Syllabus UNIT-1 INVESTMENTS Concept: Real vs. Financial assets: Investment decision processes: Sources of investment Information; Investment vs. Speculation; Factors to be considered in investment decision — Liquidity, Return, Risk, Maturity, Safety, Tax and inflation. The concept and measurement of return— Realized and expected retum. Ex-ante and ex-post retums. The concept of risk. Sources and types of risk. Measurement of risk — Range, Standard Deviation and co-efficient of variation. Risk-retum trade-Off. Risk Premium and risk aversion. Approaches to investment analysis — Fundamental analysis; Techrical analysis; Efficient market hypothesis, Behavioural finance and heuristic driven biases, UNIT-IL FIXED INCOME SECURITIES - ANALYSIS, VALUATION AND MANAGEMENT Features and types of debt instruments, Bond indenture, Faciors affecting bond yield. Bond yield measurement - Current yield, Holding period retum. YTM. AYTM and YTC. Bond valuation: Capitalization of income method, Bond - Price theorems, Valuation of compulsorily/optionally convertible bonds, Valuation of deep discount bonds, Bond duration, Macaulay's duration and modified Macaulay's duration. Bond convexity. Considerations in managing a bond portfolio, Term structure of interest rates, Risk structure of interest rales. Managing Bond portfolio: Bond immunization, Active and passive bond portfolio management strategies. UNIT-II (COMMON STOCKS - ANALYSIS AND VALUATION Basic features of common stock, Approaches to valuation - Balance sheet model, Dividend capitalization models; Eamings capitalization models; Price-earnings multiplier approach and capital asset pricing model, Free cash flow model, relative valuation using comparables ~ P/E,PIBV.P/S; ‘Security market indexes, Their uses; Computational procedure of sensex and Nify, UNIT-IV PORTFOLIO THEORY Concept of portfolio. Portfolio return and risk. Harry Markowitz's portfolio theory, Construction of minimum risk pertfolio, The single - Index model. Capital market theory: Inroduction of risk - free asset, Capital market line, Separation theorem. Capital asset pricing model (CAPM): Security market line. Identifying over- priced and under - priced securites. Arbitrage pricing theory (APT): The law of one price, Two factor arbitrage pricing. Equilibrium risk - return relations. A synthesis of CAPM and APT. UNIT-V PORTFOLIO EVALUATION Performance measures - Sherpe’s reward to variability index, Treynor’s reward to volaiility index, Jensen's differential index, Fama's decomposition of returns. Mutual funds: Genesis, Features, Types. and schemes. NAVs, Costs, Loads and return of mutual funds, Problems and prospects in India, Regulation of mutual funds and investor's protection in India.INVESTMENT MANAGEMENT MBA (OU) Iv-Semester (Finance) (Elective- CONTENTS Syllabus as per 2016-17 Curriculum LIST OF IMPORTANT DEFINITIONS AND FORMULAE La - 1a UNIT-WISE FAQ's & 10's Fl - FT LATEST EXAMS QUESTION PAPER WITH SOLUTIONS May/June-2019 api - ars PREVIOUS EXAMS QUESTION PAPER WITH SOLUTIONS May/June-2018 api - ap7 ‘MODEL QUESTION PAPERS WITH SOLUTIONS (As per the New External Exam Pattern) Model Paper-| MP1 — MP2 Model Paper-tI MP3 - MP4 Model Paper-tit MP5 — MP6 UNIT-I INVESTMENTS: 1.1 to 1.54 1.4 INVESTMENTS 12 1.4.4 Real vs Financial Assets 13 1.2 INVESTMENT DECISION PROCESS 14 1.2.4 Sources of Investment Information 16 122 Scope, Features and Imporiance of Investment Programmes “ seonemreneen A 123 __Invesiment Vs Speculation Vs Gambling 1.10 13. FACTORS TO BE CONSIDERED IN INVESTMENT DECISION 10 1.3.1 Characteristics of Investment Decisions aun 132 Liquidity, Retum, Risk, Maturity, Safely, Tax and Inflation 1m 1.4 THE CONCEPT AND MEASUREMENT OF RETURN - REALIZED AND EXPECTED RETURN 1.13 14.1 Exanie and Ex:post Returns 1.13 1.4.2 Measurement of Portfolio Returns 1.45 4.5 THE CONCEPT OF RISK 124 1.5.1 Sources of Risk sue 122 152 Types of Risk 122 1.5.3 Measurement of Risk - Range, Standard Deviation and Coefficient of Variation sciatic DM 1.54 — Risk-return Trade-off 1.28 1.55 _ Risk Premium and Risk Aversion 1.28 TT1.6 APPROACHES TO INVESTMENT ANALYSIS 129 1.6.1 Fundamental Analysis 129 1.62 Technical Analysis 1.33 1.6.2.1. Methods of Technical Analysis 134 FUNDAMENTAL ANALYSIS VS TECHNICAL ANALYSIS, 1.36 EFFICIENT MARKET HYPOTHESIS 1.36 1.9 BEHAVIOURAL FINANCE AND HEURISTIC DRIVEN BIASES. 140 ‘SHORT QUESTIONS AND ANSWERS, 145 EXERCISE PROBLEMS 149 INTERNAL ASSESSMENT 151 UNIT-II FIXED INCOME SECURITIES - ANALYSIS, VALUATION AND MANAGEMENT 2.1 to 2.46 24 FIXED INCOME SECURITIES : 22 2.2 FEATURES AND TYPES OF DEBT INSTRUMENTS 23 2.2.1 Factors influencing the Value of Debt instruments 25 23 BOND INDENTURE austin: TRB 2.3.1 Difference between Bearer Bonds and Registered Bonds 26 24 BOND YIELD AND FACTORSAFFECTING IT 2a 2.4.1 Bond Yield Measurement: Current Yield, Holding Period Retum, YTM, AYTM and YTC 2a 25 BOND VALUATION - CAPITALIZATION OF INCOME METHOD aes 28 26 BOND PRICE THEOREMS E sit 2.16 2.7 VALUATION OF COMPULSORILY CONVERTIBLE BONDS 219 27.1 Valuation of Optionally Convertible Bonds i 2.19 272 Valuation of Deep Discount Bonds caescsunsmasaiys i220 2.8 BOND DURATION: MACAULAY'S DURATIONS AND MODIFIED MACAULAY'S DURATION e 2.20 2.9 CONSIDERATIONS IN MANAGING A BOND PORTFOLIO 226 29.1 Term Structure of Interest Rates coe 226 292 Term Structure Theories - 227 293 Risk Structure of interest Rates sevcsesneseinnneinnn — 2.28 2.10 MANAGING BOND PORTFOLIO: BOND IMMUNIZATION 229 2.11 BOND PORTFOLIO MANAGEMENT STRATEGIES: ACTIVE ‘AND PASSIVE BOND 231 2.11.1 Active Portfolio Strategies 231 2.11.2 Passive Bond Portfolio Strategies 232 SHORT QUESTIONS AND ANSWERS, 2.39 EXERCISE PROBLEMS 243 INTERNAL ASSESSMENT 244UNIT-III COMMON STOCK - ANALYSIS AND VALUATION 3.1 to 3.38 3.4 BASIC FEATURES OF COMMON STOCK 32 3.2 APPROACHES TO VALUATION 33 3.21 Balance Sheet Model 33 2.22 Dividend Capitalization Models 34 3.23 Eamings Capitalization Models. 36 3.3. PRICE - EARNINGS MULTIPLIER APPROACH (P/E RATIO) 38 3.4 _CAPITALASSET PRICING MODEL (CAPM) 312 3.5 FREE CASH FLOW MODEL z 3.15 3.6 _ RELATIVE VALUATION USING COMPARABLES PIE. PIBV. PIS 3.17 3,7 SECURITY MARKET - MEANING AND CLASSIFICATION i 3.19 371 Security Market Indexes and Their U 322 3.72 Recent Trends of Stock Market 326 3.8 COMPUTATIONAL PROCEDURE OF SENSEX AND NIFTY . 3.27 SHORT QUESTIONS AND ANSWERS, 331 EXERCISE PROBLEMS 334 INTERNAL ASSESSMENT 335 UNIT-V PORTFOLIO THEORY 4.1 to 4.42 41 CONCEPT OF PORTFOLIO, PORTFOLIO RETURN AND RISK 42 4.1.1, Process of Portfolio Management 49 42 HARRY MARKOWITZ’S PORTFOLIO THEORY iat 4.10 CONSTRUCTION OF MINIMUM RISK PORTFOLIO 412 43.4 Minimum Variance Portfolio srencvttminnscne AHS 4.32 The Single index Model aaa 44 CAPITAL MARKET THEORY 4.16 44.4 Introduction of Risk-free Asset 4a7 442 Capital Market Line - Separation Theorem 420 45 CAPITALASSET PRICING MODEL (CAPM) 420 45.1 Security Market Line, Identifying Over-priced and Under-priced Securities 4z3 46 EFFICIENT FRONTIER 424 Ty47 ARBITRAGE PRICING THEORY (APT): THE LAW OF ONE PRICE, TWO FACTOR ARBITRAGE PRICING. 425 47.1 Equilibrium Risk-Retum Relations 427 48 ASYNTHESIS OF CAPM AND APT 428 SHORT QUESTIONS AND ANSWERS 434 EXERCISE PROBLEMS 438 INTERNAL ASSESSMENT 439 UNIT-V PORTFOLIO EVALUATION 5.1 to 5.34 5. PERFORMANCE MEASURES ~ SHARPE'S REWARD TO VARIABILITY INDEX 52 5.1.1 Treynor's Reward to Volatility Index 53 5.1.2 Jensen's Differential Index 56 5.1.3 Fama's Decomposition of Returns 51 5.2 MUTUAL FUNDS - GENESIS, FEATURES AND OBJECTIVES . 5.13 52.1 Types of Mutual Funds 5.14 522 Closed - Ended Schemes VS Open-Ended Schemes of Mutual Fund 5.17 523 Advantages of Mutual Funds 5.18 5.3 NAVS—CONCEPT 5.19 5.4 COSTSAND LOADS OF MUTUAL FUNDS 5.20 5.5 RETURNS OF MUTUAL FUNDS 5.20 55.1 Methods of Calculating Returns of Mutual Fund 521 5.6 MUTUAL FUNDS - PROBLEMS AND PROSPECTS IN INDIA 522 56.1 Regulation of Mutual Funds 524 5.6.2 __ Investor's Protection in India - SEBI'S Regulation to Protect Mutual Fund Investor 5.26 SHORT QUESTIONS AND ANSWERS 527 EXERCISE PROBLEMS 5.30 INTERNAL ASSESSMENT 531 TerPORTANT DEF! ONS AND FORMULAE UNIT -1 Investment act as a key clement in business because based on capital, investor ascertains u specified quantity to produce outputs, purchases equipments, tools, buildings, ete The investment decisions are very important, firms must ensure that sufficient time is spent in planning these decisions and must ensure that all the top executives from the field of production, engineering, marketing etc., are involved in weighing up the projects carefully Liquidity means the potentiality of an investor to sell-off its assets without much delay and without making any significant discount, Liquidity is also called as marketability. Retum is one of the most important motivating facior which encourages investment, Return is the premium given to the investor for making investment. The equations for quantifying the return, variance and standard deviation of individual security returns for both ex-post and ex-ante data are summarized in the following table, Historical (Ex-post) Expected (Ex-ante) Arithmetic mean rewm | Expected return Ly, Fu= Sn, Variance (Risk) Variance (Risk) Determination of Bets ofthe Pontfalio, B, = 2) According to Sewell (2001) behavioural finance is defined as “the study of the influence of psychology on the behaviour of nancial practikioners and the subsequett effect on markets) UNIT - II Debt instrument is legal obligation that enables the issuing party to raise fumds by promising to repay a lender in accordance with the terms of a contract. Bond indenture isa contract hetween bondholders and bond issuers by specifying certain righ's and regulations to both the parties A trustee is a third party such as bank which is independent and act as a representative of bond holders. Price change + Coupon interest (iuny) Price at the beginning of the holding period The formula for approximate YTM is as follow: ree (Fh) 2 Holding Period = AYTM = SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.L2 INVESTMENT MANAGEMENT 10, ‘Bond valuation is the provess of determining the bond values. Bond valucs actually refers to the present values of securities like bonds, debentures etc. The present value of all the securities future cash flow is given by. Coupon Coupon ; Present vane-[i +YTM)"” (1+ YTM) Coupon ,+ Face value (+ YTM): DDB isa debt instrument which is issued by financial institutions, DDBs possess issue price and face value. On the date of maturity, the holder receives this issue price andl face value. -. DDB valuation is 28 follows, 8{0DB) = (+h ulation of Macaulay's duration for semiannual bounds. M clay rrM yr) fear Tym (= Jor (» v™ MD = MV (FT M im) Active bond management need to adop! more/enhanced investment strategies so as to attain effective bond portfolio, MMD ng UNIT - HT Stocks are the form of securities which transfers the ownership of the firm in the form of bonds and debentures. PBR is the ratio of price per share divided by the book value per share, Price per share Book value per share The securities whose expected retum is less than its equilibrium expected retum. Equivalently, the securities with negative alpha, These securities impress investors and who therefore are willing to pay a price for them which is ‘ot justified by their EPS or P/E ratio. The intrinsic value of a share is represented by the equation, Dy D; D, + = © UR RY Ry PBR ~ D, ~ +k) Price ofthe share, pi ° K-g The weighted average cost of capital is an aggregation of multiple costs overheads utilised by the company. Most commonly used costs incide the post-tax cos! of equity, preference and debt. [Wac 7 +W/F) + WAI) Market price 10 book value ratio is calculated as follows, Mirket price per share atime FV ratio= Pie ‘bok vale i= Oe ame The securities market refers to the market for equity debt and derivatives. The debt market is further classified into three types i.c., the govemment securities market, the corporate debt market and the money market, ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.List of Important Definitions and Formulae La UNIT - IV The vanance of retums for a portfolio of assets can be calculated with the following general formula. The portfolio standard deviation of X and Yis, yo} W2 +03 W2+2p, 6,0, "6, Portfolio return = R= DY xda+p.ke) The formula for calculating sharpe ratio is Rrisk Premium _ Fe—ry 6 Total risk oP ‘The formula for calculating optimum portfolio of two securities i s, ORE + 2K Katy 84-58) The risk return relationship propounded by the ATP can be represented as follows, 1 ABA 1 4B tm +BY Fr )4 Bali 77) x covtryry = He B MG =H] n UNIT-V Closed ended mutual funds do not issue shares or units or repurchase or redeem on a periodic basis. Units of such schemes can be redeemed only on termination or through dealing in secondary market. Canshare. Canstock, Cangrowth, SBI Magnum, Mastershare ete., are examples of such mutual fund Money market funds are used in shon-term liquid assets like Centificate of Deposits (CDs) or commercial papers and for them capital is raised by selling shares to the investing public at @ price equal to the asset value of the existing shares outstanding plus a loading fee or service charge. Any investorbefore investing in any business considers two essential factors and those ‘mean return evaluates the average rate of return for a particular period Therefore, geometric mean return can be calculated as, ¢ returnand risk. Geometric MR = Yilenyleny ater Where r indicates retum and 1, 2...Tare time periods, ‘A mutual fund is a special type of investment institution which acts as investment conduit, It collects or pool the savings of the community and invests large funds in a fairly large and well diversified portfolio of sound investments, The performance measures assess the overall performance of a portfolio or fund. Eugene Fama has provided an analytical framework that allows a detailed breakdown of a funds performance into the source or components performance. This is known as the Fama decomposition of total retum, The performance measure developed by Jack Treynor is referred to as Treynor ratio or reward to volatility ratio. It is concerned with systematic risk (or beta) and therefore, i is the relationship between reward or risk premium to the volatility of retum as measured by the portfolio beta. The formula for calculating Treynor index may be stated as follows, Risk prem Portfolios BB, The performance measure developed by William Sharpe is refersed toas the shape ratio or the reward to variability ratio, Itis the ratio of the reward or risk premium fo the variability of return or risk as measured by the standard deviation of return, The formula for calculating sharpe ratio may be stated as, Risk premium _ 7, —r, »Totalrisk SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.Code No. 1067 FACULTY OF MANAGEMENT MBA (CBCS) IV-Semester Examination May/June - 2019 INVESTMENT MANAGEMENT Paper - MB - 404-1 (Finance) (Elective - Ill - Finance) Time: 3 Hours ‘Max. Marks: 80 Note: Answer All the Questions from Part-A and Part-B Each question carries 4 marks in Part-A and \2 marks in Part-B PART-A (S 4= 20 Marks) [Short Answer Typel 1. Distinguish between investment and speculation 2. Whatis active und passive bond postfolio? 