Solved Assignment July- Dec 2016 MS-44 (Sample Copy)

Course Code MS-44 Course Title Security Analysis and Portfolio Management Assignment Code MS-44/ SEM - II/2016 Assignment Coverage All Blocks

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1. Define Investment. Discuss the effect of changes in investment environment on investment decisions. Explain the various types of risks involved in investment.

Investment is the commitment of --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- of the instrument. Investment is related to saving or deferring consumption. Meaning of Investment: An investment involves the choice by an individual ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------has certain level of risk and provides the possibility of generating returns over a period of time. When an asset is bought or a given ------------------------------------------------------------------------------- is anticipation that some return will be received from the investment in the future. Definition ------------------------------------------- Perspectives: Investment is a term frequently used in the ----------------------------------------------------------------------------------------------------------------------------------------- can be divided into different types according to various theories and principles. While dealing with the various ------------------------------------------------ of investment need to be kept in mind.

Investment -------------------------------------- Economics: According to economic theories, investment is ------------------------------------------------------------------------------------------------------------------------------- consumed, but will however, be used for the purpose of future production. Examples of this type of ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- and intangible goods like 6 months of on-the-job training.

Investment ---------------------------------------------------------- Management: According to business management theories, investment ------------------------------------------------------------------------------------------------------------------------------- is also known as capital budgeting decision, which is regarded as one of the key decisions.

Investment in terms of Finance: In finance, investment --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- liquidity. Some examples are gold, silver, real properties, and precious items.

Investment in terms of Personal Finance: According to personal finance theories, an investment is the ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ or assets with capital risk.

Investment in terms of Real Estate: According to real estate theories, investment ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- or leasing. This also involves capital risk.

o COMMERCIAL REAL ESTATE: Commercial ---------------------------------------------------------------------------------------------------------------------------- for commercial purposes such as renting.

o RESIDENTIAL REAL ESTATE: This is ------------------------------------------------------------------------------------------------------------------------------------------- buying houses as real estate properties.

Effect of changes in investment environment on investment decisions-

An understanding of the operational details of the ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------constituted authority. Then there are securities or financial instruments which are the objects of purchase and sale.

Finally, the mechanism, which expedites transfers from one owner to another, comprises a host of intermediaries. All these elements comprise ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- optimal investment decisions.

Discussion in the ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- environment viz., instruments, institutions, and markets:

1. Financial Instruments-

Financial assets or instruments can be -----------------------------------------------------------------------------------------------------------------------------. The description will then be split into public and private issues differentiating the two major forms of issuance.

Creditorship Securities - Debt instruments furnish ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------bond/debenture may receive an interest at 6 per cent for one year in one of the following ways:

a) he pays Rs. ------------------------------------------------------------------------------------- Rs. 106 at the end of one year, or

b) he pays Rs. 94:30 at the ------------------------------------------------------------------------------------------------------------------------------ that is equal to the difference between Rs. 100 (redemption price) and Rs. 94.30 (issue price).

Debt instruments can be issued by public bodies and governments and also by private business firms.

Public Debt Instruments: Government issues debt instruments for long and short periods. They are rated the best in terms of quality and are risk-free. A common term used to designate them is 'gilt-edged-securities'. The 182-day treasury bills issued by

the Government of India are examples of ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------. Such debt instruments are usually over-subscribed. You can refer money market page of any one of the financial dailies, where you can find the list of short-term and

long-term securities that were bought and sold on a particular day.

Private Debt Instruments: These are issued by private business firms, which are incorporated as companies under the Companies Act, 1956. Generally these instruments ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------. There may be a series of conversions and conversion price may differ from period to period.

Special Debt Instruments : With a view to mop up resources and innovating the spectrum of debt-instruments, two new debt instruments deserve a special mention viz., Public Sector Undertaking (PSU) Bonds (long-term) and Certificate of Deposit (short-term).

Ownership Securities: These instruments are ---------------------------------------------------------------------------------------------------------------- or directly or even through a hybrid instrument known as preference shares. They are discussed in this order.

Indirect Equities: The investor acquires special ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------bought from and sold to the institution at sale and repurchase prices announced from time to time (on a daily basis).

Direct Equities: The investor can subscribe directly ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ not pay any cash consideration as happens in the case of `right shares'.

