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Prema Manoharan

UNIT I :Investment - Meaning and process of Investment Management - Speculation -Investment Avenues in India
UNIT II:Risk and Return Historical and Expected return Measurement Risk and its measurement Systematic and Unsystematic risk Types Measurement and significance of Beta.

UNIT III Security Valuation Bond, Equity and preference share valuation Yield to maturity- Bond value theorems. UNIT IV Fundamental and Technical Analysis Economy, Industry and Company analysis Tools for technical analysis. UNIT V Portfolio Selection, performance evaluation and portfolio revision- Formula plans. Capital Asset Pricing Model (CAPM)

securities ?
security analysis? portfolio?

port folio management?

A security or financial instrument is a tradable asset

of any kind
Financial instruments are tradable assets such as cash,

ownership interest in any asset, contractual rights to receive cash etc

Assets are financial resources for investment

purposes classified as real assets and financial assets

Portfolio Management
Portfolio - collection of loose sheets in a file
In finance it means collection of assets held by an

institution of by an individual Basket of stocks

Portfolio management is the art and science of making

decisions about the mix of investments

What is investment?
Monetary commitment
Sacrifice of present consumption for a return in future Investment is the employment of funds on assets with

the aim of earning income or capital appreciation.

according to the economical view - Net addition made

to the nations capital stock

according to financial view - Allocation of money to

assets that are expected to yield gain in future

Both views are related since individuals savings are

invested in the capital market to be used in economic investment

Return on investment and capital gain - differentiate

Differentiate securities and investment
Differentiate securities and portfolio

Taking up high risk for return in the short span of time Exercise ------------- : Buying a stock for its dividend ----------------: Buying a stock for its anticipated price rise in near future What are the differences between investment and speculation? What are the differences between gambling and speculation?

What is investment management?

the professional asset management of securities

and assets such as real estate to meet specified investment objectives of the investors. Investors may be 1. institutions (insurance companies, pension funds, corporations, charities, educational establishments etc.) 2. private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or exchange-traded funds).

Is there any difference between these terms?
Investment management

Asset management
Portfolio management Wealth management Money management Fund Management

Investment process -meaning

Steps of activities leading to the purchase of securities
the established operating method according to which fund

managers make decisions about which investments to buy and sell.

procedures and may also involve regular meetings of committees that approve each investment.

Investment processes include risk management

Process of investment management - 5 steps

1. 2.

4. 5.

Framing of investment policy Investment analysis Valuation of securities Portfolio construction Portfolio evaluation

Flow chart for investment process

Investment policy analysis valuation Portfolio construction Portfolio evaluation
appraisal diversification

Investible fund


Intrinsic value

revision Investment objectives industry Futuristic value Selection and allocation



investment policy
In the economic point of view: Government regulation that encourages or discourages foreign investment in India
In individual Point of view: An investment policy outlines and prescribes
a prudent and acceptable individualized investment

philosophy sets out the investment management procedures and longterm goals for the investor.

3 constituents of investment policy

Investible funds available through savings or from

borrowings? Investment objectives need for regular income? Risk perception? Required rate of return? Knowledge - about the investment alternatives and market in which investments are made

Investment objectives
Growth and income

accompanied by a conservative level of risk

Other objectives
Major objective:

Increasing the rate of return and reducing the risk Other objectives: 1. Safety of the funds invested within the legal and regulatory frame work 2. Liquidity marketability of the investment 3. Hedge against inflation rate of return should be higher than the rate of inflation

Investors goals and philosophy for investment is based on

-Current liquid and net worth -Risk aversion -Investing time horizon -Income levels -Expense levels -Restrictions on security selection

Need for investment policy

to identify need to take risk based on financial objectives

and income stability. To establish guidelines for investment To create reasonable expectations To create the framework for a well-diversified asset mix to generate acceptable long-term returns at a level of risk suitable to the Investor To describe an appropriate risk posture for the Investors Portfolio To specify the target asset allocation policy; To diversify assets

Security analysis
Market study finding the economic scenario GDP

inflation rate monetary policy capital markets trend (bull or bear) stock price fluctuation in the secondary market is it upward or downwards? Industry analysis economic significance and growth potential of the industry Company analysis - to find the earnings, profitability, operating efficiency, management, capital structure, functioning

1. Intrinsic value actual value of the company with reference to fundamental analysis with out reference to the market value
This value may or may not be the same as the current

market value. 2. Future value is the value of an asset at a specific date

Portfolio construction
Diversification - reducing risk by investing in a variety of assets

1. Selection - Determining the Appropriate Asset Allocation Ascertaining individual financial situation and investment goals is the first task in constructing a portfolio. Age, attitude etc also play role A second factor to take into account is personality and risk tolerance. 2: allocation - Achieving the Portfolio Designed in Step 1
to divide your capital between the appropriate asset classes

(Equities & bonds) as already determined.

further break down the different asset classes into subclasses,

which also have different risks and potential returns.

Portfolio evaluation
Appraisal measuring the risk and return of the portfolio

assets and comparing with the market To assess the portfolio's actual asset allocation, quantitatively categorize the investments and determine their values' proportion to the whole.
Revision -analyze and rebalance the portfolio

periodically because there are factors such as market movements, current financial situation, future needs and risk tolerance are likely to change over time.

Exercise: 1. What is Risk return trade-off ? 2. Conservative Vs. Aggressive Investors

Some terms related to diversification of assets in portfolio

Stock Picking - Choose stocks that satisfy the level of risk you want to carry in the equity portion of your portfolio sector, market cap and stock type are factors to consider. Analyze the companies using stock screeners to shortlist potential picks, than carry out more in-depth analyses on each potential purchase to determine its opportunities and risks going forward. This is the most work-intensive means of adding securities to your portfolio, and requires you to regularly monitor price changes in your holdings and stay current on company and industry news. Bond Picking - When choosing bonds, there are several factors to consider including the coupon, maturity, the bond type and rating, as well as the general interest rate environment. Mutual Funds - Mutual funds are available for a wide range of asset classes and allow you to hold stocks and bonds that are professionally researched and picked by fund managers. Of course, fund managers charge a fee for their services, which will detract from your returns.Index funds present another choice; they tend to have lower fees because they mirror an established index and are thus passively managed. Exchange-Traded Funds (ETFs) - If you prefer not to invest with mutual funds, ETFs can be a viable alternative. You can basically think of ETFs as mutual funds that trade like stocks. ETFs are similar to mutual funds in that they represent a large basket of stocks - usually grouped by sector, capitalization, country and the like - except that they are not actively managed, but instead track a chosen index or other basket of stocks. Because they are passively managed, ETFs offer cost savings over mutual funds while providing diversification. ETFs also cover a wide range of asset classes and can be a useful tool for rounding out your portfolio.