Q1). What is the concept of investment? How it is different from speculation?

Explain:

 Introduction:-
An investment is an asset or item acquired with the goal of generating
income or appreciation. In an economic sense, an investment is the purchase of goods that are not
consumed today but are used in the future to create wealth. In finance, an investment is a monetary
asset purchased with the idea that the asset will provide income in the future or will later be sold at
a higher price for a profit. An investment always concerns the outlay of some asset today (time,
money, effort, etc.) in hopes of a greater payoff in the future than what was originally put in.

Investing is putting money to work to start or expand a project - or to purchase an asset or interest -
where those funds are then put to work, with the goal to income and increased value over time. The
term "investment" can refer to any mechanism used for generating future income. In the financial
sense, this includes the purchase of bonds, stocks or real estate property among several others.
Additionally, a constructed building or other facility used to produce goods can be seen as an
investment. The production of goods required to produce other goods may also be seen as investing.

Taking an action in the hopes of raising future revenue can also be considered an investment. For
example, when choosing to pursue additional education, the goal is often to increase knowledge and
improve skills in the hopes of ultimately producing more income. Because investing is oriented
toward future growth or income, there is risk associated with the investment in the case that it does
not pan out or falls short. For instance, investing in a company that ends up going bankrupt or a
project that fails. This is what separates investing from saving - saving is accumulating money for
future use that is not at risk, while investment is putting money to work for future gain and entails
some risk.

 Meaning:-

In an economic sense, an investment is the purchase of goods that are not consumed
today but are used in the future to create wealth. In finance, an investment is a monetary asset
purchased with the idea that the asset will provide income in the future or will later be sold at a
higher price for a profit. An investment always concerns the outlay of some asset today (time,
money, effort, etc.) in hopes of a greater payoff in the future than what was originally put in.

Investment refers to the acquisition of the asset, in the expectation of generating income. In a
wider sense, it refers to the sacrifice of present money or other resources for the benefits that will
arise in future. The two main element of investment is time and risk. Nowadays, there is a range
of investment options available in the market as you can deposit money in the bank account, or
you can acquire property, or purchase shares of the company, or invest your money in
government bonds or contribute in the funds like EPF or PPF.
Investments are majorly divided into two categories i.e. fixed income investment and variable
income investment. In fixed income investment there is a pre-specified rate of return like bonds,
preference shares, provident fund and fixed deposits while in variable income investment, the
return is not fixed like equity shares or property.

 Definition:-

1. Investment is the act of putting money to work to start or expand a business or project or
the purchase of an asset, with the goal of earning income or capital appreciation.
2. Investment is oriented toward future returns, and thus entails some degree of risk.
3. Common forms of investment include financial markets (e.g. stocks and bonds), credit
(e.g. loans or bonds), assets (e.g. commodities or artwork), and real estate.

 Difference between investment and speculation:-

 Introduction:-

Speculation is a separate activity from making an investment. Investing involves

the purchase of assets with the intent of holding them for the long term,
while speculation involves attempting to capitalize on market inefficiencies for short-term profit.
Ownership is generally not a goal of speculators, while investors often look to build the number
of assets in their portfolios over time. Although speculators are often making informed decisions,
speculation cannot usually be categorized as traditional investing. Speculation is generally
considered higher risk than traditional investing, though this can vary depending on the type of
investment involved. Some consider speculation more akin to gambling than anything else.

 Meaning of investment:-

Investment refers to the acquisition of the asset, in the expectation of

generating income. In a wider sense, it refers to the sacrifice of present money or other resources
for the benefits that will arise in future. The two main element of investment is time and risk.
Nowadays, there is a range of investment options available in the market as you can deposit
money in the bank account, or you can acquire property, or purchase shares of the company, or
invest your money in government bonds or contribute in the funds like EPF or PPF. Investments
are majorly divided into two categories i.e. fixed income investment and variable income
investment. In fixed income investment there is a pre-specified rate of return like bonds,
preference shares, provident fund and fixed deposits while in variable income investment, the
return is not fixed like equity shares or property.

 Meaning of speculation:-

Speculation is a trading activity that involves engaging in a risky financial

transaction, in expectation of making enormous profits, from fluctuations in the market value of
financial assets. In speculation, there is a high risk of losing maximum or all initial outlay, but it
is offset by the probability of significant profit. Although, the risk is taken by speculators is
properly analyzed and calculated. Speculation ca be seen in markets where the high fluctuations
in the price of securities such as the market for stocks, bonds, derivatives, currency, commodity
futures, etc.