2. Financial Intermediaries-

Financial intermediaries perform the intermediation function i.e., they bring the users of funds and the suppliers of funds together. Many of them issue financial claims against themselves and use cash proceeds to purchase the financial assets of others. The Unit Trust of India and other mutual funds belong to this category.

Most financial institutions underwrite issues of ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------issues require no underwriting, underwriters are not willing to underwrite bad issues.

The financial institutions engaged in intermediary activities ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------of India Ltd., (CRIS1L) and other credit rating agencies, and the Stockholding Corporation of India Ltd. (SHCIL).

The SHCIL was sponsored by IDBI, IFCI, ICICI, UTI, LIC, GIC and ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------, SHCII has now extended its operations to GIC, LIC mutual fund, and New India Assurance Co. Ltd.

3. Financial Markets

Securities markets can be seen as primary and secondary. The primary market or the new issues market is an informal forum with national and even international boundaries. Anybody who has funds and the inclination to invest in securities would be considered a part of this market. Individuals, trusts, banks, mutual ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------because this contains all material information on the basis of which the investor would form judgement to put or not to put his money. Concealment and misrepresentations in these documents have serious legal implications including the annulment of the issue.

Some companies would use the primary market by using their `in house' skill but most of them would employ brokers, broking and underwriting firms, issue managers, lead managers for planning and monitoring the new issue. New guidelines issued by the Securities & Exchange Board of India (SEBI), now, require the compulsory appointment of a registered merchant banker as issue manager where the amount of the capital issue exceeds Rs.50 lakhs. Secondary markets or stock exchanges are set up ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------on the trading floor within official working hours under the open bid system.

Today, all exchanges in India have introduced screen-based trading where the members of the exchange transact the business (purchase and sale of ------------------------------------------------------------------------------------------------------------------------------------------in advance and members are obligated to follow them. Arbitration procedures exist for the resolution of disputes.

The regulatory mechanism relating to capital ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------and periodically submit the reports on their operations.

Types of risks involved in investment-

Interest Rate Risk- Interest rate -------------------------------------------------------------------------------------------------------------- offer a fixed rate of return, they are exposing themselves to interest rate risk. This is true for bonds and also for preferred stocks.

Business Risk- Business risk is the --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Generally speaking, all businesses in the same industry have similar types of business risk. But used more specifically, business risk refers to the possibility that the issuer of astock or a bond may go bankrupt or be unable to pay the interest or principal in the case of bonds. A common way to avoid unsystematic risk is to diversify - that is, to buy mutual funds, which hold the securities of many different companies.

Credit Risk - This refers to the ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- the higher the credit risk, the higher the interest rate on the bond.

Taxability Risk - This applies to municipal ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- maturity. Since municipal bonds carry a lower interest rate than fully taxable bonds, the bond holders would end up with a lower after-tax yield than originally planned.

Call Risk - Call risk is specific to bond issues and ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------coupons and replace them on the bond market with issues with lower interest rates. In a declining interest rate environment, the investor is usually forced to take on more risk in order to replace the same income stream.

Inflationary Risk - Also known as purchasing ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------a growth component that stays ahead of inflation over the long term. Liquidity Risk - Liquidity risk refers to the --------------------------------------------------------------------------------------------------------------------------------------------------- are limited. A good example of liquidity risk is selling real estate. In most cases, it will be difficult to sell a property at any given moment should the need arise, unlike government securities or blue chip stocks. Market Risk - Market risk, also called ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- they are a quick way to diversify. You must always ask yourself what kind of diversification your client needs. Reinvestment Risk - In a declining interest rate ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------when its principal and interest payments are reinvested at lower rates. Social/Political / legislative Risk - Risk --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- or political risk. Because the U.S. Congress has the power to change laws affecting securities, any ruling that results in adverse consequences is also known as legislative risk. Currency/Exchange Rate Risk - Currency or exchange ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ currency in which an investment is denominated vis-à-vis one's home currency may add risk to the value of a security.

2. (a) What is 'Primary Market’? Discus the important developments that have taken place in Indian primary market. .

Primary Market also called the New Issue Market, is the ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------such as stocks and bonds in order to raise money for their operations such as business expansion, modernization and so on.

