepts (ADR/GDR)
• Anchor Investor
CASE STUDIES
Secondary Market: The secondary market facilitates trades in already-issued securities, thereby enabling
investors to exit from an investment or new investors to buy already existing securities.
An active secondary market promotes the growth of the primary market and capital formation, since the
investors in the primary market are assured of a continuous market where they have an option to liquidate
or exit their investments. Let’s look at various terminologies in the secondary market:
• Over-The-Counter Market (OTC)

• Exchange Traded Markets
• Trading
• Clearing and Settlement
Market Participants and their Activities
Market Infrastructure Institutions and other intermediaries
Stock Exchanges provide a trading platform where buyers and sellers can transact in already issued
securities. Trading happens on these exchanges through electronic trading terminals which feature
anonymous order matching.
Depositories are institutions that hold securities (shares, debentures, bonds, government securities, mutual
fund units) of investors in electronic form. Currently there are two Depositories in India that are registered
with SEBI—Central Depository Services Limited (CDSL), and National Securities Depository Limited (NSDL).
A Depository Participant (DP) is an agent of the depository through which it interfaces with the investors
and provides depository services. Depository participants enable investors to hold and transact in securities
in the dematerialized form.
Trading Members/Stock Brokers are registered members of a Stock Exchange. They facilitate buy and sell
transactions of investors on stock exchanges.
Authorise Persons are agents of the brokers (previously referred to as sub-brokers) and are registered with
the respective stock exchanges. APs help in reaching the services of brokers to a larger number of investors.
A Custodian is an entity that is vested with the responsibility of holding funds and securities of its large
clients, typically institutions such as banks, insurance companies, and foreign portfolio investors.
Clearing Corporations play an important role in safeguarding the interest of investors in the Securities
Market. Clearing agencies ensure that members on the Stock Exchange meet their obligations to deliver
funds or securities.
Clearing Bank acts as an important intermediary between clearing members and the clearing corporation.
Every clearing member needs to maintain an account with the clearing bank.
CASE STUDIES
Merchant bankers are entities registered with SEBI and act as issue managers, investment bankers or lead
managers. They help an issuer access the security market with an issuance of securities.
Underwriters are intermediaries in the primary market who undertake to subscribe any portion of a public
offer of securities which may not be bought by investors.
Institutional Participants
Mutual Funds are professionally managed collective investment scheme that pools money from many
investors to purchase securities on their behalf.
Pension Funds are established to facilitate and organize the investment of the retirement funds contributed
by the employees and employers or even only the employees in some cases.
Insurance companies' core business is to insure assets. Depending on the type of assets that are insured,
there are various insurance companies like life insurance and general insurance etc.
Alternative Investment Funds: The SEBI Regulations 2012 define ‘Alternative Investment Fund’ (AIF) as one
which is primarily a privately pooled investment vehicle. Under the SEBI AIF Regulations 2012, we can list
the following types of funds as AIFs: Venture Capital Fund, Angel Fund, Private Equity Fund, Debt Fund,
Infrastructure Fund, SME Fund, Hedge Fund and Social Venture Fund.
Foreign Portfolio Investors (FPIs) is an entity established or incorporated outside India that proposes to
make investments in India. These international investors must register with the SEBI to participate in the
Indian securities markets.
Investment advisers work with investors to help them decide on asset allocation and make a choice of
investments based on an assessment of their needs, time horizon return expectation and ability to bear risk.
EPFO is a statutory body set up under the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952
National Pension System (NPS) is a pension cum investment scheme launched by Government of India to
provide old age security to Citizens of India.
Family office can be defined as the ecosystem which the family builds around itself to manage its wealth.
Corporate Treasuries: Traditionally, the role of corporate treasury has been that of manager of financial risks
and provider of liquidity. The focus area of corporate treasuries has been debt management to capital
structure management with the key responsibility of raising long term funds and minimizing the cost of
capital.
CASE STUDIES
CHAPTER 3: INVESTING IN STOCKS
Equity as an investment
Securities markets enable investors to invest and disinvest their surplus funds in various instruments. These
instruments are pre-defined for their features, issued under regulatory supervision, and in most cases have
ready liquidity. When a company issues equity securities, it is not contractually obligated to repay the
amount it receives from shareholders. It is also not contractually obligated to make periodic payments to
shareholders for the use of their funds. Equity investors also known as shareholders have a claim on the
company’s net assets, i.e. assets after all liabilities have been paid. Equity shareholders have residual claim
in the business.
Diversification of risk through equity instruments
Diversification of equity investment achieves risk reduction. Conceptually, it is achieved due to the relatively
less correlated behaviour of various business sectors which underlie each equity investment. A business cycle
is shown as a dark line. Some businesses may be at peak when others are at their trough, as shown by the
broken line. These products or businesses are called ‘counter-cyclical’ or defensive businesses. Businesses
that do better in a recession are called ‘recession-proof’ businesses. Some products, sectors or countries
come out of a recession faster than others; other products, sectors or countries may go into recession later
than others.
Risks of equity investments
Market risks arise due to the fluctuations in the prices of equity shares due to various market related
dynamics.
Sector specific risk is due to factors that affect the performance of businesses in a particular sector.