3. State the famous stock indcics in India 4. State the assumptions of CAPM. of mutual funds investment? 5. Whatare the benef PART-B (5 12 = 60 Marks) [Essay Answer Type] 6 (a) _ Explain the investment decision making process and state the sources for investment information, OR (b) Discuss various approaches for investment analysis to a prospeetive investor. 7. (a) The Ex-Post retums on a stock are as below: Year % Returns 2017 1-14 2016 1-14 2015 14-13 2014 W-12 2013 12-13 2012 H-12 You are required to find the mean return and risk of the stock. OR (b) Calculate the duration for Bond A and B with 7 percent and 8 percent coupons having maturity period of 4 years. The face value is & 1000. Both the bonds are currently yielding 6 percent. ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.QP.2 10. (a) ) @ {b) (a) (b) INVESTMENT MANAGEMENT ‘Three stocks X, Y & Z have the following data. The correlation co-efficients between the returns of each pair of stocks are given in the following matrix. x[y[z 1.00 | -0.68 | 0.18 -0.68| 1.00 |-0.39 0.18 | - 0.39) 45% and 20% of the funcls in X,Y & Z ind the risk and return of the portfolio created by investing 35% stocks respectively. OR ‘Mr. Kishore has bought a stock that has paid & 3 as dividend per share during the last year. He expects two situations either a 5 percent decline in the dividend or 5% growth in the dividend in the next year. He expected arate of return of 20%. Determine the value of stock for both the situations. Explain in detail CAPM and APT models and present the similarities and differences between them. oR Stocks A and B had the following returns over the last 5 years. Is it advisable to have a combination of both the stocks in a portfolio of equal proportions and what would be the returns and risk of that portfolio’ Discuss the features, types and schemes of Mutual funds in India. OR Postal savings and XYZ mutual fund are as below; ‘The returns generated by the N' Retums | — Returns on Postal | on XYZ Savings | Mutual Fund 2017] 11% | 6% 2016 | 13% 7% 2015 | 14% | 6% 2014] 12% | 6% 2013| 10% | 7% 2012 | 13% | 6% Returns Years | on NSE Find the Jenscins alpha of the mutual fund and state whether it had performed better than market or not. SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.‘MAYIJUNE-2019 (WITH SOLUTIONS) QP.3 (_ SOLUTIONS TO MAY/JUNE-2019, QP) PART-A( 5 * 4= 20 Marks ) [Short Answer Type] Qt. Distinguish between investment and speculation. Answers For answer refer Unit-l, Page No. 1 10, Q.No. 7, Topic: Investment Vs Speculation, 2, What is active and passive bond portfolio? Answer: Active Bond Portfolio Inactive bond portfolio, investors actively participate in trading activities. The main objective of setive bond portfolio strategies is to take advantage of variations in these factors which may have an impact on performance and valve of a bond, These strategies strive to perform more effectively than market and yield more retums compare to passive investment strategy. The basic assumption of this strategy is to make bets on future interest rates and capitalize them. Such bets can yield abnormal retums only if inierest rate forecasts are accurate and ability to interpret information is outstanding. However, forecast of interest rate are rarely accurate. Passive Bond Portfolio. For answer refer Unit-Il, Page No. 2.32, Q.No. 25, Topie: Passive Bond Management. Q3. State the famous stock indicies in India. Answer: The famous stock indices in India are, 1. S&PCNX Nifty 2, Sensex/Bombay Stock Exchange (BSE) 3. National Stock Exchange (NSE) 1. S&P CNX Nifty Nifty is one of the rigorously built stock market in India. It represents the price fluctuations of 50 selected stocks based on the market cap and the liquidity. Nifty has selected 1 April, 1995 as the base date and! 1,000 as the base value. Nifly is a value weighted index wherein weights of constituents represents the relative market caps of the companies that includes the index. 2. Sensex/Bombay Stock Exchange (BSE) The Bombay stock exchange sensitive index, usually called as the sensex is one of the most famous followed stock ‘market index in India, Sensex basically, indicates the fluctuations of 30 sensitive shares from particularly mentioned and other groups, Sensex is a value weighied index which considers April. 1, 1979 as its base date even though it started functioning on January 1, 1986 the value calculated at 598,53 was considered as 100 ax base date Value upto the end of August 2003. 3. National Stock Exchange (NSE) The National Stock Exchange was started in November 1992. Its initial capital outlay was € 25 crores which was subscribed by the Industial Development Bank of India (IDBI) and co-subscribed by other lending institutions such as GIC. LIC. other insurance companies. banks and financial institutions. ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.QP.4 INVESTMENT MANAGEMENT Q4. State the assumptions of CAPM. Anawer : For answer refer Unit-1V, Page No. 4.37, Q.No. 10. Q5. What are the benefits of mutual funds investment? Answer: For answer refer Unit-V, Page No. 5.18, Q.No. 9, Topic: Advantages of Mutual Funds for Investors (1 to 3 Points). PART-B (5 « 12 = 60 Marks) [Essay Answer Type] QS. (a) Explain the Investment decision making process and state the sources for investment information. Answer : Investment Decision Making Process For answer refer Unit-l, Page No. 1-4, Q.No. 4. Sources for investment Information For answer refer Unit |. Page No. 16. Q.No. 5, Topic: Sources of Investment Information. OR {b) Discuss various approaches for investment analysis to a prospective investor. Answer : For answer refer Unit-1, Page No. 1.29, Q.No. 23 Q7. (a) The Ex-Post returns on a stock are as below: Year % Returns 2017 15-14 2016 13-14 2015 14-13 2014 13-12 2013 12-13 2012 1-12 You are required to find the mean return and risk of the stock. Answer Ex-Post returns ~ Year | %Retums | ending val inning value Degining value 2017 | 1s—14 ~66 2016 | 13-15 1 ros | 14-13 “1 204 | 12 a 2013 | 12-13 83 202 | 12 9 mr Mean rem (F) = % 6647.7 71-77 +8.3+9.1 & 37 = 0.62 ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.(MAY/JUNE-2019 (WITH SOLUTIONS) QP.s Mean Return 0.62 \ + (83-06 - 3 = (S218 80.13 $960 69.22 + S898 71.91 - 38497 - 6033 =1.77 Hence, mean retum is 0.62 and risk is 7.77 Working Notes Calculation of export returns ending value — begining value beginning value For 2017 4i!5. x 100-66 re = 100 In the same way calculate expost retums for remaining yours. ‘OR {b) Calculate the duration for Bond A and B with 7 percent and 8 percent coupons having maturity period of 4 years. The face value Is ¢ 1000. Both the bonds are currently yielding 6 percent. Answer: For answer refer Unit-Il, Page No. 2.25, Q.No. 4. GS. (a) Three stocks X,Y & Z have the following data. Stocks | Retums | Total Risk x | 16% 8% Y | 20% | 10% z | mm | m% The correlation co-efficients between the returns of each pair of stocks are given in the following matrix. Find the risk and return of the portfolio created by investing 35%, 45% and 20% of the funds in X, Y &Z stocks respectively. Answer : Expected retum of portfolio (,) = wri +waFi + war = 0.35 « 16% + 0.45 ¥ 20% + 0.20 x14% 5.6% +9%+ 2.8% = 174 percent Expected risk of portfolio (o,) Variance of Portfolio (o?,)= wo + ws'0: + wo? + 2mwse2 + Away + Qwawaes = (0.35 * 8Y%F + (0.45 * 10%)?+ (0.20% 11 68) +2 (0.18) + (-039) = 784 +2025 + 484~ 1.36 + 0.36 -0.78 =3115 ‘OR ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.QP.6 INVESTMENT MANAGEMENT {b) Mr. Kishore has bought a stock that has paid € 3 as dividend per share during the last year. He expects two situations either a5 percent decline in the dividend or 5% growth in the dividend He expected a rate of raturn of 20%. Determine the value of stock for both the Answer: Given that, D,~ 3 (Last year dividend) 8," 5% oF 0.05 F = 20% oF 0.20 Sttuation-1 Decline in dividend by $ percent Di(1+ 2) oF _ 3+ 0.20-(-0.05) 3(1-0.05) 0.20 0.05 3(0.98) 025 2.85 _ ~ 025 14 Value of stock when dividend decline by 5 percent is € 11.4. Situation-2 Growth in dividend by 5 percent _ Dal ge] ars (1 +0.05) ~ 0.20- 005 30105) _ 3.45 5, O15 ois = 2 Value of stock when dividend grows by 5 percent is €21 Q9. (a) Explain in detail CAPM and APT models and present the similarities and differences between them. Answer: CAPM For answer refer Unit-IV, Page No. 4.20, Q.No. |2, Topic: Capital Asset Pricing Model (CAPM). APT For answer refer Unit-IV, Page No. 4.25, Q.No. 17, Topic: Arbitrage Pricing Theory (APT) Similarities and Differences Between APT and CAPM For answer refer Unit-1V, Page No. 4.28. Q.No. 19. ‘OR {b) Stocks A and B had the following returns over the last 5 years. Year 2014 | 2015 Retum of Stock A (40% | 15% Return of Stock B (1)13%| 19% Is it advisable to have a combination of both the stocks in a portfolio of equal proportions and what would be the returns and risk of that portfolio? ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.‘MAY/JUNE-2019 (WITH SOLUTIONS) QP.7 Answer : For answer refer Unit-IV, Page No. 4.32, Q.No. 3, (Exclude Topic: Coefficient of Correlation). Hence, it is advisable to have a combination of both the stocks in equal proportion in a portfolio as covariance between stock r, and f, is positive which indicates that both move in same direction. The correlation co-efficient of both the stocks is positive which indicates that correlation is very strong. Expected Return of the Portfolio Given proportion ic $0% of A and 50% of B. Combined portfolio retum can be calculated using the following formula. ‘ R= Lwk R= W,R,+W,R, = (05 * 10.4) + (0.5 = 10.6) =52+53 =105 Expected Retums of the portfolio (R,) = 10.5% Expected Risk of the Portfolio (c,) Portfolio Risk (6,)= Vow. + ox wat + 2wa.we (pana. On) = yi(10.91) = (0.5)? + (12.29 « (0.5 F + 2(0.5 )(0.5}(0.95 «10.91 * 12.29) ¥ 29.75 + 37.76 + 63.69 /131.2 Portfolio Risk (a, 10. (a) Discuss the features, types and schemes of Mutual funds in India, ‘Amswer : Features of Mutual Funds For answer refer Unit-V, Page No. 5.13, Q.No. $, Topic: Features of Mutual Funds. Types of Mutual Funds For answer refer Unit-V, Page No. 5.14, Q.No. 6. Schemes of Mutual Funds For answer refer Unit-V, Page No. 5.15, Q.No. 7. OR (b) The returns generated by the NSE, Postal savings and XYZ mutual fund are as below; Years | Returns 13% 14% 6% 12% 6% 10% Th _13% G% 15 % Find the Jenseins alpha of the mutual fund and state whether it had performed better than market or not. SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.QP.8 INVESTMENT MANAGEMENT Answer : Jensen's Performance Measure The formula of Jensen's performance measure is R,-R,= a +B(R,—R) Ordinary least squares regression must be used to find Jensen’s alpha of the mutual fund, Let (R,- R,) = ¥ and (R,, ~ R,) =X Following cquation must be computed by using the formula, Y=a+BX Where, = 3Y and ¥ = Beta can calculated as, p- NEXY —ENEY NEA? — (EX J" Returns Returns Returns | onXvZ | onPostal| x Vo pay x TR.) | Mutual Fund | Savings | (R,-R) (R,-R) ” (R,) (R) 2017 1% 14% 6% 5% 8% 40 2 2016 13% 15% ™m 6% 8% 48 6 2015 14% 16% 6% 8% 10% 80 64 2014 12% 3% 6% 6% 9% 54 36 2013 10% 16% ™% 3% 9% 27 9 2012 13% 15% 6% ry 9% 63 49 rx=35 | xy =53 | Xv =312 | EX =219 j= NEXY-UiDy AEX - (EX) _ 6(312)-(35)(53) ~~ 6(219)- (35), = 1872-1855 = [314 = 1225 1 9 Y = P= 5.83 ¥ A A= 8.83 ~ (0.19) (5.83) = 8.83 - 1.107 =7.723 Since alpha is positive (A= 7.723), the mutual fund outperformed the market on risk adjusted basis over the specific period. SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD, —<$ — _—_—_—_Code No. 4567 FACULTY OF MANAGEMENT MBA (CBCS) IV-Semester Examination May/June. 2018 INVESTMENT MANAGEMENT Paper - MB - 404-1 (Elective - Ill - Finance) Time: 3 Hours ‘Max. Marks: 80 Note: Answer All the Questions from Part-A and Part-B Each question carries 4 marks in Part-A and 12 marks in Part-B PART-A (5 x 4= 20 Marks) (Short Answer Type) 1. State the investment decision process 2. Whatare features of debt instruments and state its types? 