They sell their securities to the public through an Initial Public Offering (IPO). The securities can be directly bought from the shareholders, which is not the case for the secondary market. The primary market is a market for new capital that will be traded over a longer period. Here the securities are issued on an exchange basis.

A primary market is not inclusive of sources, --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------, companies can also go public, which means changing private capital to public capital.

Many companies have entered the primary market to earn profit by converting their capital, which is basically a private capital, into a public one, ------------------------------------------------------------------------- as “public issue” or “going public”.

Primary --------------------------------------------------:

Investment banks are the main ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- sale and then administer the entire process of its sale to the investors.

The underwriters also play the ------------------------------------------------------------------------- that are offering the shares for sale.

Primary Market Processes:

Primary markets are basically the platform --------------------------------------------------------------------------------------------------------------------------------------------- company that issues the security gets the money by selling a certain amount of securities.

Normally, the entire process of --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- to be properly adhered to before a security can change hands.

IPO or Initial Public ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- an organization announces the sale of its securities at a certain starting price.

Investors can obtain news of ------------------------------------------------------------------------------------------------------------------------------------------------------------------ on the primary market, the firm must fulfill all the requirements regarding the exchange.

After trading in the primary --------------------------------------------------------------------------------------------------------------------------------------------------------- every day. The primary market accelerates the process of capital formation in a country’s economy.

Experts have said that -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- an important source of revenue generation for investment banks.

Developments that have --------------------------------------- Indian primary market-

Average annual capital mobilisation from ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- the amount raised in 1990-91 being Rs. 4,312 crore. It received a further boost during the 1990s with the capital raised by non-government public companies.

There is a preference for raising resources in -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------and deregulation of the economy are driving growth of this segment.

While there was a sharp increase in market capitalisation as a percentage of GDP during the 1990s, the share of capital issues to GDP, a measure of resource mobilisation by the capital markets, followed an inverted curve during the 1990s.

In fact, public capital issues by non------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ per cent during 1992-97 and 0.7 per cent during the 1980s.

The first steps in development of the debt market have been taken through development of the government securities market. The issue of government bonds through auction and their active trading by banks has led to the emergence of a sovereign yield curve.

Steps have also been taken, though still in their ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------term funds for financing their growth.

Although the Indian capital market has grown in size and depth in the post reform period, the magnitude of activities is still negligible compared to those prevalent internationally? India accounted for 0.40 per cent in terms of market capitalisation and 0.59 per cent in terms of global turnover in the equity market in 2001.

Investor interest in the publ--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------increased sharply to Rs. 19,666 crore from 56 issues as compared with Rs. 7,190 crore from 35 issues during 2003-04.

Public issues by six companies, viz. ICICI Bank --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------, together accounted for 72.9 per cent of total resource mobilisation.

Indian companies raised Rs. 3,353 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------registered a sharp increase.

The primary market for equity, which consists --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------companies which were listed for the first time (IPOs).

The primary capital market grew in 2006 and 2007 after the set back of 2005. The amounts raised and the number of new issues which entered the market increased in 2007.

The total amount of capital raised through -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------wise, private placement at Rs. 1,11,838 crore (up to November 2007) accounted for the major share during 2007.

The total equity issues mobilized Was Rs. 58,722 crore, of which Rs. 33,912 crore was accounted for by the Initial Public Offerings (IPOs). During 2007, the total number of IPOs issued was 100 as compared to 75 in the previous year.

In line with the rising trend in resources raised --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------mutual funds to introduce innovative schemes.

Financial intermediaries (both from public sector and private sector) accounted for the bulk (68.3 per cent) of the total resource mobilisation from the private placement market during April-December 2007 (69.0 per cent during April-December 2006).

Resources raised through public issue grew by 74 per cent to Rs.51,806 crore whereas, resources mobilised from rights issue increased ten folds to Rs.26,202 crore. Total domestic flotation of shares increased to Rs.1,28,924 crore from Rs.77,734 crore.

Furthermore, all the issues during 2008------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Rs.703.4 crore during 2007-08 to Rs.326.0 crore during 2008-09.

(b) What do you understand by Initial Public Offer (I.P.O.)? Who are allowed to make an I.P.O.?Discuss the salient features of the SEBI guidelines on I.P.O.