1. Investment refers to the purchase of an asset with the hope of getting returns. The term
speculation denotes an act of conducting a risky financial transaction, in the hope of
substantial profit.
2. In investment, the decisions are taken on the basis of fundamental analysis, i.e. performance
of the company. On the other hand, in speculation decisions are based on hearsay, technical
charts, and market psychology.
3. Investments are held for at least one year. Hence, it has a longer time horizon than
speculation, where speculators hold assets for short term only.
4. The quantity of risk is moderate in investment and high in case of speculation.
5. The investors, expect profit from the change in the value of the asset. As opposed to
speculators who expect profit from the change in the prices, due to demand and supply
forces.
6. An investor expects the modest rate of return on the investment. On the contrary, a speculator
expects higher profits from the speculation in exchange for the risk borne by him.
7. The investor uses his own funds for investment purposes. Conversely, speculator uses
borrowed capital for speculation.
8. In speculation, the stability of income is absent it is uncertain and erratic which is not in the
case of investment.
9. The psychological attitude of investors is conservative and cautious. In contrast, speculators
are daring and careless.

 Conclusion:-

At the end of this discussion, it can be said that both are different and should not be
used interchangeably. Investors play a very crucial role in maintaining liquidity in the market but
speculators too, play a major character in absorbing excessive risk and providing required
liquidity, at the time when investors do not participate.
 Q2).What do you understand by portfolio management? Discuss the process of
portfolio management? How the security returns related to portfolio management?
Explain:
 Introduction:-

Portfolio Management is defined as the art and science of making decisions about the
investment mix and policy, matching investments to objectives, asset allocation for individuals
and institutions, and balancing risk against performance. Simply put it, someone has given you
their hard earned money and you need to help them increase the capital in the best of diversified
ways. This should be in a way in which the risk-return ratio is aptly maintained considering the
profits in mind and the holding period of investments.
Portfolio management refers to managing an individual’s investments in the form of bonds,
shares, cash, mutual funds etc so that he earns the maximum profits within the stipulated time
frame. It is the art of managing the money of an individual under the expert guidance of portfolio
managers. It is the detailed SWOT analysis (strengths, weaknesses, opportunities, and threats) of
an investment avenue, which could be in the form of debt/equity, domestic/international, with the
goal of maximizing return at a given appetite for risk.
 Meaning:-
A portfolio can be defined as different investments tools namely stocks, shares, mutual funds,
bonds, cash all combined together depending specifically on the investor’s income, budget, risk
appetite and the holding period. It is formed in such a way that it stabilizes the risk of
nonperformance of different pools of investments.
 Definitions:-
1. Portfolio management involves building and overseeing a selection of investments that
will meet the long-term financial goals and risk tolerance of an investor.
2. Active portfolio management requires strategically buying and selling stocks and other
assets in an effort to beat the broader market.
3. Passive portfolio management seeks to match the returns of the market by mimicking the
makeup of a particular index or indexes.
 Types of Portfolio Management:-

1. Active Portfolio Management:

When the portfolio managers actively participate in the trading of securities with a view to
earning a maximum return to the investor, it is called active portfolio management.

2. Passive Portfolio Management:

When the portfolio managers are concerned with a fixed portfolio, which is created in alignment
with the present market trends, is called passive portfolio management.
3. Discretionary Portfolio Management:

The Portfolio Management in which the investor places the fund with the manager, and
authorizes him to invest them as per his discretion, on the investor’s behalf. The portfolio
manager looks after all the investment needs, documentation, etc.

4. Non-Discretionary Portfolio Management:

Non-discretionary portfolio management is one in which the portfolio managers gives advice to
the investor or client, who can accept or reject it. The outcome, i.e. profit received or loss
sustained belongs to the investor himself, whereas the service provider receives an adequate
consideration in the form of fee for rendering services.

 Process of Portfolio Management:-

1. Security Analysis:

It is the first stage of portfolio creation process, which involves assessing the risk and return
factors of individual securities, along with their correlation.

2. Portfolio Analysis:

After determining the securities for investment and the risk involved, a number of portfolios can
be created out of them, which are called as feasible portfolios.

3. Portfolio Selection:

Out of all the feasible portfolios, the optimal portfolio, that matches the risk appetite, is selected.

4. Portfolio Revision:

Once the optimal portfolio is selected, the portfolio manager keeps a close watch on the
portfolio, to make sure that it remains optimal in the coming time, in order to earn good returns.