Company specific risk is due to factors that affect the performance of a single company.
Liquidity risk is the impact cost. The impact cost is the percentage price movement caused by a particular
order size
Overview of Equity Market
Equity securities represent ownership claims on a company’s net assets. A thorough understanding of equity
market is required to make optimal allocation to this asset class. The equity market provides various choices
to investors in terms of risk-return-liquidity profile.
CASE STUDIES
In addition to equity shares, companies may also issue preference shares. Preference Shares rank above
equity shares with respect to the payment of dividends and distribution of company’s net assets in case of
liquidation. However, preference share do not generally have voting rights like equity shares, unless stated
otherwise.
The chief characteristic of equity shares is shareholders’ participation in the governance of the company
through voting rights.
Equity research and stock selection
The idea behind equity research is to come up with intrinsic value of the stock to compare with market price
and then decide whether to buy or hold or sell the stock. There are many frameworks/methodologies
available for stock selection.
Fundamental Analysis
Fundamental analysis is the process of determining intrinsic value for the stock. These values depend on
underlying economic factors such as future earnings or cash flows, interest rates, and risk variables. By
examining these factors, intrinsic value of the stock is determined. Investor should buy the stock if its market
price is below intrinsic value and do not buy, or sell, if the market price is above the intrinsic value, after
taking into consideration the transaction cost.
Top-Down approach versus Bottom-up Approach: Analysts follow two broad approaches to fundamental
analysis—top down and bottom up.
Buy side research versus Sell Side Research: Sell-side Analysts work for firms that provide investment
banking, broking, advisory services for clients. They typically publish research reports on the securities of
companies or industries with specific recommendation to buy, hold, or sell the subject security. Buy-side
Analysts work for money managers like mutual funds, hedge funds, pension funds, or portfolio managers
that purchase and sell securities for their own investment accounts or on behalf of their clients.
Stock Analysis Process
The objective of stock analysis is to make the critical risk-return decision at the marketindustry-company
stock level. The stock analysis process involves three steps. It requires analysis of the economy and market.
It includes
• Economic Analysis
• Industry/Sector Analysis
Industry Life Cycle
• Introduction
• Growth
• Maturity
• Deceleration of Growth
CASE STUDIES
Porter’s 5 Model
Michael Porter suggests that five competitive forces determine the intensity of competition
in the industry, that in turn affects the profitability of the firms in the industry. The impact of
these factors can be different for different industries. The 5 factors are rivalry among existing competitors,
threat of new entrants, threat of substitute products, bargaining power of buyers and bargaining power of
suppliers.
Company Analysis
Company analysis is the final step in the top-down approach to stock analysis. Macroeconomic analysis
prepares us to understand the impact of forecasted macroeconomic environment on different asset classes.
It enables us to decide how much exposure to be made to equity.
Fundamentals Driven model - Estimation of intrinsic value
There are various approach to valuation. There are uncertainties associated with the inputs that go into
these valuation approaches. As a result, the final output can at best be considered an educated estimate,
provided adequate due diligence associated with valuing the asset has been complied with.
Discounted Cash Flow Model:
Conceptually, discounted cash flow (DCF) approach to valuation is the most appropriate
approach for valuations when three things are known: Stream of future cash flows, Timings of these cash
flows, and Expected rate of return of the investors (called discount rate).
Free Cash Flow Model:
There are two ways to look at the cash flows of a business. One is the free cash flows to the firm (FCFF),
where the cash flows before any payments are made on the debt outstanding are taken into consideration.
This is the cash flow available to all capital contributors—both equity and debt. The second way is to estimate
the cash flows that accrue to the equity investors alone. To calculate the value of the firm, the FCFF is
discounted by the weighted average cost of capital (WACC) that considers both debt and equity. To calculate
the value of equity, FCFE is discounted using the cost of equity.
As per Capital Asset Pricing Model (CAPM) ,the cost of equity is computed as follows:
Ke = Rf + β * (Rm – Rf)
Asset Based Valuation
Under this method, the value of the business is found out by subtracting the value of its liabilities from its
assets.
CASE STUDIES
Relative Valuation
Relative valuation is conducted by identifying comparable firms and then obtaining market values of equity
of these firms. These values are then converted into standardized values which are in form of multiples, with
respect to any chosen metric of the company’s financials, such as earnings, cash flow, book values or sales.
Common metrics used in relative valuation are:
• PE Ratio
• PB Ratio
• PS Ratio
• PEG Ratio
• EVA and MVA
• EBIT/EV and EV/EBITDA Ratio
• EV/S Ratio
Technical Analysis
Technical analysis is based on the assumption that any information that can affect the performance of a
stock, company fundamentals, economic factors and market sentiments, is reflected already in its stock
prices. There are three elements in understanding price behavior:
1. The history of past prices provides indications of the underlying trend and its direction.
2. The volume of trading that accompanies price movements provides important inputs on
the underlying strength of the trend.
3. The time span over which price and volume are observed factors in the impact of long-term factors that
influence prices over a period of time.
Technical analysis integrates these three elements into price charts, points of support and resistance in
charts and price trends. By observing price and volume patterns, technical analysts try to understand if there
is adequate buying interest that may take prices up, or vice versa.
Assumptions of Technical Analysis
1. The market price is determined by the interaction of supply and demand.