Initial public offering (IPO) or stock market launch is a type of ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- and to become publicly traded enterprises.

A company selling shares is never required to repay the capital to its public investors. After the IPO, when shares trade freely in the open market, money passes between public investors. Although IPO offers many advantages, there are also significant disadvantages, chief among these ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ disclose certain information that could prove helpful to competitors. The IPO process is colloquially known as going public.

Details of the proposed offering are disclosed to potential purchasers in the form of a lengthy document known as a prospectus. Most companies undertake an IPO with the assistance ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------. China has recently emerged as a major IPO market, with several of the largest IPOs taking place in that country.

An IPO accords several benefits to the previously private company:

Enlarging and diversifying ------------------------------------------------------ Increasing ------------------------------------------------, and public image Attracting and --------------------------------------------------- participation Facilitating ------------------------------------------------------------ for shares of stock) Creating multiple --------------------------------------------------- convertible debt, cheaper bank loans, etc.

Eligibility for an IPO

An Indian Company is allowed to make an IPO if:

1. The company has ------------------------------------------------------------------------------------------ preceding 5 years;

2. A public financial institution or scheduled commercial bank has appraised the project to be financed through the proposed offer and the appraising agency ----------------------------------------------------------------------------------------------------------------------------- shares at par, while the companies with a track record can issue shares at a premium.

SEBI Guidelines for IPO’s

For complete details of SEBI guidelines on IPO, you have to visit www.sebi.gov.in, where you can download the complete guideline on Disclosure and Investor Protection) Guidelines, 2002. The salient features of these guidelines are given below:

1. Promoters should ------------------------------------------------------------------------------------------------------------------------------------------------ unlisted one. Promoter's contribution is subject to a lock-in period of 3 years.

2. Net Offer to the General --------------------------------------------------------------- listing on a Stock Exchange.

3. Minimum of -------------------------------------------------------------- for 10 or less than 10 marketable lots of shares.

4. In an Issue of more ------------------------------------------------------------------------------------------------- book-building.

5. There ----------------------------------------------------------------------------------------------- of equity offered.

6. Allotment has to ----------------------------------------------------------------------------------- in case of a Rights Issue.

7. All the listing --------------------------------------------------------------------------------------------- of the subscription list.

8. Indian Development Financial -------------------------------------------------------------------------- of the Issue Amount.

9. Allotment to categories ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- by a resolution passed in the General Meeting.

10. 10% individual ceiling ----------------------------------------------------------------------- of the promoting companies

11. Securities issued to the ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Indian and Multilateral Development Financial Institutions and Indian Mutual Funds are not subject to Lock-in periods.

12. The minimum period for ------------------------------------------------------------------------------------------------------------------------------------------------------------------- Issue is 15 working days and the maximum is 60 working days.

13. A public issue is effected if the --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Issue which is referred to as the `green-shoe' option.

14. A Rights Issue has to ------------------------------------------------------------------------------------ of the opening of the Issue.

3. (a) Critically evaluate the fundamental analysis. How is it useful to a prospective investor?

Fundamental analysis is a stock valuation method that uses financial and economic analysis to predict the movement of stock prices. The fundamental information that is ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- information such as estimates of the growth of demand for products sold by the company, industry comparisons, and economy-wide changes, changes in government policies etc..

Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, liabilities, and earnings); health, ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------analysis. The terms are used to distinguish such analysis from other types of investment analysis, such as quantitative and technical.

Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives:

To conduct a ---------------------------------------------- price evolution; To make a -------------------------------------------------- performance; To evaluate -------------------------------------------- business decisions; And----------------------------------------------------- credit risk. To find ---------------------------------------------------- of the share.

When the objective of the analysis is to determine what stock to buy and at what price, there are two basic methodologies investors rely upon:

1. Fundamental analysis maintains -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- by purchasing the mispriced security and then waiting for the market to recognize its "mistake" and reprice the security.

2. Technical analysis maintains -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------. Technical analysts also analyze historical trends to predict future price movement.

Investors can use one or both of these --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- points. Similarly, many technical investors use fundamentals to limit their universe of possible stock to 'good' companies.

The choice of stock analysis is ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------for explanations of these paradigms.