5. Portfolio Evaluation:

In this phase, the performance of the portfolio is assessed over the stipulated period, concerning
the quantitative measurement of the return obtained and risk involved in the portfolio, for the
whole term of the investment. The portfolio management services are provided by the financial
companies, banks, hedge funds and money managers.

How Investors Impact Portfolio Returns

The age at which an investor intends to withdraw money from a portfolio remains a critical
factor in selecting a suitable investment objective. For example, an investor who is only a few
years from retirement wants to protect their portfolio earnings and likely will invest in a mix of
cash, money markets, and short-term bonds. Conversely, a young investor typically seeks to take
on relatively higher risk, investing in a mix of stocks, high-yield bonds, and perhaps managed
futures, each of which has the potential to exceed the rate of inflation over time.Of note, the
advent of the internet age provided investors with near-real-time access to market returns, as well
as easily accessible relative performance data. When investing in a mutual fund, investors can
pull charts and fund returns versus a benchmark index, as well as a peer group average, typically
going back ten years or more, as well as the top asset allocations of particular funds. 

Characteristics of Securities

 Securities are tradable and represent a financial value.

 Securities are fungible.

Classification of Securities

 Debt Securities: 

Tradable assets which have clearly defined terms and conditions are called debt
securities. Financial instruments sold and purchased between parties with clearly
mentioned interest rate, principal amount, maturity date as well as rate of returns are
called debt securities.

 Equity Securities:

 Financial instruments signifying the ownership of an individual in an organization are

called equity securities. An individual buying equities has an ownership in the company’s
profits and assets.

 Derivatives: 

Derivatives are financial instruments with specific conditions under which payments need
to be made between two parties.

Q3). Discuss in detail how the key macroeconomic variable impact on stock market with
suitable Example? 19
____________________________________________________________________________
________
 Introduction:-

The claim that macroeconomic variables affect stock market behaviour is a well
Established theory in the financial economics literature. However, it is in the past two decades
That there is a growing effort made by researchers to empirically calibrates these
macroeconomic
Effects. More studies are focused on the developed markets such as the US, UK and the
Japanese. Examples of these studies are Fame (1981) and Chen (1991) for the US market,
Hamao (1988) on Japanese market, and Poona and Taylor (1992) on the UK market. The
Performance of stock market is gauged through movements in its index which is influenced by
many factors such as companies’ specific factors, domestic factors (macroeconomic, social
&
Political) and international factors.
This paper extends the literature to address the question whether domestic
Macroeconomic variables affect stock market index (proxy for stock price) within the context of
An emerging market. Emerging markets seem to have distinguished features from those of the
Developed markets. Given the different political and economic structures, the risk and return
Profiles in these markets seem to also differ. For instance risks and returns in the emerging stock
Markets are found to be higher relative to the developed stock markets (Errunza, 1983; Claessens
Dasgupta and Glen 1993; Harvey, 1995). In fact, in the recent years, there seems to be more
Empirical evidence to suggest that emerging markets are segmented from the developed markets
(Goetzmann and Jorion, 1999; Billson, Brails ford and Hooper 2001). The studies lend support to
The view that emerging markets now represent a feasible investment alternative for international
Investors witnessing massive capital inflows into these markets. The investors carefully watch
The performance of stock markets by observing the stock market index, before investing funds.
The stock market index provides a historical stock market performance, the yardstick to compare
The performance of individual portfolios and also provides investors for forecasting future trends
in the market.
One way of linking macroeconomic variables and stock market is through Arbitrage
Pricing Theory (APT) where multiple risk factors can explain asset returns (Ross, 1976).While
Early empirical studies on APT focused on individual security returns (for selection of relevant
Studies see Fame, 1981, 1990; Fame and French, 1989; Schwedt, 1990; and Black, Fraser,
MacDonald, 1997). It is also used in an aggregate stock market framework, where a change in a
Given macroeconomic variable could be seen as reflecting a change in an underlying systemic
Risk factor influencing future returns. Empirical works based on the APT theory are
characterized
By modeling a short run relationship between macroeconomic variables and stock price (Fame,
1981; Black et al, 1997). Another approach is the discounted cash flow or present value model
(PVM). This approach relates the stock price to future expected cash flows. Thus, the PVM can
Be used to focus on the long run relationship between the stock market and macroeconomic
Variables.
A wide array of studies have been conducted in developed countries on the impact of
Macroeconomic factors on stock prices over the last several years (Fame, 1981; Lee, 1982;
Kaneko and Lee, 1995; Mukherjee and Naka, 1995; Booth and Booth, 1997; Mavrides, 2000
Maysami and Koch, 2000; Sadorsky, 2003; Chen, 2003; Homma, Tsutui and
Benzoic, 2005;
Ratanapakorn and Sharma, 2007; Humpe and Macmillan, 2009). These
studies conclude that
stock prices do respond to the changes in macroeconomic factors but
the sign and causal
Relationship might not hold equal for all the studies. For studies in
developing countries,
Empirical work on the subject is yet to produce a consensus. In Nigeria, for
example, some
Empirical studies (Emenuga, 1996; Nwokoma, 2002; Izedonmi and Abdullahi,
2011; among
Others) have found little or relatively insignificant relationship between
macroeconomic variables
And stock market. Other studies (e.g. Soyode, 1993; Yohannes, 1994;
Adeleke and Gazebo,
2012) have found significant co-movement between macroeconomic
variables and stock market.
Owing to the conflicting results identified in these Nigeria studies, it is clear
that the
Relationship between macroeconomic factors and stock market performance
in Nigeria remain
Unsettled. Thus, more in-depth studies are needed to understand the
macroeconomic variables
That might influence the performance of the Nigerian stock market.
Moreover, country likes
Nigeria is of particular importance to study such relationship since it is one
among the emerging
Markets. Furthermore, the capital market has undergone tremendous
changes after the adoption
Of liberalization policy and it became more open to international investors.
The reforming market
and the significant economic potential have been attracting a large
number of foreign
Institutional investors into the Nigerian stock market. In this end, ‘how does
and at what extent
The Nigerian stock market responds to the changes in macroeconomic
factors?’ remains an open
Empirical question. Understanding the macroeconomic factors that could
impact the stock market
Index, with the recent data can be useful to investors, traders as well as the
policy makers.
The objective of this study is to test whether economic factors explain the
behavior of the
Nigerian stock market Index. The study uses monthly data from January
2000 to December 2010
to investigate the impact of six macroeconomics variables, such as;
money supply,
Manufacturing index (proxy for economic activity), oil price, inflation, interest
rate and exchange
Rates on Nigeria stock market Index. It is believed that the finding of this
study would extend the
existing literature by providing some meaningful insight to the policy
makers and the
Practitioners as far as the developing country like Nigeria are concerned.
The rest of the paper is structured as follows. Section two reviews some
selected
Empirical literature, while section three focuses on data sources and
econometric methodology
Used in the study. The empirical results are reported and discussed in
section four. Finally the
Conclusion of the study is provided in section five.