2. Supply and demand are governed by many rational and irrational factors.
3. Price adjustments are not instantaneous and prices move in trends
4. Trends persist for appreciable lengths of time.
5. Trends change in reaction to shifts in supply and demand relationships.
6. These shifts can be detected in the action of the market itself.
There are numerous trading rules and indicators. There are indicators of overall market momentum, used to
make aggregate market decisions. There are trading rules and indicators to be applied for individual
securities. Some of the popular ones are:
• Trend-line analysis
• Moving averages
• Bollinger-Band Analysis
CASE STUDIES
CHAPTER 4: INVESTING IN FIXED INCOME SECURITIES
Since bonds create fixed financial obligations on the issuers, they are referred as fixed income securities. The
issuer of a bond agrees to
1) pay a fixed amount of interest (known as coupon) periodically
2) repay the fixed amount of principal (known as face value) at the date of maturity.
The fixed obligations of the security are the most defining characteristic of bond. Mostly bonds make semi-
annual interest payments, though some may make annual, quarterly or monthly interest payment (except
zero coupon bonds which make no interest payment).
Bonds can also be issued with embedded options. Some common types of bonds with embedded options
are: bonds with call option, bonds with put option and convertible bonds.
Determinants of bond safety
The most important document to understand the safety aspects of the bond is its indenture. It is the legal
agreement between the firm issuing the bond and the bondholders, providing the specific terms of the debt
agreement. All the features of the bond i.e. its par value, coupon rate, maturity period, periodicity of coupon
payments, collateral for the bond, seniority of the payments will be set forth in the indenture. To understand
the probability of default by the issuer, most bond investors rely on Rating Agencies which have their own
methodology to gauge the creditworthiness. They use symbols to express their opinion, Typically, ratings are
expressed as grades from ‘AAA’ to ‘D’.
Analysis and Valuation of Bonds
Bond Pricing: The price of a bond is sum of present value of all future cash flows of the bond. The interest
rate used for discounting the cash flows is the Yield to Maturity (YTM).
Bond Yield Measures:
The coupon yield is the coupon payment as a percentage of the face value.
The current yield is the coupon payment as a percentage of the bond’s current market price.
Yield to Maturity (YTM) is the discount rate which equates the present value of the future cash flows from
a bond to its current market price .
Yield to call measures the estimated rate of return for bond held to first call date in a bond with an
embedded option.
CASE STUDIES
Measuring Price Volatility of bonds:
Market price of a bond is a function of the Par value of the bond; Coupon rate of the bond; Maturity period
and Prevailing market interest rate.
1. Bond prices and the interest rates have inverse relationship.