Fundamental analysis includes:

1. Economic -------------------------------------- 2. ----------------------------------- analysis 3. Company ----------------------------------

The intrinsic value of the shares is ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------market price, then one should sell the shares.

Investors may also use fundamental analysis within different portfolio management styles.

Buy and hold investors believe -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------, so they lower their risk and probability of wipe-out.

Value investors restrict their -------------------------------------------------------------------------------------------------------------------------------------------------------------------. The values they follow come from fundamental analysis.

Managers may use ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ price will eventually fluctuate, creating opportunities for profit.

Managers may also consider ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- to buy fundamentally suitable companies.

Contrarian investors hold that -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- on value, while ignoring the opinions of the market.

In addition, managers --------------------------------------------------------------------------------------------------------------------------------------------------------------------- high priced growth stocks.

Lastly, managers may ------------------------------------------------------------- in computer models (quantitative analysis).

Investors using fundamental analysis can use either a top-down or bottom-up approach.

The top-down investor starts their ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------analysis of total sales, price levels, the effects of competing products, foreign competition, and entry or exit from the industry. Only then do they refine their search to the best business in the area being studied.

The bottom-up investor -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------, and proceeds in reverse of the top-down approach.

Fundamental analysis is a method that is used by many different types of investors in various situations. Here are some of the uses of fundamental analysis.

1. Buy and Hold

One of the most common investment strategies ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------analysis can give you an indication of this information.

2. Valuing Good Companies

This type of analysis can also help you evaluate which companies are good investments and which ones are not. For example, you will be able to look at ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- and the debt load of a company to gauge how healthy the company actually is.

3. Value Investors

Value investors regularly utilize ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------statements to see if they are valued correctly.

(b) What are the various techniques of technical analysis? Explain the various challenges to technical analysis.

Technical analysis is a method to predict the future ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------. The data and analysis using several parameters are then used to take a call on future prices of securities.

Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, business cycles, stock market cycles or, classically, through recognition of chart patterns.

Technical analysis stands in ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------group, or financial institutions will typically have both a technical analysis and fundamental analysis team.

Some Techniques Used in Technical Analysis-

1. Simple Moving Averages (SMA) A simple --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-----. For example: A 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5.

The calculation is repeated for each price ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------simple moving average would be calculated as follows:

Over the last --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------and the moving average will continue to move over time.

2. Exponential --------------------------------------------

In order to reduce the lag in simple moving averages, technicians often use exponential moving averages (also called exponentially weighted moving averages). EMAs reduce the lag by applying more weight to recent prices relative to older prices. The weighting applied to the most recent price depends on the specified period of the moving average.

The shorter the EMA's period, the more weight that will be applied to the most recent price. For example: A 10-period ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------to recent price changes than a simple moving average. Here's the calculation formula.

EMA(current) = ( (Price(current) - EMA(prev) ) x Multiplier) + EMA(prev)

For a percentage---------------------------------------------------------------------------------- specified percentage.

For a period-based EMA, "Multiplier" is equal to 2 / (1 + N) where N is the specified number of periods.

For example, a 10-period EMA's Multiplier is calculated like this:

This means that a 10-period EMA is equivalent to an 18.18% EMA.

3. Weighted Moving Average (WMA)

The exponential moving average is just one of many forms of weighted moving averages. Instead of just adding up the measurements for a sequence of days and dividing ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------the smoothing a moving average provides. An un weighted moving average is simply a weighted moving average with all the weight factors equal to 1. You can use any weight ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ to trading the Chicago pork belly market. Let's put it to work on our bellies as well.

This graph compares the weight ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ simple moving average that weights every day equally.

Exponential smoothing gives today's measurement twice the significance the simple average would assign it, yesterday's measurement a little less than that, and each successive day less than its predecessor with day 20 contributing only 20% as much to the result as with a simple moving average. ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- the smoothing constant decreases toward zero. If the smoothing constant exceeds 1, older data are weighted more heavily than recent measurements

4. MACD (Moving Average Convergence/Divergence)

The MACD indicates the % difference between two (exponential) moving averages. A MACD indicates that “something is going on”. There are few ways of using MACD. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------average if the indicator.

