Dayananda Sagar Academy of Technology & Management

Department of Management Studies

MBA- THIRD SEMESTER ( Batch of 2022-2024)

Course Code: 22MBAFM304

Course Title: Security Analysis of Portfolio Management

Faculty Instructor: Dr. Praveen Kumar Sinha

Email ID: Praveen-mba@dsatm.edu.in

1
Objective

Return and Risk Concepts: Concept of Risk, Causes of Risk,

Types of Risk- Systematic risk- Market Price Risk, Interest Rate Risk,
Purchasing Power Risk, Unsystematic Risk- Business risk, Financial Risk,
Insolvency Risk, Risk-Return Relationship, Concept of diversifiable risk
and non- diversifiable risk. Calculation of Return and Risk of Individual
Security & Portfolio (Theory & Problems).
Risk

• Risk refers to the possibility that the actual outcome of an

investment will differ from its expected outcome.
• More specifically, most investors are concerned about the
actual outcome being less than the expected outcome.
• The wider the range of possible outcomes, the greater the
risk.
 Types of risks

A. Systematic risk: it is caused by factors external to the particular

company and uncontrollable by the company. The systematic risk
affects the market as a whole. This indicates that the entire market is
moving in a particular direction either downward and upward. The
economic conditions, political situations and the sociological changes
affect the security market. The systematic risk is divided into:
a) Market risk: it is defined as that portion of total variability of return caused by
the alternating forces of bull and bear markets.
b) Interest rate risk: it is the variation in the single period rates of return caused
by the fluctuations in the market interest rate. It affects the price of bonds,
debentures and stocks. The fluctuations in the interest rate are caused by the
changes in the government monetary policy ad the changes that occur in the
interest rate of the treasury bills and the government bonds.
c) Purchasing power risk: variations in the returns are caused by the loss of
purchasing power of currency. Inflation is the reason behind the loss of
purchasing power. The rise in prices penalizes the returns to the investors and
every potential rise is a risk to the investor.
Factors affecting the systematic risk
• Economic factor
• Political and social conditions
• Forces of Bulls/Bears affect market risk
• Fluctuations in the market interest rate
• Government policies
B. Unsystematic risk: The factors are specific and unique and related to
particular firm. It stems from managerial inefficiency, technological
change in process, availability of raw material, changes in consumer
preferences and labour problems. It can be classified into :
a) Business risk: it arises from inability of a firm to maintain its competitive
edge and the growth or stability of the earnings.
b) Financial risk: it is associated with the capital structure of a company. A
company with no debt financing has no financing risk. Higher the financial
leverages, higher the financial risk. It may also arises due to short term
liquidity problems, shortage in working capital due to funds tied in working
capital and receivables etc.
c) Default risk: These arise due to default in meeting the financial obligations
on time. Non-payment of financial dues on time increases the insolvency
and bankruptcy costs.
Factors affecting Unsystematic risk
• Technological change
• Changes in consumer habits
• Non availability of raw materials
• Sales fluctuations, Lack of R&D
• Lockouts, high fixed cost
• Heavy debt/loans funds with high interest costs affecting return on investment
Statistical Tools to Measure Risk

• Statistical tools such as measures of dispersion can be used to evaluate the risk associated with returns from the project
or investment.
• Measures of deviation include variance and standard deviation.
• Beta is the measure of non diversifiable risk. It measures the sensitivity of the security with reference to a broad market
index like BSE, NIFTY.
Measurement of Expected Return & SD