2. Bond price volatility is inversely related to coupon.
3. Bond price volatility is directly related to term to maturity
4. Bond price movements resulting from equal absolute increases or decreases in yield are not symmetrical.
Interest Rate Risk is defined as the risk emanating from changes in the interest rate in the market.
Determining duration: Duration (also known as Macaulay Duration) of a bond is a measure of the time taken
to recover the initial investment in present value terms. Calculating Duration of a bond is covered in detail
in the NISM Workbook. Pleas go through it carefully to understand the same.
CHAPTER 5: DERIVATIVES
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underlying. Derivatives are based on wide range of underlying assets. These include metals, energy
resources, Agri commodities and financial assets.
Types of derivative products
Forward contract is an agreement made directly between two parties to buy or sell an asset on a specific
date in the future, at the terms decided today.
A futures contract is an agreement made through an organized exchange to buy or sell a fixed amount of a
commodity or a financial asset on a future date at an agreed price.
An Option is a contract that gives its buyers the right, but not an obligation, to buy or sell the underlying
asset on or before a stated date/day, at a stated price, for a premium (price)
A swap is a contract in which two parties agree to a specified exchange of cash flows on a
future date(s).
Structure of derivative markets
OTC Markets: Some derivative contracts are settled between counterparties on terms mutually agreed upon
between them. These are called over the counter (OTC) derivatives. They are non-standard and they rely on
the trust between parties to meet their commitment as promised.
Exchange Traded Markets: Exchange-traded derivatives are standard derivative contracts defined by an
exchange, and are usually settled through a clearing house. The buyers and sellers maintain margins with
the clearing-corporations, which enables players to enter into contracts on the strength of the settlement
process of the clearing house.
CASE STUDIES
Purpose of Derivatives
Hedging: When an investor has an open position in the underlying, he can use the derivative markets to
protect that position from the risks of future price movements.
Speculation: A speculative trade in a derivative is not supported by an underlying position in cash, but simply
implements a view on the future prices of the underlying, at a lower cost.
Arbitrage: Arbitrageurs are specialist traders who evaluate whether the difference in price is higher than the
cost of borrowing.
Commodity and Currency Futures and Options
Commodity derivatives: Commodity derivatives markets play an increasingly important role in the
commodity market value chain by performing key economic functions such as risk management through risk
reduction and risk transfer, price discovery and transactional efficiency. Commodity derivatives markets
allow market participants such as farmers, traders, processors, etc. to hedge their risk against price volatility
through futures and options.
Currency derivatives: Unlike any other traded asset class, the most significant part of currency market is the
concept of currency pairs. In currency market, while initiating a trade you buy one currency and sell another
currency. A currency future, also known as FX future, is a futures contract to exchange one currency for
another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date.
Currency Options are contracts that grant the buyer of the option the right, but not the obligation, to buy or
sell underlying currency at a specified exchange rate during a specified period of time.
Underlying concepts in derivatives
Zero Sum Game: In a futures contract, the counterparties who enter into the contract have opposing view.
The sum of the two position’s gain and loss is zero assuming zero transaction costs and zero taxes.
Settlement Mechanism: Earlier most derivative contracts were settled in cash. However, SEBI has mandated
physical settlement (settlement by delivery of underlying stock) for all stock derivatives.
Arbitrage: The law of one price states that two goods (assets) that are identical, cannot trade at different
prices in two different markets. The demand in the cheaper market will increase prices there and the supply
into the costlier market will reduce prices, bringing the prices in both markets to the same level. Prices in
two markets for the same tradable asset will be different only to the extent of transaction costs.
Margining Process: Margin is defined as the funds or securities which must be deposited by Clearing
Members as collateral before executing a trade. The provision of collateral is intended to ensure that all
financial commitments related to the open positions of a Clearing Member can be offset within specified
period of time.
CASE STUDIES
Open Interest: Open interest is commonly associated with the futures and options markets. Open interest
is the total number of outstanding derivative contracts that have not been settled. The open interest number
only changes when a new buyer and seller enter the market, creating a new contract, or when a buyer and
seller meet—thereby closing both positions. Open interest is a measure of market activity. However, it is to
be noted that it is not trading volume.
CHAPTER 6: MUTUAL FUND
Mutual fund is a vehicle (in the form of a “trust”) to mobilize money from investors, to invest in different
markets and securities, in line with stated investment objectives. Mutual funds offer different kinds of
schemes to cater to the need of diverse investors. Various investors have different investment preferences
and needs. In order to accommodate these preferences, mutual funds mobilize different pools of money.
Benefits of investing through mutual funds
• Affordable Portfolio Diversification