Various challenges to technical analysis-

Empirical studies support EMH and show ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- price and new information causes instantaneous price adjustment, technical relationship is not repeating.

Statistics test of ----------------------------------------------------------------------- move in trends

If --------------------------------------------------------------------- would self-destruct (call as self fulfilling prohecy)

If the rule is -------------------------------------------------------------------------- copy and neutralize it at last

Too ----------------------------------------------------------------------- variable changes over time.

4. (a) What is Markowitz Portfolio Theory? Explain the basic assumptions of Markowitz Theory.

Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- is that an asset's risk and return should not be assessed by itself, but by how it contributes to a portfolio's overall risk and return.

MPT assumes that investors are risk averse, meaning that given two portfolios that offer the same expected return, investors will prefer the less risky one. Thus, an investor ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------based on individual risk aversion characteristics. The implication is that a rational investor will not invest in a portfolio if a second portfolio exists with a more favourable risk-expected return profile – i.e., if for that level of risk an alternative portfolio exists that has better expected returns.

Under the model:

Portfolio return is ------------------------------------------------------------------------------------------------ assets' returns. Portfolio volatility is a function of --------------------------------------------------------- assets, for all asset pairs (i, j).

BREAKING --------------------------------------------------------------------- Theory - MPT'

A major insight provided by MPT is ----------------------------------------------------------------------------------------- alone, but should be evaluated by how the investment affects the overall portfolio's risk and return. MPT shows that an investor can construct a ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------return is less important than how the investment behaves in the context of the entire portfolio. Portfolio Risk and Expected Return MPT makes the assumption that ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------the portfolio's expected return would be: (4% x 25%) + (6% x 25%) + (10% x 25%) + (14% x 25%) = 8.5% The portfolio's risk is a complicated function of the variances of each asset and the correlations of each pair of assets. To calculate the risk of a four-asset portfolio, an investor needs each of the four assets' variances and six correlation values, since there are six possible two-asset combinations with four assets. Because of the asset correlations, the total portfolio risk, orstandard deviation, is lower than what would be calculated by a weighted sum. Efficient Frontier Every possible combination of assets that ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------return but a lower risk. It is possible to draw an upward sloping hyperbola to connect all of the most efficient portfolios, and this is known as the efficient frontier. Investing in any portfolio not on this curve is not desirable.

Harry Markowitz was awarded a Nobel prize for developing MPT. Assumption under Markowitz Theory:

(1) The market is efficient and all investors ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------value of shares. Thus, all investors are in equal category.

(2) All investors before --------------------------------------------------------------------------------------- because they are risk averse.

(3) All investors ----------------------------------------------------------------------------------------------- from their investments.

(4) The investors base their ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ per year and by adding annual capital gains.

It is also necessary to know the standard ------------------------------------------------------------------------------------------------------------------------------------------------- are important parameters for finding out whether the investment is worthwhile for a person.

(5) Markowitz brought out the theory ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ returns could be brought out by the investor.

(6) From the above, it is clear ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- surrounded by minimum risk.

(7) The investor assumes that --------------------------------------------------------------------------------------------------------------------------------------------------------------- him. On the contrary, when risks are low the return can also be expected to be low.

(8) The investor ------------------------------------------------------------------------------------------- to his portfolio.

(9) An investor should be able to get higher return for each level of risk “by determining the efficient set of securities”.

(b) Explain the logic of the Arbitrage-Pricing Theory (APT). Compare and contrast with the Capital Asset Pricing Model (CAPM) ?

Arbitrage Pricing Theory (APT)-

In finance, arbitrage pricing theory (APT) is a ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------. The model-derived rate of return will then be used to price the asset correctly - the asset price should equal the expected end of period price discounted at the rate implied by the model. If the price diverges, arbitrage should bring it back into line.

The theory was proposed by the economist Stephen Ross in 1976.

Risky asset returns ----------------------------------------------------------------------------- if they can be expressed as:

where

is a ------------------------------------------------- asset is a ------------------------------------------------- factor

is the sensitivity of ------------------------------------------------------ also called factor loading, and is the risky ----------------------------------------------------------- shock with mean zero.

Idiosyncratic shocks are ------------------------------------------------------------- and uncorrelated with the factors.