3. State the uses of Security Market Indexes 4. How to determine portfolio return and risk? 5S. State types of mutual funds. PART-B (5 «12 = 60 Marks) (Essay Answer Type) 6. (a)_Discuss the factors influencing for investment decision for a rationale investor. OR (b) Explain the elements in fundamental analy sis 7. (a) The ex-ante returns oma fund are estimated as below. [% Retums 1123 T1464 [1321 [986 [ton [956 Probability | 0.1 | 01 | 01 | 02 | 03 | 02 ‘You are required to find the return and risk of the fund. OR (b) Consider « bond selling ata par value of 1,000 with 7 years to maturity and 8% coupon payment, ifthe yield to maturity is 9% find the duration of bond when the coupon are paid annually and semi-annually. 8. (a)_‘The latest dividend paid on an equity share is 3.45 per share these dividends have been growing al a constant rate of 6.7% pet annum and are likely to grow at this rate tll long discount future. The required rate of retum is 11.12%. You are required to find its intrinsic value today, after two years and after 5 years. oR ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.QP.2 INVESTMENT MANAGEMENT (b) Mr Ashok wants to purchase a stock and hold nit for 5 years. He estimates that € 4 dividead would be paid by the company for the next five years. He hopes to sell the shares at @ 60 at the end of the fiflh year. His required rate of return is 10% What is the present price? 9. (a) Explain the assumptions and applicability capital asset pricing model in portfolio selection, OR (b) Assume your selfas a portfolio manager and with the help of the following det over priced or under priced in terms of the security market line. ls, slate the securit ‘Sundard Deviation 0.50 035 0.40 024 0.28 0.18 Nifty Index . 0.20 _ERills 0.00 10. (a) Discuss the problems and prospects of Mutual Fund Investments in India. oR (b) Withthe following details evaluate the performance of the different funds by using Sharpe, Treynor and Jensen methods with R, = 5%. ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.MAY/JUNE-2018 (WITH SOLUTIONS) QP.3 (_ SOLUTIONS TO MAY/JUNE-2018, QP_} PART-A(5 x 4 = 20 Marks) Answer: For answer refer Unit-l, Page No. 146. Q.No.4. Q2. What are features of debt instruments and state its types? Answer : Features of Debt Instruments, For answer refer Unit-Il, Page No. 2.41, Q.No. 6 ‘Types of Debt instruments For answer refer Unit-ll, Page No. 2.41. Q.No. 5. Q3, State the uses of Security Market Indexes, Answer: For answer refer Unit-IIL Page No. 3.23. Q.No. 15, Topic: Uses of Security Market Indexes (6 Paragraph Only). Q4. Howto determine portfolio return and risk? Answer : For answer refer Unit-1V, Page No. 4.36, Q.No. 9. Q5. State types of mutual funds. Answer : For answer refer Unit-V, Page No. 5.29. Q.No. 9. PART-B (5 « 12 = 60 Marks) (Essay Answer Type) the factors influencing for investment decision for a rationale inv Q8. (a) Discus Answer : For answer refer Unit-l, Page No. 1.10. Q.No. 8, Topic: Factors to be Considered While Making an Investment OR (b) Explain the elements in fundamental analysis. ‘Answer : tor. For answer refer Unit-1, Page No. 133, Q.No. 2S, Topic: Components of Fundamental Analysis, Q7. (a) The ex-ante returns on a fund are estimated as below. [Probability | 0.1_| You are required to find the return and risk of the fund. Answer : Calculation of Expected Return Expected return (9) = Epi ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.QP.4 INVESTMENT MANAGEME! % Returns (r)_| Probability (p) ] 123 ol 14.64 o. 13.21 01 9.46 02 10.11 03 9.56 02 Total (7) ] Calculation of Risk Return [Probability] P,r, i (r) (p) (x, -10.825) 1123 Or 1123 0.405 14.64 ot 16a 3815 13.21 on 1321 2.385 0.569 9.86 02 1972 | 0.965) 0.186 10.11 03 3033 | (713) 0.153 9.56 02 to2_| 1.265) 0.320 Total Risk 2.699 Hence expected returm is 10.825% Expected risk is 2.699. OR {b) Consider a bond selling at a parvalue of ¢ 1,000 with 7 years to maturity and 8% coupon payment, if the yield to maturity is 9% find the duration of bond when the coupon are paid annually and ‘semi-annually. Answer Given that, bond = & 1,000 Maturity period ~ 7 years Coupon rate = 8% ‘Yield to maturity = Value Duration of bond when coupon is paid annually CExL, CPx? CPx}, C4 , CE 16, FAT D (+o! a+? +n +08 +08 — +08” +07 F.C, Ch, Ch, Ch, Ch, Ch deal ase dent to C408 ene Oto! sont . 80%6 , 1080*7 (1.09)' © (1.09) .09)° i w_, 80, _w >, 301080. 1.08)" * (097 * (L097 ~ (1.099% * (1.099% * (7.09" ~ (1.09) = 7339.1134.67 4188.32 + 226.70 + 289.97 4 286.21 + 4138.58 73.30 + 67.33 4 61.77 + $6.67 31.99 + 47.10 + $00.79 = S384 949.04 = 5.58 years Duration of bond when coupan is paid semi annually: ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.‘MAYIJUNE-2018 (WITH SOLUTIONS) t cr, co crx: (1+ 0.045)" | +0045)" | (1+ 0.045 @ (3) | M=@)«@) | B= (4) xt 40 09569 3828 1914 40 09157 3663 36.63 40 08763 358.08 52.88 40 0.8386 33.54 6708 40 0.8024 32.10 80.25 40 0.7679 30.72 92.16 40 0.7uR 2039 102.86 40 0.7032 28:13 112.52 40 0.6729 2692 4 40 0.6439 25.76 128.8 40 0.6162 24.65 1356 6 40 0.5897 23:59 14154 63 40 0.3643 22.37 146.70 7 loo | 0.5399 $61.50 3930.5 948.83 5167.5 51675 D> yan = 5.45 years QB. (a) The latest dividend pald on an equity share Is © 3.45 per share these dividends have been growing ata constant rate of 6.7% per annum and are likely to grow at this rate till ong discount future. The required rate of return is 11.12%. You are required to find its Intrinsic value today, after two years and after 5 years. Answer : Given that, Latest dividend ~ 8 3.45 Required rate of ret Growth rate (constant) ~ 6.7 (i) Calculation of intrinsic value of equity share today: (14 g) | 348(1 +0067) Skog O12 0067 ~ 368 pitty = ra1.26 Calculation of intrinsic value of equity share after two years, Dy (1+ gy _ 3450+ 0.067) kg” O1112-0067 3.45 (1.138) = Dts (i) Calculation of intiinsic value of equity share after § years Dy(L+ x) _ 345(1+ 0.067) kg O112-0.067 3.45 (1.383) (0.0482 110794 Ss OR ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.QP.6 INVESTMENT MANAGEMENT {b) Mr. Ashok wants to purchase a stock and hold on It for 5 years, He estimates that ¢ 4 dividend ‘would be paid by the company for the next five years. He hopes to sell the shares at 7 60 at the end of the fifth year. His required rate of retum Is 10%. What Is the present price? Answer : db, dD Pat (> atk? a>k" Present value of stock (S,) = Ay are! Given that, Dy Dy DyyoooD, = Annual dividends = & 4 (constant) S, = Sale price at end of holding period = 8 60 A= Required rate of return = 10% n= holding period in years = 5 years 4 4 4 4 “4 S=syet 5 et er ag he (1+0.10)' 0.10)? (1 +010)" (1+ 0.10) (1+ 0.10) = 3.64 + 3.31 + 3.01 + 2.73 + 39.74 = 252.43. Q9. (a) Explain th Answer : Assumptions of Capital Asset Pricing Model For answer refer Unit-IV, Page No. 4.21, Q.No. 12, Topic: Assumptions of CAPM. Applicability of Capital Asset Pricing Model For answer refer Unit-lV, Page No. 4.21, Q.No. 13, Topic: Advantages/Applicability of CAPM, OR (b) Assume your self as a portfolio manager and with the help of the following details, state the socurities that are over priced or under priced in terms of the security market line. Security | Expected Beta ‘Standard Deviation ssumptions and applicability capital asset pricing model in portfollo Answer : ‘The return on the SML can be estimated with the help of the following formula. m= + Ba 77) So, estimated retum for security 4 will be, =r Bier) = 0,09 + 1.7 (0.13 - 0.09) = 0.158 SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.MAY/JUNE-2018 (WITH SOLUTIONS) QP.7 Likewise, the return on SML of other securities is estimated and tabulated as follows, ‘Treynor Measure = Fund A Q10. (a) Discuss the problems and prospects of Mutual Fund Investments in India. For answer refer Unit-V, Page Nos, 9.22, 5.23, Q.No. 16, Topics: Problems of Mutual Funds in India, Prospects of Mutual Funds in India Bund 1,00 oR Jensen Measure = R,-[R, +8, (R,—R)l (>) With the following details evaluate Z the performance of the different funds R,, = Market Index by using Sharpe, Treynor and Jensen methods with R,= 5%. Fund d= 2~[5 + 0.98 (10 - 5)] =2-[5 +0.98(5)] [5+49] =2-99 =-79 Fund B= 12 - [5 + 0.97 (10 ~5)] =12-[5 +0.97(5)] Amaiet¢ 12-[5 +485] =12-9.88 =2.15 Fund C= 8 [5 +1.17 (10 - 5)] 8 [5+ 1.17(5)] =8- 10.85 =-2.85 Fund D = 9 — [5 + 1.22 (10 ~ 5)] =9-[5 + 1.22(8)] =9-[(5 +61] =-21 =0.25 Market = 0 [By definition). _ SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.R16 PAPERIL FACULTY OF MANAGEMENT MBA (CBCS) IV-Semester Examinations Modet Paper-1 INVESTMENT MANAGEMENT Time: 3 Hours ‘Max. Marks: 80 Note: Answerall the questions from Part-A and Part-B Each question carries 4 marks in Part-A and 12 marks in Part-B. PART-A (5 « 4=20 Marks) (Short Answer Type) Solutions 1 Real Assets Vs Financial Assets. (Unit | - HPR and YTM (Unie-ll | 3. Price Eamings Ratio (Unit-tIl | Page 4. Security Matket Line {unis Page s Open Enced Funds: (Unit-V | Page Wo. 5.27/01) PART-B (5 « 12 = 60 Marks) (Essay Answer Type) 6. (a) Whatare the various forms of investment altematives? Give a detailed account of any five. (Unit. | Page| OR {b) Define risk and distinguish between systematic and unsystematic risk. nit Ps 7. (a) What are fixed Income secunties? What are the different types of fixed income securities in India? (Unital | Page Me. 2.2/1) OR (b) Calculate the duration for bond ‘A’ and bond ’B" with 7% and 8% coupons having a maturity period of 4 years. The face value of the bonds are 2. 1000/- and both the bonds are currently yielding 6%. Which one is advisable and why? (Unit J Page Mo. 2.25 Problem No.4) 8. (a) _ Explain various epproaches of common stock veluation, (Unit | Page We. 3.3 02) OR {b) Explain the Whitbeck Kisor Model in stock valuation. (Unit | Page We. 3.9] 08) 9. (a) Ansari got the following information regarding his favorite stocks. He wants to invest in all the four stocks equally ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.MP.2 10. ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. INVESTMENT MANAGEMENT The market variance is 25 and expected return is 20%. (0) What would be Ansari’s portfolio retum and risk? )) Can you advise him regarding the amiount to be allocated on each security 60 as to enhance his eamings? (Unit V | Page Ne. 42/ Problem Ne. 1) OR (0) Define Markowitz diversificaton. Explain the statistical method used by Markowritz to obtain the risk reducing benefit (UnitV Page (a) From the folowing information, rank these mutual funds based on ‘Sharpe's and Treynor's methods, ‘Mutual | Average | Standard | Corelation Funds | Annual | Oeviation | with Market Return A 8 ar 08 B 14 18 06 c 15 8 09 Market | 13. 12 : Risk free rate of interest is 9. (Unit: J Page No. 6.5 Problem No. 3) OR {b) Explain about the problems and prospects of Indian mutual fund industry. Slate and explain how they are less risky than investments in stocks. 