 Economic growth is a measure of expansion of the economy over time.

 How is growth measured?

 It is measured over time relative to the performance of the economy over the exact same
period in the immediate past, such as the economic calendar year, that is, Oct. 1st to Sept.
30th, or a quarter, that is, three months.

Why is growth important?

 It enables wage and income earners, producers, and even macro-economic planners to
take appropriate rational pre-emptive action that avoids any negative effect of a major
change in the direction of the economy.
 Final market value of goods and services produced by the property and labor of all but
only of residents of a country.
 a measure of the annual growth and expansion in size of the economy
 a measure of the relative economic strength/power of a country
 GDP was first calculated at the request of President Roosevelt in order to adequately plan
US preparedness for WW II .
 GNP stands for the Gross National Product, a measurement of the annual economic
productivity of the property and labor of all but only citizens of a country regardless
where this activity occurs in the world.
 GDP stands for the Gross Domestic Product, a measurement of the annual productivity of
the property and labor of all citizens and foreign residents within the geographic borders
of a country including its foreign territories such as embassies and purchased military
bases abroad.
  GDP divided by population is called the per-capita GDP, a measure of the annual
improvement in the standard of living of the average citizen/resident of a country.

Imperfections of the GDP

 First is the problem of double counting which could lead to an exaggeration GDP.
Solution: Whether you measure the GDP by spending, by production, or by income, be
sure to count final market value of goods and services only once.
 Solution: Be sure to exclude: cost of intermediate goods and services, market products
that are meant not for direct consumption but for use in further manufacturing and
processing; transfer payments, purely financial transactions like buying and selling of
securities, welfare payments, and the cost of resold items like used cars.
 Second, GDP exaggerates actual improvement in the standard of living. Take a look at
figure on page 117 of your book.
 Real income is nominal or money or unadjusted income adjusted for inflation.
 Because GDP = sum [Q (quantity) x P (price)]; an increase in GDP can be just the effect
of higher prices-called inflation.
 Solution: deflate the real-GDP which takes out the effect of P, and hence, inflation in the
GDP.
 To get the Real GDP, divide GDP by the GDP deflator index and multiply by 100
 To get the Price Index, also called the Deflator Index, divide the given year price by the
base year price.
 To find the base year, look for the year whose price is equal to 100%. (Practice with
Table 10:1, p. 118).