The APT states that if asset ----------------------------------------------------- between expected returns and the factor sensitivities:

where

is the ------------------------------------------ factor, is the ------------------------------------------- rate,

That is, the expected ---------------------------------------------------------------------------- sensitivities to the n factors.

Note that there are some assumptions and ---------------------------------------------------------------------------------------------------------------------------------- may never surpass the total number of assets (in order to avoid the problem of matrix singularity).

CAPM V/S APT-

The CAPM and the APT are alternative models of risk and return. It is worthwhile to consider the differences between the two models, both in terms of pedagogy and in terms of application.

Asset Pricing Model are very useful tools ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------that sometimes we can not control. These are two methods that while different from each other, they try to explain and provide the same type of information in a unique way.

As people become more exposed to a highly ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------like to start by talking about the two pricing methods and highlight some of their advantages and disadvantages.

The Arbitrage Pricing Theory (APT) is a very detailed pricing method. The APT is based on five different economical factors. The factors are: business cycle, time horizon, ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------investments. By using these macroeconomic variables it provides a way to estimate the risk premium for every individual variable.

Intuitively, the APT makes a lot of sense ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------of the stock to these factors." As these factors move, so does the expected return on the stock, and therefore its value to the investor.

In the CAPM theory, the expected ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------of the APT, whereby the only factor considered is the risk of a particular stock relative to the rest of the market, as described by the stock's beta.

From a practical standpoint, CAPM ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------elegant and relatively simple to calculate.

However, the APT has some offsetting advantages. The model adds factors until the unsystematic risk of any security is uncorrelated with the unsystematic risk of every ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------intuition was cloudier because the unsystematic risks could be correlated across securities. Also, the APT emphasizes the role of arbitrage in obtaining a linear relationship between expected returns and betas.

One advantage of the APT is that it can ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------unsystematic risk of one security becomes uncorrelated with the unsystematic risks of other securities.

It may be noted that CAPM and APT are different --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- equilibrium returns are established

5. Critically evaluate the three formula plans and suggest modification, if any, to make them useful for investors in Indian Stock Market.

Formula Plans- Formula plans are a type of ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------one asset class to another with changing circumstances, thus helping you automatically buy low and sell high.

Different Types of Formula Plans are given below: 1. Constant-Rupee-Value Plan: The constant rupee value plan specifies that ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- sell some of the shares in order to keep the value of his aggressive portfolio constant.

If the price of the stock falls, the investor ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------plan’s major advantage is its simplicity. The investor can clearly see the amount that he needed to have invested.

However, the percentage of his total fund that this ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------called for to keep the constant rupee value of the stock portfolio.

Of course, the portfolio’s value cannot be ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------, the portfolio will have to be allowed to fluctuate to some extent before action taken to readjust its value.

The action points may be sent according --------------------------------------------------------------------- in some economic or market index, or – mostly ideally – percentage changes in the value of the aggressive portfolio.

The timing of action points can ---------------------------------------------------------------------------------------------------- placed dose together cause excessive costs that reduce profits.

If the action points are too far apart, ---------------------------------------------------------------------------------------------------------------------------- implementation of formula plans. We will use fractional shares and ignore transaction costs to simplify the example.

Numerical Example: To illustrate the constant rupee value plan, -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------whenever the aggressive portion is 20 per cent above or below Rs.5,000.

On hundred shares of a Rs.50 each stock and Rs.------------------------------------------------------------------------------------------------------------------------------------------------------------------- original price of Rs.50. The fifth column shows the adjustments called for by the 20 per cent signal criterion.

The fourth column shows that by the end ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ the stock never rose above the Rs.50 starting price.

Main limitation of the constant rupee value plan is that it requires some initial forecasting. However, it does not require forecasting the extent to which upward fluctuations may reach.

In fact, a forecast of the extent of -------------------------------------------------------------------------------------------------------------------------------------------------------------- as its value shrinks. This step requires knowledge of how stock prices might go.

Then the required size of the conservative -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- values to which they might fluctuate, he can obtain better overall results from a constant- rupee- value plan.

2. Constant Ratio Plan: The constant ratio plan goes one step ---------------------------------------------------------------------------------------------------------------------------------------------- the portfolio is forced to sell stocks as their prices rise and to buy stocks as their prices fall.