522/016)‘Model Question Papers with Solutions Model Question Pepers wih Song ig —__ MODEL R16 PAPERID FACULTY OF MANAGEMENT MBA (CBCS) IV-Semester Examinations Model Paper-I INVESTMENT MANAGEMENT Time: 3 Hours Max. Marks: 80 Not eens 6 (2) (b) (b) Deep Discount Bonds (Unit! Page Free Cash Flows {Univtt | Page Net Asset Value {Unit-V | Page We Ex-post Return Vs Ex-ante Return (Units | Capital Market Line Vs. Security Market Line Answer all the questions from Part-A and Part-B. Each question carries 4 marks in Part-A and 12 marks in Part-B. PART-A (5x 4= 20 Marks) (Short Answer Typed Solutions 5.27/02) 1.47) 09) PART-B (5 x 12 = 60 Marks) (Essay Answer Type) Explain various causes of risk. oR A. company manages a slock fund consisting of fund stocks with the following market values and betzs. Siock | Market Value | Bota 1,00,000 1.10 50,000 120 75,000 075 1.25,000 0.80 1,50,000 1.40 500,000 | Calculate beta of the portfolio. ‘Wnit-| | Page Ho. 1.26 | Problem fo. 1) Mr. Sagar is considering the purchase of a bond currently seling at © 878.50, The bond has four years to maturity witha face value of € 1000/- and 8% coupon rate. The next annual interest payment is due after one year from today. The required rate of retum Is 10%. (i) Calculate the intrinsic value of the bond, Should Sagar buy the bone? 409700 (i) Calculate the YTM of the bond. {Unit | Page Mo. 2.15 Probiem No.6) oR Descrite various theories proposed for understanding the tem structure of interest rates. {Uniti Page Mo. 2.27 1020) ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.MP.4 INVESTMENT MANAGEMENT 8. (@) Explain the significance of P/E ratio in equity valuation. OR (b) The retums of Fashions Ltd. At present is 21%. This assumed to be continued for the next 5 years and after that is assumed to have a growth rate of 10% indefinitely. The dividend paid for the current year is €3.2/-. The requirad rate of retum is 20% and the present price is %57/-. What is the estimated price according to two stage model, Should you purchase the bond? (Uniti | Page Mo. 3.11 | Problem No. 3) Explain the Sharpe index model. How does it differ from the Markowitz model? © = OR (b) Mention the assumptions underlying the standard Capital Asset Pricing Model (CAPM). Despite its limitations, why is the CAPM widely used? 10. (a) Consider the following information for three mutual funds A, B and C and the market. Stock | Mean Standard | Beta Retum | Deviation A 15% 20% 0.90 B 17% 24% 1.40 c 19% 27% 4.20 Market 16% 20% 1.00 Index _ _ The mean risk-free rate was 10 per cent. Calculate sharpe’s measure, treynors measure and Jeniens measures for the three funds and for the market index. (Uni OR (b) The data related to a mutual fund trust is as follows. ‘Scheme size Face value of units Value of investments Receivables Accrued income Other current assets | Liabilities Accrued expenses +% 10.00 lacs +%0,75 lacs + 70.25 lacs +%3.00 lacs +%2.25 lacs -%0.50 lacs Calculate the NAV of the above mutual fund. SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. (Wnit-1V | Pag 15 108) (Unit1V | Page Wo. 4.21 | 013) 1 Page No. 6.19) Problem No. 1)Question Papers with Solutions MP. PAPERIO R16 FACULTY OF MANAGEMENT MBA (CBCS) IV-Semester Examinations Model Paper-Il INVESTMENT MANAGEMENT ‘Time: 3 Hours Max, Marks: 80 Note: Answer all the questions from Part-A and Part-B. Each question carries 4 marks in Part-A and 12 marks in Part-B. PART-A (5 « 4= 20 Marks) (Short Answer Type? Solutions 4, Types of Mutual Funds {Unit-V | Page Mo. 5.29 / 09) 2, How to determine portfolio return and risk? (UnittV | Page No. 4.36/03) 3. Dividend Discounted Models (Unit tll | Page Wo, 3.31/03) 4, Bond Duration (Unit Page Mo, 2.41 | 04) 5. Co-efficient of Variation (Units | Page Wa. 1.46 | 05) PART-B (5 » 12 = 60 Marks) (Essay Answer Typed 6. (a) Explain the various approaches to investment analysis. Mo, 1.29023) OR (b) Define Behavioural Finance, How do you evaluate the behavioural critique? (Unit-l/ Page Mo, 1.40/32) 7. (a) Explain briefly about various bond price theorems. (Unit / Page Mo. 2.16/02) OR (b) The Madsoft Company recently issued a 1000, 12% semiannual bond with 20 years of maturity (a) What will be the price of the bond, if the market rate of interest is 14%? (b) Determine the bond's Macaulay's duration when it was issued and (c) Two years later. (Unit 1 | Page Ne. 2.34 / Problem Wo. 6) 8. (@)_ Whatare the various measures of relative value? Explain. (Unit | Page Wo, 3.17 1011) OR (b) Describe briefly the Bombay Stock Exchange Sensitive Index (SENSEX) and the S&P CNX Nifty Index (Nifty) and their computational procedure, (Unit. | Page Wo. 3.27 1021) 9. (@) Stocks X & Y have yielded the following returns for the past 6 years. Return (%) ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.MP.6 INVESTMENT MANAGEMENT Years | Return | Retum x y 1 | 12% | 22% 2 | 18% | 18% a | 14% | 14% 4 | 22% | 10% 5 | 15% | 12% 6 | 20% | 18% Whatis the expected retum and risk of a portioio made up of 60% of Xand 40% of Y? nit-1V 1 Page No. 4.7 | Problem No. 5) OR (b) Stock X and Y had the following retums over the past 5 years, Yeor 200s | 2010 | 2011 | 2012 | 2013 Return on X (%) 9 —10 6 17 21 Return on ¥ (%) " -13 4a 2 15 it advisable to have a combination o! both the stock in a portfolio? (nit 1V | Pago Mo. 4.32 | Problem No. 3) 10. (a) Explain about the various methods of calculating returns on mutual funds. (Ut oR {b) Explain about the regulatory authority which protects the investors interest in India. [Page No. 5.21 1013) SIA PUBLISHERS AND DISTRIBUTORS PVT, LTD.Asked Questions And Important Questions Unit- 1 ESSAY QUESTIONS QI. Differentiate between real and financial assets. ‘Answer Important Question For answer refer Unit-l, Page No. 1.3. Q.No. 3. 2. What is investment process? Describe briefly the different stops involved in investment decisions. Answer May/Sune-13, 02a) For answer refer Unit-1, Page No. 1.4, Q.No. 4 Q3. Explain risk and retum with reference to investment. Answer : Important Question For answer refer Unit-I, Page No. 1.13, Q.No. 12. Q6, Explain various causes of risk. Important Question OR What are the root sources of risk? Answer Important Question For answer refer Unit-l, Page No. 122. Q.No. 16. Q5. Define risk and distinguish between systematic and unsystematic risk. May/une-16, 02(0) For answer refer Unit-l, Page No. 1.23, Q.No. 18. Q6. What is investment? Explain the different factors to be considered in investment decision. Dec.=14, 0210) OR Explain the factors that are being considered while taking investment decisions. Important Question OR Explain the Influencing factors for investment decision. Dee-13, 02(a) OR Discuss the factors to be considered in investment decision. Answer: For answer refer Unit-1, Page No. 1.10. Q.No. 8. ‘SHORT QUESTIONS Qt. Real Assets Vs Financial Assets. Answer: CApeit-17, Olah, May/Iune-16, QU) For answer refer Unit-1, Page No. 145. Q.No. 1. Q2. Ex-post Return Vs Ex-ante Return Maydune-1, O10) OR Exante and Ex-post Returns Apeit-18, O16) OR What is Ex-ante and Ex-post returns? Answer : Dec-13, O10) For answer refer Unit-I, Page No. 147, Q.No. 9 ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.F.2 INVESTMENT MANAGEMENT Unit-2 ESSAY QUESTIONS Q1. What are fixed income securities? What are the different types of fixed income securities In India? Answer : Important Question For answer refer Unit-II, Page No. 2.2, Q.No. |. 2, What are the factors that influences the value of debt Instruments? Answer : Important Question For answer refer Unit-II, Page No. 2.5. Q.No. 4. Q3. Explain the significance of bond portfolio management and state various types of bonds, Answer : Aprit-18, Q3(a) For answer refer Unit-II, Page No. 2.6, Q.No. 8. Q4. A 1000 par value bond bears a coupon rate of 14% and matures after 10 years. interest is payable semi-annually. Compute the value of the bond if the required rate of return is 16%. Determine the yleld- to-maturity if it is purchased for 1100 and is held till its maturity by an investor. Answer : Dec.-14, O30) For answer refer Unit-II, Page No. 2.11, Problem No. 2 Q5. Mr. Sagar is considering the purchase of a bond currently selling at © 878.50. The bond has four years to maturity with a face value of f 1000/- and 8% coupon rate. The next annual interest payment is due after one year from today. The required rate of return is 10%. (I) Calculate the intrinsic value of the bond. Should Sagar buy the bond? (li) Calculate the YTM of the bond. Answer 1 May/June-16, 03(0) For answer refer Unit-II, Page No. 2.15, Problem No. 6. Q6. Explain the method for valuing debenture that is compulsorily convertible (partially or fully) into equity shares. Answer : Aprit”May-11, Q3(a) For answer refer Unit-Il, Page No. 2.19, Q.No_ 13. Q7. Calculate the duration for bond ‘A’ and bond ‘B’ with 7% and 8% coupons having a maturity period of 4 years. The face value of the bonds are %. 1000/- and both the bonds are currently yielding 6%. ‘Which one is advisable and why? Answer : (Dec.-15, Q3(ap | AprilMay-14, 93(0)) For answer refer Unit-ll, Page No, 2.25, Problem No. 4. Q8. Describe briefly about the active and passive bond portfolio management strategie: OR ‘Important Question Explain active and passive bond portfolio management strategies. Answer + Dec.-13, Q34a) For answer refer rage No. 231, Q.No. 23. SHORT QUESTIONS Qi. What are Doji candle stick and deep discount bonds? Important Question OR Doji Candle Stick May/June-16, O1(c) OR Deep Discount Bonds. Answer: (May/June-16, QI(d) | April-15, QR(d) | May/Jume-12, QU(g)) For answer refer Unit-ll, Page No, 2.39, Q.No. 1. SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.UNIT-WISE FREQUENTLY ASKED QUESTIONS AND IMPORTANT QUESTIONS F3 2. What do you mean by bond convexity, AYTM and YTG? Tmportant Question OR Bond Convexity Dec-15, Qe) OR AYTM and YTC Answer: Dec=15. Q1d) For answer refer Unit-ll, Page No. 2.39, Q.No. 2. Unit-3 ESSAY QUESTIONS ‘Sts; (Vela de you. andaratand by common stock? Explain te various festureelzhararieriedcs of common stock. Answer Important Question For answer refer Unit-Ill, Page No. 3.2. Q.No_1 2. Explain various approaches of common stock valuation. Dee-=13, Q4a) OR Critically examine the various approaches to valuation of common stocks. Answer: ApritMay-09, Odie) For answer refer Unit-Ill, Page No. 3.3, Q.No. 2 Q3. Whatis price earnings multiplier approach? Explain the key determinants of the price earnings multiplier. Apri Mtay-11, Osa) OR Explain the significance of P/E ratio in equity valuation. Answer Aprit-17, Osa) For answer refer Unit-Ill, Page No. 3.8, Q.No. 7. Q4. The current dividend on an equity share of Profile Limited is & 4.00. Profile Limited is expectedto enjoy an above-normal gorwth rate of 16% for 6 years. Thereafter the growth rate will fall and stabilize at 10%. Equity investors require a return of 16% from Profile's stock. What price you would like to place onthe stock of the Profile Limited? Answer : Dec-14, 04h) For answer refer Unit-IIl, Page No. 3.9, Problem No. | Q5, The returns of Fashions Ltd. At present is 21%. This assumed to be continued for the next 5 years and after that is assumed to have a growth rate of 10% indefinitely. The dividend pald for the current year is 23.2/.. The required rate of return is 20% and the present price is 757/.. What Is the estimated price according to two stage model. Should you purchase the bond? ‘Answer : May/June-16, Q4(0) For answer refer U rm roblem No. Pramod Ltd. Operates a large ready made garment system in the textile Industry. The current market price of the stock is % 40/- and is expected to be @ SS/- after 3 years. The dividend per share would be © 2/- for the next 3 years. Calculate the rate of return of Pramod Lid's stock. ‘Answer : Dec.-15, O40) For answer refer Unit-Ill, Page No_ 3.13, Problem No. 3 Q7. What are the various measures of relative value? Explain. Answer : Important Question For answer refer Unit-III, Page No. 3.17. QNo. 11 ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.ra INVESTMENT MANAGEMENT Q8. Explain in detail about security market indexes. Also highlight the user of security market indexes. Important Question OR “Stock market indices are the barometers of the stock market”. Discuss. Answer : Dec.-15, 08a) For answer refer Unit-ITl, Page No. 3.22, Q.No. 15. SHORT QUESTIONS Q1. Price Eamings Ratio (Aprile 17, Qlie) | Jam-12, Oth) OR P/E Multiplier Approach May/une-16, Oe) OR Price-Eaming Multiplier (Dee-18, QU) | Dec-14, OUP) OR Earnings Multiplier Model Answer : April/May-14, 01) For answer refer Unit-Il, Page No, 3.31, Q.No. I. Q2. Whatis CAPM and dividend discounted models? ‘Important Question OR CAPM Dee-I5, Ole) OR Dividend Discounted Models Answer : May/June-16, O10) For answer refer Unit-II1, Page No. 3.31, Qo. 3. unit-4 ESSAY QUESTIONS Q1. Define the terms, (a) Portfolio (b) Portfolio risk and return. Answer : Important Question For answer refer Unit-IV, Page No. 4.2, Q.No. 1 Q2. Ansari got the following information regarding his favorite stocks. He wants to invest In all the four stocks equally. (i) What would be Ansari’s portfolio return and risk? (li) Can you advise him regarding the amount to be allocated on each security so as to enhance his earnings? Answer Dee-15, Q5(b) For answer refer UnitelV, Page No. 4.2, Problem No. 1 SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.UNIT-WISE FREQUENTLY ASKED QUESTIONS AND IMPORTANT QUESTIONS FS Q3. What Is Markowitz Theory? State its assumptions and significance. Answer = Important Question For answer refer Unit-IV, Page No. 4.10, Q.No. 3. Q4. Define Markowitz diversification. Explain the statistical method used by Markowritz to obtain the risk reducing benefit, Answer : May/June-16, Q5(a) For answer refer Unit-IV, Page No. 4.10, Q.No. 4. QS, Whatis CAPM? Discuss its assumptions. Important Question oR Explain the Capital Asset Pricing Model (CAPM). Answer : May/Iune-12, Q5(a) Fora Q6, Mention the assumptions underlying the standard Capital Asset Pricing Model (CAPM). Despite its imitations, why Is the CAPM widely used? May/Sune-13, Q5(a) oR Discuss the assumptions and applicability of Capital Asset Pricing Model (CAPM) under present situation, AprMay-14, O5(a) OR Explain the assumptions and applicability of capital asset pricing model, Answer: Dec.-13, Q5(a) For answer refer Unit-IV, Page No. 4.21, Q.No. 13. Q7. What are the similarities and differences between CAPM and APT? Aug iSept.