 The base year is the year the economy is assumed to have 0 % inflation; therefore, we
choose for the base year, years in which the economy was most stable, has least amount
of inflation.
 Therefore, the real-GDP is no more accurate than as a comparison between two
economic periods; Paul is taller than John, but shorter than James.
 GDP reflects only the dollar worth of the economy, not the economic well-being of
citizens.

# does not take account services produced at home.

# adds the income from economic activities that detract from the well being of citizens such as
drug trafficking and use.

 Third: even the real-GDP gives an inaccurate reading of actual improvement in

economic well by not taking into account useful productivity such as self-provided
household services, while adding non useful ones like income from accidents and drug
activity.
 Four: per-capita-GDP does not reflect in-state distribution of income.
 Five: per-capita-GDP understates the productivity of developing countries: See Table
10:2, p. 119.
�developing country real-GDP excludes their entire rather significant but nonofficial economic
sector because of lack of records.

�does not include much of the rural non-pecuniary economic activity that does not pass through
the market such as self-subsistence production, and reciprocal, communitarian, and voluntary
exchange.

FORECASTING

 Forecasting intended to reduce the level of uncertainty about the future trend of the
economy is necessary for the rational planning of production, and hence for the overall
efficiency of the economy.
 Short term economic forecast, up to 8 quarters ahead.
 Medium-term economic forecast, is between 2 to ten years
 Long-term forecast is any prediction more than ten years ahead; special cases call for
prediction of 30 years ahead.
 Forecasting is made a little easier by the recurrent nature of the business cycle, enabling
macro-economists to establish statistical regularities as formula for predicting the
economy.
 But statistics not withstanding, economic forecasting is not a precise science and
predictions may often be off target. Yet forecasting still serves the useful purpose of
giving us, within broad limits, a sense of where the economy may be headed, allowing
consumers, producers and government macroeconomic policy planners to plan ahead
with some level of rational certainty.

The Business Cycle

 No economy however strong ever follows a straight growth path; all economies fluctuate
over time.
 Fluctuations in the economy (GDP) over time are referred to as business cycles.
 The Great Depression forced neoclassical economists to accept for the first time that
business cycles and the extent of fluctuations in the economy are both significant.
 For a number of theoretic and historical reasons, both classical (1776-1871) as well as
neoclassical economists had prior to the Great Depression, believed business cycles
would be weak and insignificant for the overall production.
 The first two decades of this century were expansionist and pro-growth years.
 World War I, the cause of the first serious disturbance in the U.S. economy, was seen as
externally induced, and not the fault of the U.S. economy.
 The roaring 1920s suggested the economy as a whole was so strong it could not fail even
if some industries fail.
 The Great Depression, therefore, caught economists completely off guard as for nearly
twelve years 1929-1941, the economies of the US and Western Europe plummeted,
resulting in 32% drop in the GDP with unemployment rates reaching a high of 28% in
1932.
  Since then, the US economy has been pro-growth with five notable recessions, none of
which lasted long, suggesting the overall economy remains healthy, reaching its historical
high in the current 1993 to 2000 period.

Nature of a Typical Business Cycle.

 The typical GDP growth path goes from trough to recovery to peak to decline and back
to trough (Figure 10.4), with six known broad characteristics.
 First, though they follow typical patterns, no two business cycles are ever the same.
 Second, with increased economic interdependence and interconnectedness among
countries, especially among the Western industrial countries, business cycle changes in
one country quickly draw the other economies into similar behavior.
 Third, the business cycle is an inherent part of all money-using economies, so nothing to
worry about when the economy goes down south, provided it is healthy enough to
recover.
 A change in the flow of the economy (GDP) occurs whenever there is a significant
change in the money supply, a change which could be caused by any of the following:
 Introduction of new technologies like the computer, the Internet.
 Shift in consumer demand and not a change in demand cause by change in income.
 Sharp increase in government spending.
 Change in consumption of imports.
 Major change in the capital stock (capital available for investment).
 Four, forces at work in a typical business cycle are cumulative, each phase generating its
own momentum and counteractive forces that beget the next phase.
 Five, Government policy intended to control one side of the business cycle might wind
up inducing the other. E.g., generating unemployment to fight inflation may end up
throwing the economy into a recession. (More on this later).
 Six and finally, fluctuations in the GDP over time are not even across industry.

Q4). “Technical analysis appears to be a highly controversial approach to security

analysis” elaborate.