• Economies Of Scale
• Transparency
• Tax Benefits
• Convenient Options
• Regulatory Comfort
Working of mutual funds
Day to day operations of mutual fund is handled by the AMC. The sponsor or, the trustees if
so authorized by the trust deed, shall appoint the AMC with the approval of SEBI. Various functions include:
• Compliance Function
• Fund Management
• Operations and Customer Services Team
• Sales And Marketing Team
Types of Mutual fund products
Mutual Fund Schemes are classified on various parameters, some of them being:
• Open Ended v/s Close Ended

• Active Funds v/s Passive Funds
• By the investment Universe: Equity Funds, Debt Funds, Commodity Funds, Gold Funds, International
Funds etc.
CASE STUDIES
Processes of investing in mutual funds
Processes of units include Purchase, Redemption and Systematic Transfers.
Net Asset Value, Total Expense Ratio, Pricing of Units
The NAV or Net Asset Value is the current value of a mutual fund unit. This will depend upon the current
mark to market (MTM) value of the securities held in the portfolio of the fund and any income earned such
as dividend and interest.
Pricing of Units: In case of open-ended funds, transactions are priced using the NAV to ensure parity among
investors that buy new units, investors that stay in the fund, and investors that move out of a fund.
Total Expense Ratio: All types of expenses incurred by the Asset Management Company have to be clearly
identified and appropriated for all mutual fund schemes. The most important expense is the Investment and
Advisory Fees charged to the scheme by the AMC.
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MANAGERS
Risk and return are the two important aspects of financial investment. Portfolio management involves
selecting and managing a basket of assets that minimizes risk, while maximizing return on investments. A
portfolio manager plays a pivotal role in designing customized investment solutions for the clients.
Types of portfolio management services
On the basis of provider of the services PMS can be classified as:

1. PMS by asset management companies
2. PMS by brokerage houses
3. Boutique (independent) PMS houses
Discretionary Services: Discretionary portfolio manager individually and independently manages the funds
of each investor as per the contract. This could be based on an existing investment approach or strategy
which the portfolio manager is offering or can be customized based on client’s requirement.
Non-Discretionary Services: Non-discretionary portfolio manager manages the funds in accordance with the
directions of the client. The portfolio manager does not exercise his/her discretion for the buy or sell
decisions. The portfolio manager has to consult the client for every transaction.
Advisory Services: In advisory role, the portfolio manager suggests the investment ideas or provides non-
binding investment advice. The investor takes the decisions. The investors also execute the transactions.
(Kindly go through the compliance rules given in the workbook once)

CASE STUDIES
CHAPTER 8: OPERATIONAL ASPECTS OF PORTFOLIO MANAGERS
Entities which can invest in PMS
The following entities can invest in PMS with a minimum investment of Rs. 50 lacs:
• Individuals
• Non-resident Indians (as per the RBI guidelines)
• Hindu Undivided Family
• Proprietorship firms
• Association of person
• Partnership Firms
• Limited liability Partnership
• Trust
• Body Corporate
Disclosures to the prospective clients
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disclosure document is to be given to the prospective client along with the account opening form prior to
signing of the agreement.
Best Practices for the disclosures – Global Investment Performance Standards
The GIPS standards are ethical standards for calculating and presenting investment performance based on
the principles of fair representation and full disclosure. These standards were originally created for
investment firms managing composite strategies, with a focus on how firms present performance of
composites to prospective clients.
Process of On-boarding of clients
The two important elements of the customer life cycle are: client onboarding and reporting. The following
are the important aspects of the client onboarding process in case of a PMS service:
1. Reading of Disclosure Document
2. Fulfilling KYC Requirements.
KYC Requirements differ as per the type of client. Some of them are:
• KYC for Non-Residents
• NRI Demat Account
• NRI Trading Account
•
3. Submitting Duly Filled Application Form
CASE STUDIES
Content of agreement between the portfolio manager and investor: The portfolio manager before taking
up an assignment of management of funds and portfolio on behalf of a client, enters into an agreement in
writing with such client that clearly defines the inter se relationship and sets out their mutual rights,
liabilities, and obligations relating to management of portfolio.
Direct On-boarding in PMS
As per the SEBI circular, Portfolio Managers shall provide an option to clients to be onboarded directly,
without intermediation of persons engaged in distribution services. Portfolio Managers shall prominently
disclose in its disclosure documents, marketing material and on its website, about the option for direct on-
boarding.
Costs, expenses and fees of investing in PMS
• Investment Management and Advisory Fees