-04, QS(a) OR Compare and contrast capital asset pricing model and arbitrage pricing theory. Answer : Important Question For answer refer Unit-IV, Page No. 4.28, Q.No. 19. SHORT QUESTIONS Q1. Security Market Line ‘(Apet-17, QUg) | Dee-15, Qty) | Dee4, Q1¢h)) OR What Is SML? Answer : For answer refer Unit-IV, Page No. 4.34, Q.No. | Q2. Arbitrage Pricing Important Question Answer: Aprit-17, 1th) For answer refer Unit-lV. Page No. 4.34. Q1 Q3. The Law of One Price May/June-16, Ola) Answer : For answer refer Unit-IV, Page No. 4.34, Q.No. 3 SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.F6 INVESTMENT MANAGEMENT Q4. Minimum Variance Portfolio (Apri May-14, Q1¢h) | May/Iune-13, QI(e)) OR What is minimum variance portfolio? Answer : Dec. 12-Jan-13, QN(g) For answer refer Unit 5. CML AprUNS, QR) OR Capital Market Line Answer: May/Jume-12, QU) For answer refer Unit-IV, Page No. 4.36, Q.No. 7. Unit- 5 ESSAY QUESTIONS ‘Q1. Consider the following information for three mutual funds A, B and C and the market. The mean risk-free rate was 10 per cent. Calculate Sharpe's measure. Treynor measure and Jensen's measure for the three funds and for the market index. May/Tune-13, Q6(b) OR Consider the following information for three mutual funds A, B and C and the market. | Stock | Mean Standard | Beta | Return | Deviation | A 15% 20% 0.90 B WW% 24% 1.10 c 19% 2% 1.20 Market | 16% 20% 1.00 Index | The mean risk-free rate was. 10 percent. Calculate Sharpe's measure, Treynor's measure and Jensens measures for the three funds and for the market Index. Answer Aprit-17, Q6(b) For answer refer Unit-W, Page No. 5.7, Problem No. 1 Q2. What do you mean by mutual funds? State its features, types and objectives. Important Question oR What do you mean by mutual fund? What are its features? Explain different types. Answer: Jan.-12, Q6{a) For answer refer Unit-V, Page No. 5.13, Q.No. 5 ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.-WISE FREQUENTLY ASKED QUESTIONS AND IMPORTANT QUESTIONS FZ Q3. Explain about the problems and prospects of Indian mutual fund industry. State and explain how they are less risky than investments in stocks. Dee-15, 9610) oR Discuss the problems and prospects of mutual funds in India. AprilMay-14, 06) OR Explain the problems and prospects of mutual funds investment system in India. ‘Answer + Dec=15, Q6(a) For answer refer Unit-V, Page No. $.22, Q.No. 16, Q4. Explain the regulatory framework proposed by SEB! to protect the investors of mutual fund. Important Question OR Explain about the regulatory authority which protects the investors interest in India. May/Sune-16, Q6(a) OR Discuss the Investors protection mechanism in India. Answer: Aprit-15, O60) For answer refer Unit-V, Page No. $.26, Q.No. 18. SHORT QUESTIONS Qi. Write a note on open ended funds and mutual fund. Important Question OR Open Ended Funds Ou) oR Mutual Funds Aprittay-14, 210) iol Aprit-17, QU) oR Net Asset Value Answer: (Dee, QUA) | Dect, Q1M) For answer refer Unit-V. Page No. 5.27. Q.No.2 3. ANC Answer: May/sune-16, 10) yswer refer Unit-V, Page No. $27. Q.No 3 Q4. Exchange Traded Funds Answer: May/June-16, QU) Foor answer refer Unit-V, Page No. $.27. Q.No. 4 Q5. Types of Mutual Funds Apts, OW) oR State types of mutual funds. Answer (Dec.-13, QUG) | Decn12an-13, OUD) or answer refer Unit-V, Page No. 5.29. Q.No. 9 ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.UNIT Investments _1 LEARNING OBJECTIVES ] ‘fier studying this unit, one would be able to understand, ‘The Concept of Investment and Investment Decisions, Differentiate Real Assets from Financial Assets Investment Decision Process and Factors Affecting it ‘The Concept and Measurement of Return-realized and Expected Return, ‘The Sources and Types of Risk and Measurement of Risk Various Approaches to Investment Analysis. oo 9% oo @ Behavioural Finance and Heuristic Driven Biases. The investment environment consists of various types of marketable securities and the buying and selling decisions relating to these securities. Investment process deals with how an investor make decisions for selecting marketable securities to invest in and how and when to make investments. Before understanding the investment environment and process, the term investment must be explained. Investment is referred as a sacrifice of present dollars for future dollars. Time and risk are the most important attributes of investment, The sacrifice which takes place in the present is certain but the amount of reward expected in future is uncertain. Many studies which were conducted on investments have concluded that investment risk and expected return are significant for investors, The level of risk faced by investors is usually estimated by examining historical experience. There are two approaches to investment analysis, fundamental analysis and technical analysis. Fundamental analysis make use of earnings and rates and risk evaluation of the firm for ascertaining adequate stock prices. Technical analysis is basically done for identitying recurrent and predictable patterns in stock prices. ividend prospects of the firm, expectations of future interest ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.12 INVESTMENT MANAGEMENT 1.4 INVESTMENTS Q1. Explain briefly about investment and investment decisions. Answer : Investment Investment act as a key element in business because based on capital. investor ascertains a specified quantity to produce outputs, purchases equipments, tools, buildings, etc. Even after investing, there is a probability to get losses in the form of damaged stock or out dated stock. Hence, itis essential for every investor to consider the importance of investment, Moreover, itis not possible for the investor to possess sufficient capital with him all the times. Therefore, capital can also, be borrowed in the form of loan by paying interest periodically. Hence, an investor while undertaking the business yields retums in the form of profits and incurs costs in the form of paying interest rates. Interest rates plays a crucial role in business, because the borrowing rate need to be reasonable. [the interest rate is low, investor would be able to gain more profits Investor need to analyse the market thoroughly before investing, by considering the element of risk and finally need to invest to obtain maximum returns. ‘Therefore, we can define investment as, “the process of sacrificing something in present for the prospects of gaining something later”. It implies that there are three dimensions to an investment, time, today’s sacrifice and prospective gain. For making proper investment involving both side and return, the investor has to make a study of the attenuatives avenues of investment the risk and return characteristics and make proper projection or expectation of the risk and return of the attenuative investments under consideration, Investment Decisions ‘The income that a person receives may be used for purehusing goods and services that he currently requires or itmay be saved for purchasing goods and services that he may requite in the future. In other words, income can be used for current consumption or saved for the future consumption. Savings are generated when a person or an organization abstains from resent consumption for future use. A person saving part of his income tries to find a temporary repository for his savings until they are required to finance his future expenditure, Thesc kind of decisions are known as investment decisions. The investment decisions are very important, firms must ensure that sufficient time is spent in planning these decisionsand must ensure that all the top executives from the field of production, engincering, marketing etc., are involved in weighing up the projects carefully 2. What are the various forms of investment alternatives? Give a detailed account of any five. ‘Answer: (Model Paperst, Q6(a) | Dec-18, 02a) There are numbers of investment aliernatives or avenues available for a investor. The most important Alteriatives are shown in the following figures. [aves AnratveTAvener [epost] | [Money Marker) (Haig stares] | [inmurance schemes] | [Real Este] (Financial Derivative) [Govenrmee ving manent vk | lions ox debentures] | Mutual Funds Reiremen schemes Figure: Investment Altornatives/Avenues: Deposits A sum of money paid into bank is referred as Deposit. It is a kind of financial asset of a investor. Deposits can be of different types such as Bank Deposits (current deposits, savings deposit or fixed deposit). Post Officer Deposit ( PO saving deposit, PO time deposit, PO monthly income scheme } and company fixed deposits ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.UNIT) INVESTMENTS 13 z ‘Government Savings Schemes In India, there are various kinds of small saving schemes available for individual investors which are offered by the government. The Indian Government offered these schemes to the investors through post office and selected banks of India. Some of the schemes wre listed below, (ay (b) © N ional Savings Certifi Money Market Instruments Public Provident Fund Scheme (PPF) Senior Citizen's savings scheme (Si te (NSC), Money market is an important constituent of Indian financial system, Reserve Bank of Indis defined money market as “a centre for dealings, mainly ofa short-term character in monetary assets, it meets the short-term requirements of the borrowers and, provides liquidity or cash to lenders. Itis the place where shori-ierm surplus investible funds atthe disposal of the financial and ‘other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government” 4. Bonds or Debentures These are long term debt instruments usually yield high rate of interest. The safety factor with these investments can be analyzed by considering credit ratings. They are freely tradcable and transferable, and hence provides for liquidity Fixed income securities provide investors with two kinds of income, They are (i) Current income (periodical receipt of interest or dividend) Gi) Capital gains. Debt instruments are the cherished conduit for investors money. An assured return and high interest rateare responsible for preference of bonds over equities. The year 1996-1997 witnessed their trading in the debt market, us resource mobilization reached a record level of almost ® 25,000 crores, which is much above the equity segment. The funds mobilized by ICICI and IDBI through debt issues accounted for high percentage of funds mopped in primary market. Financial institutions, banks and corporate bonds are offering attractive bonds like deep discount bond, education bonds, flexi-bonds ete. 5. Equity Shares Equity shares represent ownership position in a company. Equity holders are owners of the company and cleet the board of directors and enjoy voting right. Equity shareholders control the operations ofthe firm. Equity shareholders have a claim on remaining assets which are lefover after meeting the claims of creditors and preference shareholder in event of liquidation. Equity share capital is also called as risk capital, because if the company is not performing well, the holders of the equity share sufferers and if the company is doing well they will reap the benefits 4.4.4 Real vs Financial Assets Q3. Differentiate between real and financial assets. Answer : Financial and real accets constitute the most important form of acsets which can be differentiated om the (allowing grounds Criteria Financial Assots Real Assots ] 1. Nature Financial assets are intangible im nature Real assets are tangible and are also called as physical assets 2. | Examples | Technical knowledge, tmdemarks, putents et. are | Machinery. building, inventory, computers etc. are the examples of financial assets ofw firm, the examples of real assets 3. |Objective | Financial assets do not contribute towards the | Real assets heavily contributes towards the wealth 4, | Contribution to production system accumulation of society's wealth. Financial assets contribute indirectly towards production of goods and the delivery of services, as they helps in providing the financial assistance to the enterprises by guiding them to specifically undertake investment opportunities. of the society, Real assets contribute directly to improve the | production capacity of the finn to produce goods and services. ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.14 INVESTMENT MANAGEMENT 5. | Funetion Financial assets is concerned with the allocation of | Real assets is concerned with the production of| income or wealth among the investors, shareholders | goods and services. il ether parties associated with the business 6, | Risk nancial assets involve less risks Real assets invelve more risk than investing in financial asset, 1 or | Financial assets can he created and destroyed at any | Real assets undergoes destruction only as a result liquidation} time during the business operations, of accidents or by wear and tear of the assets, 8. | Representation | Financial assets can be placed on both sides of the | Real assets ean be shown only on the assets side ‘on balance sheet | balance sheet such as assets and liabilities, of the balance sheet 9. [Components | Financial assets have both fixed and current assets. | Real assets have only fixed assets, 1.2 INVESTMENT DECISION Q4. What is investment process? Describe briefly the different steps involved in investment decisions. Anawer : May/Sane-13, 920) Investment Decision Process The investment process involves a series of activities leading to the purchase of securities or other investment allernatives. Process/Stages of Investment Decisions The investment process can be divided into five stages as, 1. Investment policy Investment analysis 3. Investment valuation 4. Portfolio construction Portfolio evaluation, 1 ObpeiNes 2 Knowedye INVESTMENT VALUATION iRnevaie” PORTIOLIO CONSTRUCTION] + Dh J Figure: Investment Process ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.UIT INVESTMENTS 1.5 4. Investment Policy ‘The government or the investors before proceeding into investment formulates the policy for the systematic functioning. The essential ingredients of the policy are the investable funds, objectives and the knowledge about the investment alternatives and market. ()— Investable Funds The entire investment procedure revolves around the availability of investable funds, the fund may be generated through savings or from borrowings. Ifthe funds are borrowed the investor has to be extra careful inthe selection of investment alternatives. The return should be higher than the interest paid (i) Objectives ‘The objectives are framed on the basis of the required rate of return, need for regularity of income, risk perception and the need for liquidity. The risk takers objective is to cam high rate of return in the form of capital appreciation, whereas the primary objective of the risk averse is the safety of the principal Knowledge ‘The knowledge about the investment alternatives and markets, plays a key role in the policy formulation. The investment alternatives range from security to real estate, The risk and return associated with qu investment alternatives differ from each other. Investment in equity is high yielding but has more risk than the fixed income securities, The tax sheltered schemes offer tax benefits to the investors. The investors should aware of the stock market structure and the functions of the brokers. The mode of operation varies among BSE, NSE and other exchanges. Brokerage charges are also different. The knowledge about the stock exchange enables him to trade the stock intelligently. 