Module 2

SAPM
AKHIL SWAMI
• Descriptors/Topics: Risk and Return – Measuring
Historical Return, Measuring Historical Risk,
Measuring Expected (Ex Ante) Return and Risk.
• Fundamental Analysis: Economic Analysis, Industry
Analysis , Company Analysis Framework
• Technical Analysis : Basic Tenets of Technical Analysis
- Dow Theory - Behavior of Stock Prices - Major
Trends - Charts and Trend Lines - Resistance and
support Lines - Different Patterns, Elliot Wave
Theory, Efficient market theory.
 RISK AND RETURN
• Risk is inherent in investment
• Risk is theoretically as the fluctuation in return
from a security. A security that yields
consistently returns over a period of time is
termed riskless security or risk free security.
• There are risk taking investors and risk
avoiding investors.
 Sources of risks

• Business risk
• Market risk
• Interest rate risk
• Inflation risk
• Currency risk
• Political risk
• Systematic risk
• Unsystematic risk
 beta
• Beta is a measure used in fundamental
analysis to determine the volatility of an asset
or portfolio in relation to the overall market.
To calculate the beta of a security, the
covariance between the return of the security
and the return of market must be known, as
well as the variance of the market returns.
 an investor wants to calculate the beta of stock
A, when compared to the SENSEX. Based on
data over the past five years, the correlation
between A and SENSEX is 0.83. Ahas a standard
deviation of returns of 23.42% and SENSEX has
a standard deviation of returns of 32.21%.
THEN THE beta will be Beta of A = 0.83 x (0.2342
÷ 0.3221) = 0.6035, so the stock is less volatile
than the sensex
• For another example, assume the investor also
wants to calculate the beta of stock B in
comparison to the SENSEX . Based on data
over the past five years, B and SENSEX have a
covariance of 0.032 and the variance of SPY is
0.015.

• THEN THE BETA WILL BE Beta of TSLA =0.032 ÷

0.015 = 2.13, THIS STOCK IS HIGHLY VOLATILE
 Some characteristics of investments
• The higher the expected rate of return, the
greater is the risk
• Some investments cannot be converted readily
into cash , or they involve a penalty for doing so.
• Investments in securities issued by a company
with no history or not listed company may carry
higher risk
• MF cannot be legally insured against a loss in
the market value.
• Return from Investment is securities is not
only dependent on the performance of the
company but so many other factors that
influence it.
• Timing of the market is also very important for
making money in the investment.
• The past performance is no guarantee for
future returns
 Fundamental analysis

• For stocks and equity instruments, this

method uses revenues, earnings, future
growth, return on equity, profit margins and
other data to determine a company's
underlying value and potential for future
growth. In terms of stocks, fundamental
analysis focuses on the financial statements of
the company being evaluated.
• It believes that the fundamentals of the
company will be realized sooner than later
and true value will be understood by the
market and price will follow value.
• difference between price and value.
• EIC analysis is the backbone of fundamental
analysis
• Economic analysis aims at determining
whether the economic climate is conducive
and is capable of encouraging the growth of
the business sector , especially the capital
market.
• Aggressive sectors and defensive sectors and
their correlation with economy.
• A discussion on performance of a macro economy
usually has 2 components.
• 1. the national economy
• 2. the effect of the international economy on the
national economy.
• The interaction of other economies with the
domestic economy also has a large influence on a
nations economic growth.
• Open economy will be more effected by
international factors than closed economy.
 Tools for economic analysis
• GDP
• Monetary policy and liquidity
• Inflation
• Interest rates
• International influences
• Consumer sentiment
• Fiscal policy
• Input factors to growth
• Business confidence
• Employment opportunities
• Economic analysis and international investment
• Opportunities to the international investors
 Industry analysis
• Product lines
• Complimentary products
• Product growth
• Seasonal or cyclic
• Technology of product and distribution
• Economies of scale
• Economies of scope
• suppliers
• Employment data
• Market segmentation
• Distribution channels
• Raw material sources
• Raw material rate
• Buyers and their behavior
• Substitute products
• Product rate
• Determinants of product success
• Cost structure
• Value additions
• Logistics
• Marketing and selling
• Marketing practices
• Innovation
• Social , political and legal environment
• Trade cycle
 Company analysis
• Porters model
• Entry barriers-----economies of scale, brand
identity, capital requirement, absolute cost
advantage, government policy, product
differences, switching costs, access to
distribution, access to necessary inputs
 Substitute products
• Relative price performance of substitute
products
• Switching costs
• Customer propensity to switch
 Supplier power
• Differentiation of inputs
• Switching costs of suppliers
• Presence of substitute inputs
• Supplier concentration
• Importance of volume to suppliers
• Cost relative to total purchase
• Cost differential of input quality differentiation
• Threat of backward integaration
 Basics of fundamental analysis
• • Is the company’s revenue growing?
• • Is it actually making a profit?
• • Is it in a strong-enough position to beat out
its competitors in the future?
• • Is it able to repay its debts?
• • Is management trying to "cook the b
 Return on assets
• ROA=(net profit/total income)x(total
income /total assets)
• With a successful product differentiation
strategy, ROA will rise because a rising profit
margin.
 Return on investment
(net profit /equity investments)x100,
owners equity+ free reserves
Earning per share =net profit/number of shares
outstanding
Diluted EPS-when you take care of the expected
outstanding shares( that will be converted at a
later date)
Dividend per share-=total dividend
payment/number of shares outstanding
• Payout ratio=(dividend per share/EPS)X100
• PRICE EARNING RATIO-current market price
/EPS
• BOOK VALUE PER SHARE=(total assets-
intangible assets)/number of shares
• Price to sales turnover ratio
 Intrinsic value of a stock
• Before we get any further, we have to address
the subject of intrinsic value. One of the
primary assumptions of fundamental analysis
is that the price on the stock market does not
fully reflect a stock’s “real” value. After all,
why would you be doing price analysis if the
stock market were always correct? In financial
jargon, this true value is known as the intrinsic
value.
• Growth stock
• Value stack
• Momentum stock
 Technical analysis
• Market action discounts everything
• Prices move in trends
• History tends to repeat itself
• Investors have used price charts and price
patterns as tools for predicting future price
movements for as long as there have been
financial markets. The first studies of market
efficiency focused on the relationship
between price changes over time to see if in
fact such predictions were feasible.
• Evidence can be classified into three classes

• Studies that looks at the

• really short term
• (hourly, daily) price behavior

• studies that focus on

• short-term
• (weekly, monthly price movements) price
• behavior and
• Defensive stocks and aggressive stocks
• Short –long
• Short covering-long unwinding
• Support level –resistance level
• Moving averages
• Market breadth
• Volume indicators
• Market thickness
• Charts---M /W
• Trianges
Candlestick pattern