• Custodian/Depository Fee
• Registrar And Transfer Agent Fee
• Brokerage and Transactions Costs
• Certification charges, Fund Accounting charges and Professional fee
• Out of Pocket and Other Incidental Expenses
High Water Mark is the highest value that the portfolio/account has reached. The portfolio manager charges
performance based fee only on increase in portfolio value in excess of the previously achieved high water
mark.
Profit sharing/performance related fees are usually charged by portfolio managers upon exceeding a hurdle
rate or benchmark as specified in the agreement.
CHAPTER 9: PORTFOLIO MANAGEMENT PROCESS
Importance of Asset Allocation Decision
Asset allocation is the process of deciding how to distribute an investor’s wealth into different asset classes
for investment purposes. An asset class is defined as a collection of securities that have similar
characteristics, attributes, and risk/return relationships.
Understanding correlation across asset classes and securities
Correlation measures the strength and direction of relationship between two variables. Correlation
coefficient vary in the range −1 to +1. Understanding correlation across asset classes is very crucial in making
asset allocation decision. Correlation is the most relevant factor in reaping the benefits of risk diversification
i.e. in reducing portfolio risk.
CASE STUDIES
Investment Policy Statement (IPS)
Development of Investment Policy Statement (IPS) is the key step in the process of portfolio management.
IPS is the road map that guides the investment process. Either investors or their advisors draft the IPS
specifying their investment objectives, goals, constraints, preferences and risks they are willing to take. All
investment decision are based on IPS considering investors’ goal and objectives, risk appetite etc. Since
investors requirement’s change over a period time, IPS also needs to be updated and revised periodically.
Investment Constraints
• Liquidity Constrains
• Regulatory Constrains
• Tax Constrains
Psychographic analysis of investor
Psychographic analysis of investor bridges the gap between standard finance which treats investors as
rational human beings and behavioral finance which view them as normal human beings who have biases
and make cognitive errors. In other words, psychographic analysis of investor recognizes investors as normal
human beings who are susceptible to biased or irrational behavior.
Lifecycle of investing
• Accumulation Phase
• Consolidation Phase
• Spending Phase
• Gifting Phase
The investment policy statement needs to provide a framework for evaluating the performance of the
portfolio. It will typically include a benchmark portfolio which matches in composition of the investor’s
portfolio.
CASE STUDIES
Asset allocation decision
The asset allocation decision which is made after taking into consideration investor’s characteristics is
strategic asset allocation (SAA). It is the target policy portfolio.
Tactical asset allocation (TAA) is short-term asset allocation decision. These decision are taken more
frequently than SAA. The idea behind TAA is to take the advantage of the opportunities in the financial
markets.
Rebalancing of Portfolio
Portfolio needs to be continuously monitored and periodically rebalanced. The need for rebalancing arises
due to price changes in portfolio holdings. Over time, asset classes produce different returns that can change
the portfolio's asset allocation. To keep the portfolio's original risk-and-return characteristics, the portfolio
may require rebalancing.
CHAPTER 10: PERFORMANCE MEASUREMENT AND

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The main issue in performance measurement and evaluation is the human tendency to focus on the return,
the investment has earned over a period of time with little regard to the risk involved in achieving that return.
Rate of return measures
• Holding Period Return