2. Investment Analysis After formatting the investment policy, the securities to be bought have to be scrutinized through the market, industry and company analysis. (Market Analy: ‘The stock market mirrors the general economic scenario. The growth in gross domestic product and inflation are reflected in the stock prices. The recession in the economy results in a bear market. The stock prices may be fluctuating in the short run but in the long run they move in trends i.¢., either upwards or downwards. (i) Industry Analysis The industries that contribute to the output of the major segments of the economy vary if their growth rates and their overall contribution to economic activity changes. Some industries grow faster than the GDP and are expected to continue in their growth. The economic significance and the growth potential of the industry have to be analyzed. Company Analysis The purpose of company analysis is to help the investor to make better decisions. The company’s carnings, profitability, operating efficiency. capital structure and management have to be screened. These factors have direct bearing on the stock prices and the return of the investors. Appreciation of the stock Value is a function of the performance of the company, Company with high product market share is able to create wealth to the investors in the form of capital appreciation. 3. Investment Valuation ‘The valuation helps the investors to determine the return and risk expected from an investment in the common stock @ (ili) ‘The intrinsic valuc to the share is measured through the book value of the share and price earnings rates. Simple discounting model also can be adopted to value the shares. The real worth of the share is compared with the market price and then the investment decisions are made. (il) Future Value Future value of the securities could be estimated by using a simple statistical technique like trend analysis, The analysis of the historic behavior of the price enables the investor to predict the future value. 4. Construction of Portfolio A portfolio is a combination of securities. The Portfolio is constructed in such a manner to meet the investor goals and objectives, The investor should decide how best toreach the goals from the securities available. The investor tries to attain maximum return with minimum risk. Towards the end he diversifics his portfolio and allocates funds among, the securities. + Diversification The main objective of diversification is the reduction of risk in the loss of capital and income. A diversified portfolio is comparatively less risky than holding a single security. There are several ways to diversify the portfolio, SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.16 INVESTMENT MANAGEMENT (2) Debt and Equity Diversification Debt instruments provide assured return with limited capitals appreciation, Common stocks provide income and capital gain but with the flavor of uncertainty. Both debt instruments and equity are combined to complement each other. (b) Industry Diversification Industries growth and their reaction to government policies differ from each other. Banking industry shares may provide regular but with limited capital appreciation. The information technology stock vield high return and capital appreciation, but their growth potential after the year 2002 is not predictable. Thus, industry diversification is needed as it reduces risk. tO} Securities from different companies are purchased to reduce risk. Technical analysis suggests the investors to buy securities based on the price movement. Fundamental analysts suggests the selection of financially sound and investors friendly companies. Portfolio Evaluation Based on the diversification level, industry and company analyses the securities have to be selected. Funds are allocated for the selected securities. Selection of securities and the allocation of funds and seals the construction of portfolio, ‘The portfolio has to be managed efficiently the efficient management calls for evaluation of the portfolio. This process consists of portfolio appraisal and revision () Appraisal The return and risk performance of the security may vary from time to time. The variability in returns of the securities is measured and compared. The development in the economy, industry and relevant companies from which the stocks are bought have to be appraised, the approval warns the loss and steps can be taken to avoid such losses. (i) Revision Revision depends on the results of the approval, The low yielding securities with high risk are replaced with high yielding securities with low risk factor. To keep the return at a particular level necessitates the investment to revise the components of the portfolio periodically ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. 1.2.1 Sources of Investment Information Q5, What is investment information? Explain the various sources of investment information in the light of the IT era. Answer : Investment Information Investment such as government securities, bank and post office deposits and other investments are risky. An investment decision, therefore, calls for careful evaluation of available alternatives, assessing the reward and risk associated with cach of the altemstives that are believed to best serve the investment objectives at hand. Despite the facts that luck and experience play their role in making the correct choice, the objective and, intelligent investment decisions are always based on sound information ‘The investment results are influenced by the whole {gamut of events, public policy changes, marke! conditions, policies and performance of companies and so on, So data, have to be gathered on economic and market events, national nd international events, public and corporate policies and performance facts. Since, the gathering of primary data is both time consuming and costly, the investing public has to resort 0 the sources of secondary information. Further, to facilitate quick analysis and decision making, it would be useful to collect data from sources that have already done a good deal of data analysis and, condensed them into a capsule form, Various agencies publish various types of data. There are a number of trade joumals, periodicals, official documents, advisory reports published by the investment brokers and counsellors that can, be valuable sources of information for investment decision making, Sources of Investment Information Some of the important sources of investment information are briefly described below, A. Economic and Industry Data 1. Monthly abstract of statistics and monthly statistics of the production of selected industries in India are the ‘two important publications of the Central Statistical Organization The former contains information on selected economic indicators such as national income. agricultural produetion, industrial production, money supply imports, exports ete. The later provides industry-wise production data, plan outlays, industry- \wise production they provide useful for gauging the economy's well-being, trends in and direction of the economy and business trends and cycles.UNIT) INVESTMENTS 17 2. The economics survey, the explanatory memorandum on the budget of the central government and the finance budget of the government of India need a careful study by the investors. They providedata analysis of current economic scene, the effects of fiseal and monetary policies of the past, government revenues, expenditures and defi financing, proposed fiscal and monetary measures to be adopied in the forthcoming year. 3. The weekly statistical supplement, monthly bulletin, report on currency and finance and the annual report of the Reserve Bank of India (RBI) are an invaluable source of macro data, In these publications, the RBI provides considerable data in & concise form among others, money supply, prices, exchange rates, balance of payment situation, bank credit liquidity position of the banking system and the strategy and monetary tools employed by the RBI. Thus, these sources shed considerable light on the financing and investment climate prevailing inthe country, 4. The Centre for Monitoring Indian Economy (CMIE) and the Commerce Research Bureau (CRB) are two non-government agencies that collect, classify and present main economic data in a capsule form. ‘The Economic Monitoring Services ofthe Commerce Research Bureau brings out a weekly report on prices, money and banking and world currency developments. Market Data ‘A number of sources provide stock market data ranging from price quotations to reviews of stock market trends in India, Important sources of market information include, 1. Stock Exchanges Daily Official List It provides daily price quotations and various characteristis (i.e, redemption, tax status, dividend announcement, gross dividend per share, date of closure of register of members etc.,) of the quoted securities ~ central and state government securities, comporate bonds, preference shares and equity shares. Book/Directory of the Stock These publications review stock market trends, new ‘issues made during the year, official policy in regard to capital issues, brokerage, stamp duty cic, besides providing a wealth of information on the working of companies. 3. RBI's Weekly Statistical Supplement, Monthly Bulletin and Report and Currency and Finance As noted before, these publications are a valuable source of economic and industry data, Besides. they give All-India, regional and industry: ‘numbers of security prices, running and redemption yield in various types of securit 4, The Economic Times, Financial Express, Business Standard, Fortune Indla, Investments. Today, Economic Scene, Commerce and Business india index These are some of the new transfer and periodicals that carry (ona regularbasis) awealth of stockmarket information, market quotations, review stock market trends. Articles on current developments affecting slock market’s future movements and other matters of interest to the investor 5. The Reports and Newsletters of Investment These are other important sources of market data They provide, among others, stock market reviews, trends and a detailed analysis of sceuritics in which they are specialized. Company Data ‘The fundamental analysis and valuation of stocks call for gathering and examination of the company’s specific data So, is of interest to the investors, 1, Company's annual reports and prospectus are the main sources of company data, the former being an annval feature of « public company and the later being Published while making public issue. The annual report contains the chairman's speech, balance sheet and profit and loss account with explanatory notes and a review of the working of the company over the last 510 10 years routines what the company proposes todo in thenext ‘year: In the prospectus, company presents a review of their working, the composition of their management team and their fuiure investment plans for which the capital is sought from the public, 2, Stock exchange official directory is another important source. It covers all the companies whose shares are listed on the stock exchange and gives for each ‘company, its brie history, progress and balance sheet and profit and loss accounts and important financial ratios, their trend over the last ten years SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.INVESTMENT MANAGEMENT DB. Kothari’s economic and iavestment guide of India, a yearly publications of the Kothari and sons, is yet another important source of company data. This guide contains a lot of data on individual companies, their progress and ‘management besides a good write-up on industry scene. ‘The economic times, financial express, business standard, commerce and business India and India today present reports, comments, reviews