Under the constant ratio plan, -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- balancing may mean missing intermediate price movements.

The constant ratio plan holder can adjust portfolio balance either at fixed) intervals or when the portfolio moves away from the desired ratio by a fixed percentage.

Numerical Example: The chosen ratio of stock to bonds is 1:1 meaning that the defensive and aggressive portions will each make 50 per cent of the portfolio.

Therefore, we divide the initial --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- falls by 10 per cent from the desired ratio, the original ratio is restored.

The sixth column indicates the four ---------------------------------------------------------------------------------------------- price dropped considerably before rising back to the starting level, this portfolio still made a little bit of money.

The advantage of the constant ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- selecting individual securities, nor does it perform well if the prices of the selected securities do not move with the market.

The major limitation for the constant ratio ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- considerations in the present discounted evaluation framework.

This means, at times, they may both rise and decline in value at approximately the same time. There is a limited advantage to be gained from shifting out of the rising stocks into the bonds if, in the downturn, both securities prices decline.

If the decline in bond prices is of the same ----------------------------------------------------------------------------------------- the constant ratio plan are eliminated. If the constant ratio plan is used, it must be coordinated between securities that do not tend to move simultaneously in the same direction and in the same magnitude.

3. Variable Ratio Plan: Instead of maintaining a constant ----------------------------------------------------------------------------------- ratio plan user steadily lowers the aggressive portion of the total portfolio as stock prices rise, and steadily increase the aggressive portion as stock prices fall.

By changing the proportions of -------------------------------------------------------------------------------------------------------------------------------------- aggressively as stock prices fall and selling stock more aggressively as stock prices rise,

Numerical Example: It illustrates another variable ratio plan. ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------drops, the value of the stock portion and the percentage of stock in the total portfolio decline.

When the market price reaches Rs.50, ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------a new portfolio adjustment is triggered. The sale of 51.76 shares reduced the percentage of stock in the portfolio back to 50.

In the example, the portfolio was adjusted for a 20 per cent drop and when the price returned to Rs.50. Other adjustment criteria would produce different outcomes. The highest under this plan results from the larger transactions in the portfolio’s stock portion.

The portfolio adjustment section of----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------forecasts the variable ratio plan designed to take greater advantage of price fluctuations than the constant ratio plan does.

Modifications of Formula Plans:

The formula plans can become useful for investors in stock market by modification under the following assumptions: (a) The formula plans are --------------------------------------------------------------------------------------------------------------------------------------------------------------------- change and flexibility according to the changed circumstances.

(b) The formula plans work under ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------therefore necessary in a formula plan.

(c) The stock prices do not ---------------------------------------------------------------------------- to be made by the investor.

(d) The reflection of historical -------------------------------------------------------------------------------------- some readjustments.

The methodology adopted for modifications in formula plans are the following: (1) The investor can ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- plan under which he is operating.

(2) The investor may continue ------------------------------------------------------------------------------------------------------------------------------------------ a feeling and his emotions are involved that there will be an exploitation of the trends.

(3) The formula plans can be modified by putting some flexibility in it, according to the requirements of the investor and the environment in which he is operating.

So far the formula plans have ---------------------------------------------------------------- is called the Rupee Cost Average.

Rupee Cost Average: This is a technique which is specifically studied ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------investor should continuously invest a constant sum of rupees in a specified stock of specified portfolio at periodic differences.

A rupee average can be made by an ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------, the intervals of purchasing stocks can be large and may be dependent on the prices of stocks.

A short interval for conducting the purchases and sale of stock is considered ideal but if it is not possible to buy the best at short intervals, the investor can wait for longer intervals thus bringing in flexibility in time through variations in length of time between investments.

The methodology in a rupee averaging ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------formula plans accumulating his fund because his average cost per share is very low.

The rupee averaging plans like other formula plans do not help the investor in making a selection of securities on his portfolio. It only helps him to combine his portfolio in a manner to draw out the best results.

This technique is useful when it ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- for short intervals as it can lead the investors to losses.

The most important factor in this --------------------------------------------------------------------------------------------- the timing which is maintained for liquidating the stocks. The investor should have knowledge of the economic industry company framework of investments when he is investing under this plan.

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