• Time weighted Rate of Return (TWRR) or Geometric Mean
• Money weighted Rate of return (MWRR)
• Arithmetic Mean Return
• Gross Return
• Net Return
• Compounded Annual Growth Rate
• Annualized Return
• Cash Drag adjusted Return
• Alpha and Beta Return
• Portfolio Return
Students should be aware about how each of the above returns are calculated
CASE STUDIES
Risk measures
Two possible measures of risk have received support in theory to capture total risk: the variance and the
standard deviation of the estimated distribution of expected returns. Whereas downside risk includes
concepts such as semi-variance/standard deviation and target semi variance/standard deviations.
Standard deviation is the square root of variance. It quantifies the degree to which returns fluctuate around
their average. A higher value of standard deviation means higher risk
Semi variance measures the dispersion of the return below the mean return. Target Semi variance measures
the dispersion of the return below the target return. In case of symmetrically distributed return, semi
variance will be proportional to variance and provides no additional insight.
Portfolio risk versus individual risk
Standard deviation or variance of the returns is used as measure of risk. While computing portfolio risk, it is
to be borne in mind that portfolio standard deviation is not the weighted average standard deviation of
individual investments in a portfolio (except when these investments have perfect positive correlation with
each other, which is practically an impossibility). Portfolio risk depends on the weights of the investments,
their individual standard deviations and more importantly the correlation across those investments
Systematic Risk and Unsystematic Risk
Systematic risk is defined as risk due to common risk factors, like interest rates, exchange rates, commodities
prices. It is linked to supply and demand in various marketplaces. All investments get affected by these
common risk factors directly or indirectly.
Systematic risk is measured by Beta. Beta relates the return of a stock or a portfolio to the return on market
index. It reflects the sensitivity of the fund’s return to fluctuations in the market index.
Beta = Cov (MrPr) / Var(Mr)
Tracking error is the standard deviation of the difference between the portfolio and its target benchmark
portfolio total return. Generally indices are used to benchmark portfolios.
Risk-adjusted return
Sharpe Ratio is the portfolio’s return in excess of the risk-free return and divide the excess return by the
portfolio’s standard deviation. This risk adjusted return is called Sharpe ratio. This ratio named after William
Sharpe. It measures Reward to Variability.
The Treynor measure adjusts excess return for systematic risk. It is computed by dividing a portfolio's excess
return, by its beta.
CASE STUDIES
The Sortino Ratio, portfolio’s return in excess of the risk-free return is divided by the portfolio’s semi-
standard deviation. Thus, Sortino Ratio adjusts portfolio’s excess return to the downside risk.
The numerator in the information ratio represents the fund manager’s ability to use his skill and information
to generate a portfolio return that differs from the benchmark. The denominator measures the amount of
residual (unsystematic) risk that the investor incurred in pursuit of those excess returns.
The M2 Ratio is adjusted the risk of the portfolio to match the risk of the market portfolio. For such a risk
adjusted portfolio, they calculated the return, and compared it with the market return to determine
portfolio’s over or underperformance.
Performance attribution analysis
Differential return can achieved by choosing to over-invest in (or overweight) a particular economic sector
that outperformed the total benchmark (sector allocation) for that period or to underinvest in or avoid (or
underweight) an asset category that underperformed the total benchmark (asset allocation).
Differential return can also be achieved by selecting securities that performed well relative to the benchmark
or avoiding benchmark securities that performed relatively poorly.
An Indian investor who buys and sells securities that are denominated in currencies other than the Indian
rupee need to calculate the return after adjusting the fluctuation in Indian rupee against those foreign
currencies, as the return earned on investments denominated in foreign currencies would not be the same
when converted back to rupee term.
CHAPTER 11: TAXATION
Taxation of investors
Income-tax liability of an assessee is calculated on basis of his ‘Total Income’. What is to be included in the
total income of assessee is greatly influenced by his residential status in India and his citizenship is of no
consequence.
The residential status of an Individual as inferred from provisions of Section 6 of the Act can
be categorized into the following categories:
1. Ordinary Resident in India
2. Resident But Not Ordinarily Resident in India
3. Deemed resident
4. Non-Resident
CASE STUDIES
Residential status of a company

• Indian Company
• Foreign Company
Capital Gains
Any profits or gains arising from the transfer of a capital asset is taxable under the head ‘capital gains’ in the
previous year in which such transfer takes place. However, every transfer of a capital asset does not give rise
to taxable capital gains because some transactions are either not treated as ‘transfer’ under Section 47 or
they are excluded from the meaning of a capital asset.
The Indexed Cost of acquisition shall be calculated in a two-step process. The first step is to calculate the
cost of acquisition of capital asset. In the second step, such cost of acquisition is multiplied with the Cost
Inflation Index (CII) of the year in which capital asset is transferred and divided by CII of the year in which
asset is first held by the assessee or CII of 2001- 02, whichever is later.
The income in the nature of dividend on securities is taxable in the hands of the assessee under the head
‘income from other sources’.
The income in the nature of interest on securities is taxable in the hands of the assessee under the head
‘income from other sources’. This income is taxable as other sources if it is not in the nature of business
income.
CHAPTER 12: REGULATORY, GOVERNANCE AND