of the working of individual companies, changes in company policy and management, future plans prospects of the companies. ‘Some government sources provide company or company related information. ‘The company news and notes, a monthly publication of the department of company affairs, government of India, carries circulars and notification is in respect of changes and/or interpretation of the provisions of the companies act. International Data {In today’s interdependent world, the intemational economic, political, market, business and technological developments havea considerable bearing on the conditions and prospects prevailing ina country’s economy, market and for business firms. To evaluate the investment worth of securities of companies engaged in joint ventures with foreign collaborators, export oriented companies and multinational companies, itis important to collect and examine the international economic, market and business data, Furthermore, information relating to the international money. capital and currency exchange ‘market data is important for intemational portfolio investment 1. ‘Some important sources of international data include the following. International Financlal Statistics, a monthly publication of the International Monetary Fund (IMF). Provides for each country yeerly, quarterly and monthly data on major economic indicators such as GNP, money supply consumer price index, stock market indices, currency exchange rate expressed in the US dollars and balance of payment condition. Moody's and Standard, Poor's Industrial Banking and Finance and other International Manuals cover extensively the individual company profiles of both the US and international companies. Capital International Perspective, a Geneva publication, reports onthe various national stock market, indicates. a wodld capital market, intemalional interest rates and capital flows. ‘The Financial Times of London, the Economist, the UK weekly, the Wall Stree: Journal, a U.S daily, Baron's National Businessand Financial Weekly of the USA. International Business Week, Fortune International and the Far Eastern Economic Review are some of the international newspapers and periodicals that contain a lot of information on current international developments of interest to business executive and the investors. New Sources The financial packages provide the information about the various facts of the economy, industry and companies in the user friendly manner. Some of the financial packages are introduced here in brief. They include, @ a i) ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. cm CIMM is adatabase, introduced by the well-known research organization called Center for Monitoring the Indian Economy (CMIE).Itprovides company specific information both qualitative and quantitative under different heads. It also provides industry specific data in a very lucid fashion. Stock market information is also given by this package and updated on a monthly basis. Cline-Ole This package is designed and marketed by capital market, a well-known organization in the field of finance. This package also provides the information on companies, industry and economy. Information is also provided by this package, Vans This is aunique product introduced by the Vans Information Services Ltd, Mumbai based company. This is basically package, which provides the information of various articles and news in the different magazines and newspapers. Finally, world wide web sites are the most powerful source to generate investment information in the present day world. Various search engines available on internet helps investor to source specific investment related information.UNIT] INVESTMENTS 19 1.2.2 Scope, Features and Importance of Investment Programmes Q6. Explain the scope, importance and features of investment programmes. Answer + ‘Scope and Importance of Investment The following information depicts the scope and importance of investment, (i) Ienables employees to sclect a suitable retirement funds which yields them maximum returns from their savings, Gii) Individuals have started to enterinlo financial markets and able to own stocks to a greater extent. Among all ‘markets, mutual funds was able toattract many small investors in achieving adequate returns. ii) Apart from undertaking business, it has become a source of profession by becoming investment bankers who provide securities to sell and supporting in the dealings of mergers and acquisitions (iv) Therefore, individuals possessing the adequate knowledge of how to trade securities, have the scope of uming into portfolio managers, security analyst. Eventually, investments is helpful to corporates, individuals, investors and society resulting in fulfillment of muliiple tasks. Features of an Investment Programme Features of an investment programme act asa key component to the investors in choosing investment polici 1. Capital Growth It plays a pivotal role in valuing a company. Hence, investors continuously work towards the achievement of “growth stocks”, Wherein the relationship beiween ‘corporation and industry growth and capital appreciation can be obtained. A perfect model of “growth stock” is obtained when a right industry is chosen for a right issue and at the right time, which is a complicated work 2. Safety of Principal Even though, it is not possible to protect the investment completely. their is a scope to safeguard against expected reusonable losses. Diversifying the ‘anvestment is a worth while option so as to conirol certain losses. Diversification can be done through horizontal as well as vertical. When an investor deals with same stage of production in various companies, then it isan horizontal diversification. In contrast, in a vertical diversification, investors own various stages of production, ie. from raw material to finished goods in various companies. Another form of diversification is first categorising the securities as, bonds and shares. Again regrouping those bonds and shares into various types. But over diversification involves many complications and hence not advisable. 3. Purchasing Power Stability Every investor need to focus on future purchasing power because almost all investors invest their current funds with a faithfulness of acquiring higher profits in future. Investors need to analyze carefully, the following factors, in order to sustain purchasing power stability. (i) Likelihood of profits and losses which can be achievable from investment. (i) Expecting the standard of inflation, Restrictions levied with regard to family and personal matters. 4. Adequate Liquidity and Collateral Value ii) Inany business, unexpectedly, cash could be required st any time, without which profitable opportunities can be lost, Therefore, every investor need to allot certain degree of those assets which can be easily transferred into cash as and when required in order to have stable market value. Investment could be liquid, if it is cither marketable or reversible. When the investment is sold for cash in market, then it is marketable whereas in reversibility, business deal is either winded-up or reversed. 5. Tax Benefits ‘An organization's true value is ascertained, only by considering earnings after tax. Earnings before tx can be regarded as only notional profits as they highly get affected by taxes. Here, an investor is concerned mainly with two issues, his income and payment of tax. Because tax is based ‘on income. If the investor's income is high, then tax levied ‘would also be high and ifthe income is low then payment, of tax is also less. 6 Income Stability It is essential to possess the strong durability of purchasing power income and monetary income. Although, sometimes. ifthe situation changes, focus must be shifted on. other features that helps in rendering it to a balanced form, 7. Concealability Investorsneed to disguise the property protect from Uncertain degrees of taxation, social disorders or government, confiscation. Gold and precious items are regarded as best, examples as its worth is high with low volume and easily convertible. ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.1.10 INVESTMENT MANAGEMENT 1.2.3 investment Vs Speculation Vs Gambling Q7. Differentiate between investment and speculation. How investment differs from gambling? Anower + Investment Vs Speculation Investment ‘Speculation 1. ] Time horizon Plans for a longer time horizon. His holding periods may be from year to few years, Plans for a very short period, Holding period varies from few days to months. Risk returns | Assumes moderate risk, Like to have moderate | Willing to undertake high risk. Like to have: rate of return associated with limited risk, returns for assuming high risk 3. | Decision Considers fundamental factors and evaluates the | Considers inside information, here says and performance of the company regularly, ‘market behaviour, 4. | Funds Uses his own funds and avoids borrowed funds. | Uses borrowed funds to supplement his personal resources, Investment Vs Gambling Investment has to be distinguished from gambling, Typical examplesof gambling are horse rac tc. Gambling involves taking high risks not onty for high return but also for thrill and excitement. Gambling is unplunred and non scientific, without knowledge of the nature of the risk involved It is surrounded by uncertainty and is based oa tips and rumours. In gambling. artificial und unnecessary risks are created for inereasing the returns. ud games, lotteries, Investment is an attempt of careful planning, evaluation and allocation of funds to various investment outlets which offer safety of principal with moderate and continuous return over a long period of time. 1.3 FACTORS TO BE CONSIDERED IN INVESTMENT DECISION Q8. What Is Investment? Explain the different factors to be considered in Investment decision. Dec.=14, Q21a) OR Explain the factors that are being considered while taking investment decision: OR Explain the Influencing factors for investment decision. Doc-13, 02a) (Refer Only Topic: Factors to be Considered While Making an Investment) OR Discuss the factors to be considered in investment decision. (Refer Onty Topic: Factors to be Considered While Making an Investment) Answer : Investment Decision For answer refer Unit-l, Page No. 1.2, Q.No. 1, Topic: Investment Decisions. Factors to be Considered While Making an Investment May/Sume-13, Q2a) The factors to be considered while making an investment include, Amount of investment Minimum rate of return on investment Ranking of investment proposals Risk and uncertainty, ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. 1 2 3. Retum expected from the investment 4 5.UMIT-1) INVESTMENTS 411i 1. Amount of Investment When a firm has unlimited funds for investment, it can accept all the capital investment proposals which give a rate ‘of return higher than the minimum acceptable or cut-off rate. However, most firms have limited funds and therefore capital rationing has to be imposed. In such a situation the firm can accept only those proposals which are within its means. For this purpose, all the projects are arranged in an ascending order according to the capital investment required and accept only those projects which are within its capital constraints. 2. Minimum Rate of Return on Investment The management expects & minimum rate of return on the capital investment. The minimum rate of return is usually decided on the basis of the cost of capital. The minimum rate of return is also called as cut-off-point. The cut-off-point refers to the point below which a project would not be accepted. 3. Return Expected from the investment Investment decisions are made in anticipation of increased return in the future. Therefore, itis neeessary to estimate the future return or benefits accruing from the investment proposals. 4. Ranking of Investment Proposals When a number of projects appear to be accepted on the basis of their profitability the projects will be ranked, in ‘order of their profitability is order to determine the most profitable project. 5. Risk and Uncertainity Different investment proposals have different degrees of risk and uncertainity. Risk involves situations in which the probabilities of a particular event occuring are known whereas in uncertainity these probabilities are unknown. 