Security Analysis and Portfolio

Management
 Unit I
• Investment – Meaning, Nature and Scope
• Investment Decision Process
• Environment
• Investment Risks – Interest risk, Inflation risk…
• Valuation of Securities
• Notion of Dominance
 Unit II
• Techniques of Risk Measurement and their
application
• Concept of Beta
• Classification of Beta
• SML Vs CML
• Portfolio Revision
• Portfolio Reconstruction
 Unit III
• Security Analysis :
Fundamental Analysis – EIC
Technical Analysis
Efficient Market Hypothesis
• Dow Jones Theory
• Measurement of Systematic and Unsystematic
risk
 Unit IV
• Portfolio Analysis: Portfolio selection and
theories
1. Markowitz Model
2. CAPM
• Portfolio Revision and Performance Evaluation
of Managed Portfolios :
1. Sharpe Ratio
2. Treynor Ratio
3. Jensen’s Alpha
 Investment
• Movement of funds from Surplus Sector to
Deficit Sector
• When a person has more money than he
requires for current consumption, he would
be a potential investor.
• Definition: “The process of sacrificing
something now for the purpose of gaining
something later.”
 Dimensions of Investment
• Sacrifice – Today
• Gain – Later
• Time
 Different views..
• Layman – Monetary Commitment
• Economist – Net Addition made to the nation’s
capital stock that consists of goods and
services that are used in the production
process.
• Financial investment is the allocation of
money to assets that are expected to yield
some gain over a period of time.
 Features of Investment
• Return
• Risk
• Time Period
• Liquidity / Marketability
• Safety
 Objectives of Investment
• Maximization of Return
1. Annual Income (Dividend, Interest etc)
2. Capital Appreciation
• Minimization of Risk
• Liquidity
• Hedge against Inflation
• Tax Considerations
 Other…
• Near-Term High Priority Goals
• Long-Term High Priority Goals
• Low Priority Goals
• Entrepreneurial or Money - Making Goals
 Features of an Ideal Investment
• Safety
• Liquidity
• Regularity and Stability of Income
• Stability of Purchasing Power
• Capital Appreciation
• Tax Benefits
• Legality
 Types of Investors
• Individuals
• Institutions
1. Insurance Companies
2. Mutual Funds
3. Banks
4. FII
 Investment Constraints
• Risk Tolerability
• Liquidity / Marketability
• Investors Age
• Need for Regular Income
• Tax Liability / Exemption
 Errors While Investing
• Inadequate comprehension of return and risk.
• Vaguely formulated investment policy.
• Naive extrapolation of the past.
• Cursory decision-making.
• Simultaneous Switching
• Misplaced love for cheap stocks.
• Over diversification and under-diversification.
• Buying shares of familiar companies
• Wrong attitude toward losses and profits.
• Tendency to speculate.
 Investment vs. Speculation
Basis Investment
1. Time Horizon Plans for a longer time
horizon
2. Holding Period From 1 year to few years
3. Risk Assumes moderate risk
4. Return Likes to have moderate rate
of return
5. Decision Basis Considers fundamental
factors and evaluates the
performance of the
company regularly
6. Funds / Leverage Uses his own funds and
avoids borrowed funds
Speculation
Plans for a very short period
Varies from few days to
months
Willing to undertake high
risk
Likes to have high rate of
return
Considers inside
information, hearsays and
market behavior
Relies on borrowed funds to
supplement his personal
resources
 Investment vs. Gambling
• Gambling is a very short term investment in a game.
• Time horizon is shortest.
• Results are determined by the roll of dice or turn of a
card.
• Entertainment is primary, Earning income is secondary.
• Employs artificial risks while investment involves
commercial risk.
• No risk-return trade-off; Negative outcomes are
expected.
• Financial analysis does not reduce the risk proportion
involved in gambling
Approaches to Investment Decision Making

• Fundamental Approach
• Psychological Approach
• Academic Approach
• Eclectic Approach
 Fundamental Approach
• Most commonly advocated.
• There is an intrinsic value of a security and this
depends upon the underlying fundamental factors.
• Intrinsic value is based on EIC analysis.
• At any given point of time, there are some securities
for which the prevailing market price would differ
from the intrinsic value.
• Sooner or later, the market price would fall in line
with the intrinsic value.
• Superior returns can be earned by buying under-
valued securities & selling over-valued securities.
 Psychological Approach
• Stock prices are guided by emotions rather than
reason.
• Prices are influenced by the psychological mood of the
investors.
• Investors use some form of technical analysis with a
view to develop trading rules aimed at profit making.
• Based on certain persistent and recurring patterns of
price movements.
• Uses a variety of tools like bar chart, point and figure
chart, moving averages analysis etc…
 Academic Approach
• Believes that stock markets are reasonable
efficient in reacting quickly and rationally to the
flow of information.
• Stock prices reflect intrinsic value very well.
• Prices behavior corresponds to random walk.
Successive price changes are independent.
• There is a positive relationship between risk and
return.
• Expected return from a security is linearly related
to its systematic risk.
 Eclectic Approach
• Based on all the three different approaches.
• Fundamental approach is helpful in
establishing basic standards and benchmarks.
• Technical analysis is useful in broadly gauging
the prevailing mood of the investors.
• Despite many instances of misprices
securities, there appears to be a fairly strong
correlation between risk and return.
 Investment Process

Investment Portfolio Portfolio

Analysis Valuation
Policy Construction Evaluation
Sources of Investment Information
• International Affairs
• National Affairs
• Industry Information
• Company Information
• Stock Market Information