ETHICAL ASPECTS OF PORTFOLIO MANAGERS
Prevention of Money Laundering Act, 2002
The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place
in India to combat money laundering. The provisions of PMLA came into force on July 1 2005. The objective
CASE STUDIES
of PMLA is, “to prevent money-laundering and to provide for confiscation of property derived from, or
involved in, money-laundering and for matters connected therewith or incidental thereto.”
SEBI (Prohibition of Insider Trading) Regulations 2015
Any dealing/trading done by an insider based on information which is not available in public domain, gives
an undue advantage to insiders and affects market integrity. This is not in line with the principle of fair and
equitable markets. In order to protect integrity of the market, the SEBI (Prohibition of Insider Trading)
Regulations have been put in place.
SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003
SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003
prohibits fraudulent, unfair and manipulative trade practices in securities. Regulation 2(1)(c) defines fraud
as inclusive of any act, expression, omission or concealment committed to induce another person or his
agent to deal in securities.
SEBI (Portfolio Managers) Regulations, 2020

This section gives a summary of the SEBI (Portfolio Managers) Regulations, 2020.
Soft dollar practices
Investment management firms pay commission to brokerage firms for executing trades. Soft dollar
arrangements are the one where investment managers pay a higher commission to the brokerage firm in
lieu of enjoying additional services like access to their research reports, hardware, software or even non-
research-related services, etc.. In portfolio management services, the investor is charged the brokerage fee.
Soft dollar arrangement must be avoided as it is abusive in nature. There should be transparency with regard
to the services availed by the buy side firm such as portfolio manager and the charges paid towards them.
PLEASE SEND YOUR FEEDBACK / QUERIES TO info@pass4sure.in
WE WISH YOU THE BEST FOR YOUR EXAMS
TEAM PASS4SURE
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NISM SERIES XXI A - PORTFOLIO

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NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors Certification

V. IMP CASE STUDIES BASED Q&As

Answer the following questions based on the above data.

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Answer Explanation – Mr. Anil wanted to invest Rs 75 lakhs in 4 stocks equally.

Therefore for each stock, the investment amount is 75 lakhs / 4 = 18,75,000

Shares purchased = 18,75,000 / 300 = 6250

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Total receipt = Sale Value + Dividend Received

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Answer - c – Holding Period Return

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Based on this data, please answer the following questions :

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Sharpe Ratio = Return – Risk Free Return / Standard Deviation

Sharpe Ratio for Asset B = 10 – 5 / 10 = 0.50

Similarly, Sharpe Ratio for Asset C is 12-5/15 = 0.46

Thus, Asset B has the best Sharpe Ratio

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a. Yes, as D has highest standard deviation

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Based on statistical measures such as variance and correlation a single investment's

a. Combining B with C will be suboptimal

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Answer – b - Depending upon the investment objective

EPS = Profit / No. of Shares = 8 crores / 1 crore = 8

Therefore the market price should be Rs 176

So simple return = Net Return / Amount invested x 100

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So the total amount received will be Rs 100 + Rs 75 = Rs 175

This return is for 5 years.

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Rs. 10 lakhs has been invested in bonds at Rs 96 per bond.

Total value = 1466608 + 1020768 = Rs 24,87,376

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Answer - c - The weight of equity will increase at the end of 2 years

Answer Explanation – As calculated in Q 2.3 above, Rs 10 lakhs invested in equities have

Q 3.6 Calculate the Intrinsic Value of the equity share.

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Q 3.7 Calculate the fair value of the bond.

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a. Rs. 5.45 crore

Answer – a – Rs. 5.45 crore

Ans Explanation – Firms similar to Sunshine Metals Ltd have a PE Ratio of 22

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This the discretionary portfolio manager cannot invest in unlisted securities.

a. The benchmark should be investible

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Answer – d – All of the above

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Answer Explanation - As per SEBI - General Responsibilities of a Portfolio Manager :

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Answer Explanation - Profit sharing/performance related fees are usually charged by

Large Cap Large Cap

Sharpe Ratio for Fund A = 9.97 – 5 / 10.26 = 0.4844

Q 5.2 - Rank the funds on the basis of Sharpe Ratio:

a. Rank 1 – Fund A & Rank 2 – Fund B

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Answer – a - Rank 1 – Fund A & Rank 2 – Fund B