1.3.1 Characteristics of Investment Decisions Q9. Explain about various characteristics of investment decisions. Answer : For answer refer Unit-I, Page Nos. 1.11 and 1.12, Q.Nos. 10 and 11, 1-3.2 Liquidity, Return, Risk, Maturity, Safety, Tax and Inflation Q10. Explain the concept of liquidity, return and risk related to investment decisions. Answer : Investment decisions are characterized by the following features such as liquidity, return and risk, so that firm can cam significant profits by making investments, 4. Liquidity Liquidity means the potentiality of an investor to sell-off its assets without much delay and without making any significant discount. Liquidity is also called as marketability. Example of liquid assets are money market instruments whereas collectable like a piece of artwork is an illiquid asset. Itis difficult for an investor to sell a painting or any piece of artwork within an hour and if it happens also the painting should be sold for a low price 2. Return Return is one of the most important motivating factor which encourages investment. Return is the premium given to the investor for making investment. In order to evaluate the performance of investment manager, it is very essential to calculate the historical returns. These retums are also commonly used as a key input for forecasting the returns in future. SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.112 INVESTMENT MANAGEMENT The return of an investment includes two clements which are as follows, (Current Return The first element of return is periodic cash flow (income) like dividerd or interest which are produced from the investment. Current return is assessedas the regular periodic income in connection withthe initial price of the investment. Capital Return Capital return is the second element of retum whi is exhibited in the price fluctuations. Capital return is referred as appreciation or depreciation in price which is divided by the initial price of the asset. Capital return dominates the assets such as equity stocks, e Hence, the total return for any security is given as, a Total return ~ Current return + Capital retum The value of current retum can be zero or positive whereas the value of eupital retum can be negative, zero or positive. 3. Risk Risk means the uncertainty or probability that the actual outcome of an investment may be different from the desired outcome. In other words, risk refers to the variability inrewms froma security, Basically, the investors concentrate ‘more on actual outcome which is less than the expected ‘outcome. Ifthe range of potential outcome is wide then the risk will also be high. Risk emerges fiom many sources and among them, the three important sources are business risk, interest rate risk and market risk, The modem portfolio theory expressed total risk as, Total risk = Unique risk + Market risk Unique risk is » part of total risk which arises from some specific factors of the firm, such as labour strike. development of new product or entry of new competitor. [tis also called as diversifiable risk or unsystematic risk. Market risk is part of total risk whichis related with economy-wide factors such as growth rated of GDP. money supply. inflation rate and interest rate structure. Its also called as systematic, risk or non-diversifiuble ris Q11, Explain the concept of maturity, safety, tax and inflation by highlighting its special features related to investment decisions. Answer : Investment decisions are characterised by the following features like maturity, safety, tax and inflation, Alll these factors have a significant impact on the investment decision, ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. 1. Maturity Maturity is the essence of security. It means the last payment date of loan or any other financial instrument, for \which the interest and the principal is left as due to be paid. Maturity is a time span in which the borrower should fulfil the obligation of repaying theamount, as itwill be the end of the life of security. Every debi has a maturity date, whieh, is a date by which the debt must be paid off. Maturity date is fixed at the time of issuance of debt and it can be from fone day to 20 or 30 years or more, A short-term debt is a debt which matures within a year ofits issuance whereas, a long-term debt is a debt which matures afler a year or more from its issuance 2. Safety The investments does not provide complete safety, it only protects from loss under certain reasonable conditions. Before taking a decision about the type or timing of investments, a careful analysis of economic and industry trends should be done. The safety of an investment refers to the certainty of returns of capital without loss of money or time, Safety isan important feature which an investor desires for his investments, Every investor expects to get back his capital on maturity without loss and without any delay, If the return is higher, then the degree of safety is less. 3. Tax Taxation must not be considered as an absolute evil as it provides some benefits to few individuals which, tre greater than the related costs which other individuals, have to bear. Irespective of taxation benefits, taxes have considerable influence on investment decisions and, its resulls. As the investors are more interested in after-tax, returns, the securities in the market are priced based on the federal and state tax laws, Before making any investment decisio ‘must initially ascertain the applicable tax rate. After identifying the applicable tax rate, the security’s expected after-tax retum and risk must be forecasted by investor so that he can make an intelligent investment decision. Both personal and corporate income taxes play an important role in investment decision making, 4. Inflation Like taxation, inflation also provide benefits to some individuals which are grewer than the related costs borne by ther individuals. Inflation also have a significant impact on investment decisions and results. The inflation rate helps the investor in taking intelligent investment decision. AAs inflation is direcily linked with the economy, it helps in determining the economic conditions of a country and providesinformation to investorto take an effective decision.UNIT] INVESTMENTS 1.13 1.4 THE CONCEPT AND MEASUREMENT OF RETURN — REALIZED AND EXPECTED RETURN Q12, Explain risk and return with reference to investment. Write briefly about realized and expected returns. Answer : The risk and return with reference to investment is shown in the following figure, t + Sigh at Pevie Hawes! pects | Hibecal Ech mt pt Males! — ete Comte CAPA seek a) Eepoat testes part tk a) (eee peene wh ° . Figure Risk For answer refer Unit-l, Page No. 1.12, Q.No. 10, Topic: Risk. Return The term “retum’” from an investment refers to the benefits from that investment. In the field of finance in ‘general and security analysis in particular, the term return is almost invariably associated with a percentage (say, return ‘on investment of 12%) and not « more amount (like, profit of 150), In security analysis we are primarily concerned with retum from investor's perspective. Our main concern is to compute the return for an investor from a particular investment say,a share ora debenture or some other financial instrument. Realized Retum The retum earned or received by investor on investment for some previous period of time is known as realized return. Usually, investors invest their money for future returns which they expect 1o eam, but when investing period is expired or finished, then the investors will have their realized returns. Expected Return The return which is expected by the investors to realize after making investment is knownasexpected return, However, the expectation of the investors depends on the Tetum of risk free investment such as treasury note, risk premium etc. Thus, the higher the risk. higher will be the expected return 1441 Exante and Ex-post Retums Q13. Explain the concept of ex-post and ex-ante returns. Answer: Ex-post Returns Ex-post retums refer to the aetual retums obtained from the investments. They properly measure the returns generated by an investment, one must consider both the price change and cash flow derived from the iavestment during the period it was held. The measurement of retumns from the historical data canbe referred to ex-post returns. This includes both current income and capital gains (or losses) brought about by the appreciation (or deprecistion)ofthe price ofthe security. The income and capital gains price of the security. The income and capital gains are then expressed as a percentage of the initial investment. Ex.ante Retumns ‘The majority of investors tends to emphasize the returns they expect froma security while making investment decision and the expected return of a security. This enables investor to look into future prospects from an investment and the measurement of return from expectations of bencfits is known as ex-ante returns. The equations for quantifying theretum, variance and standard deviation of individual security returns for both, post and ex-ante data are summarized in the following bie, Historical (Ex-post) | Expected (Ex-ante) Arithmetic mean return ‘Variance (Risk) Expected retum z= Dae, ot Variance (Risk) = Sl, ae, Standard deviation S, de. ny, ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.114 INVESTMENT MANAGEMENT PROBLEMS 1. Compute returns (ex-post) from the following data. Price as on 31-3-2000 (2) Price as on 31-3-2004 (®) Dividends for the year 2000-2001 (%) Solution : Retums ex-post from holding the stock of A Lid., is calculated as follows, ALi, Similarly, for 8 Lid, _(5-10)+1 6 "m0 49 10 710 =0.6 oF 60% 2. Assessment of return ona share of planet corporation under three different scenarios is as follows, What is th Solution + The expected retum on the share of planet corporation will be as follows, E(e) = (0.25 * 36) + (0.50 * 26) + (0.25 « 12)=9 + 13 +3=25% 3. From the following data of PQR Lid, determine return and risk. R% | 18 | 24 | 16] 12] 14] Solution + zs a 18421416 +12 +14 3 ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. Retum, =a t62% 3UNITED INVESTMENTS 1.15 [as—162y' + (21—162y" +(16~ 16.37 (2-162)? +a4-16.2)7 Risk, & " re _ PR2AF OAT OOF aR [488 5 5 4. From the following Information, calculate returns and risk. R(%) Probability Solution + Hi (%) PB FeyePy | aya? 2 | 02 24 6% 1.352 wo | ot Lo 036 0.036 8 03 24 1.96 0.588 6 02 12 11.56 2312 2 | 02 24 6% 1352 94 5.64 Rem, 7 =9.4% Risk, = /5.64 = 2.37 14.2 Measurement of Portiollo Returns Q14, Discuss the measures of risk and retum of a portfolio of two securities. Answer: Portfolio Investing in securities such as shares, debentures and bonds is profitable as well as exciting. It is indeed rewarding, but involves a great deal of risk and calls for scientific knowledge as well as artistic skills. In such investments, both rational as well as emotional responses are involved, Investing in financial securities is now considered to be one of the best avenues for investing one’s savings while it is acknowledged to be one of the mest risky avenues of investment, It is rare to find invesiors investing their entire savings in a single security. Instead, they tend to invest in 8 group of securities. Such a group of securities is called portfolio. Creation of & portfolio helps to reduce risk without sacrificing returns, An investor inves Hence, portfolio formatior Portfollo Retum The return on a portfolio is simply the weighted average return, a portfolio retum can be calculated with the following, equation as, his funds in a portfolio expecting to get a good retum consistent with the risk bearing capacity 8 the most important part of investment decision making, Som, ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.1.16 INVESTMENT MANAGEMENT Where, oW=b WW, = Weight of asset ‘and = a=! =a-b = Return for asset i. o,W oH, Portfolio Risk When, p, =0 Risk is defined as variability of return froma portfolio. ‘The variability of return is measured with variance and standard deviation, The variance of retums for a portfolio of assets can be calculated with the following general formula as, 2 = Loin? 42D cov Where, IV, and W, are the weights for assets i and j, «©, is the variance for the é* asset, ©, is the covariance of assets # and j and N denoce number of assets (i, The square root of the variance is the portfolio’s standard deviation of returns (,) The portfolio standard deviation of V and Yas, Oyy~ YOY Wy +0} HY +2Py Oy Oy Wy Hy ‘Two-asset Case The objective of forming portfolio is to maximize retum and minimise risk. The parameter of co-variables correlation defines the movement of return on assets, comprising the portfolio along with direction of such a ‘movement inversely co-related retums tends to reduce risk. The correlation between twoassets are, three +1 or 0 ort IF it ts perfectly positive correlation i.e., p=+ we can change the above formula When, p,=+1 0, -\or W2 +07 W2 +2, 0,0,,¥, Let, 0, Wa 0, W,= b= Va +b" + 2ab 0,- Vad) =atb °,-6,¥,+a, 0 9,4 9H, When, p, =~ 1 Let, 6, =a ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD. o,= VO, H+ OW? ‘The risk and return of a portfolio consisting of two assets A and B with equal weights can be computed as follows, Calculation of Portfolio Risk for Two Assets Peg tt. Risk of portfolio when, p yy "+1 o,W, +a,H, = [1S * 0.5] + [2.42 « 0.5] 0.75 + 1.21 = 1.96 Risk of portfolio when, py =~! 5,-0,,-0,¥, =[15 « 0.5]- [242 x05] =0.75 ~ 1.21 =- 0.46 Risk of portfolio when, p= 0 lon = VES x05 +242" xOS —V2.25«02545.86%0.25 = V05625 +1405 = 1.42 Risk with negative correlative is low. n-Asset Case portfolio formed with three or more securities can be evaluated in terms of return and risk in the following manner, Portfolio Retum Tar Wor Wy tr Wy ttUNIT) INVESTMENTS 1.17 Where, 777, afe returns on securities 1,2,..., ny and , WV, are weights of securities in the portfolio. 12.20) SH W018 ++ 2P yes nM Gy Measurement of Portfollo Risk For answer refer Unit-I, Page No. 1.24, Q.No. 19. PROBLEMS 1. Calculate portfolio return and risk from the following information. The portfolio consist of equal weights of securities X and Y. 5 (%) Fy (%) 12 14 12 | 6 | 13 spebetete Solution : Determination of Portfollo Risk and Return , - i) 6-8) = (224 = 1.50 ‘SIA PUBLISHERS AND DISTRIBUTORS PVT. LTD.