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Master in Business Administration - Semester3

MF0010 Security Analysis and Portfolio Management - 4Credits
(Book ID: B1208)
Assignment Set- 1 (60 Marks)


Note: Each question carries 10 Marks. Answer aII the questions.

Q.1 Frame the investment process for a person of your age group.
t is rare to find investors investing their entire savings in a single security. nstead, they
tend to invest in a group of securities. Such a group of securities is called a portfolio. Most
financial experts stress that in order to minimize risk; an investor should hold a well-
balanced investmentportfolio. The investment process describes how an investor must go
about making.
decisions with regard to what securities to invest in while constructing a portfolio, how
extensive theinvestment should be, and when the investment should be made. This is a
procedure involving the following five steps:
Set investment policy
Perform security analysis
Construct a portfolio
Revise the portfolio
Evaluate the performance of portfolio
1. Setting nvestment Policy
This initial step determines the investor?s objectives and the amount of his investable
wealth. Since there is a positive relationship between risk and return,
the investment objectives should be stated in terms of both risk and return.
This step concludes with the asset allocation decision: identification of the potential
categories of financial assets for consideration in the portfolio that the investor is going to
construct. Asset allocation involves dividing an investment portfolio among different asset
categories, such as stocks, bonds and cash.
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The asset allocation that works best for an investor at any given point in his life depends
largely on his time horizon and his ability to tolerate risk.
Time Horizon The time horizon is the expected number of months, years, or decades that
an investor will be investing his money to achieve a particular financial goal. An investor with
a longer time horizon may feel more comfortable with a riskier or more
volatile investment because he can ride out the slow economic cycles and the inevitable ups
and downs of the markets. By contrast, an investor who is saving for his teen-aged
daughter?s college education would be less likely to take a large risk because he has a
shorter time horizon.
Risk Tolerance Risk tolerance is an investor?s ability and willingness to lose some or all of
his original investment in exchange for greater potential returns. An aggressive investor, or
one with a high-risk tolerance, is more likely to risk losing money in order to get better
results. A conservative investor, or one with a low-risk tolerance, tends to favour investments
that will preserve his or her original investment. The conservative investors keep a "bird in
the hand, while aggressive investors seek "two in the bush.
While setting the investment policy, the investor also selects the portfolio management style
(active vs. passive management).
Active Management is the process of managing investment portfolios by attempting to time
the market and/or select ,undervalued? stocks to buy and ,overvalued? stocks to sell, based
upon research, investigation and analysis.
Passive Management is the process of managing investment portfolios by trying to match
the performance of an index (such as a stock market index) or asset class of securities as
closely as possible, by holding all or a representative sample of the securities in the index or
asset class. This portfolio management style does not use market timing or stock selection
strategies.
2. Performing Security Analysis
This step is the security selection decision: Within each asset type, identified in the asset
allocation decision, how does an investor select which securities to purchase. Security
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analysis involves examining a number of individual securities within the broad categories of
financial assets identified in the previous step. One purpose of this exercise is to identify
those securities that currently appear to be mispriced. Security analysis is done either using
Fundamental or Technical analysis (both have been discussed in subsequent units).
Fundamental analysis is a method used to evaluate the worth of a security by studying the
financial data of the issuer. t scrutinizes the issuer's income and expenses, assets and
liabilities, management, and position in its industry. n other words, it focuses on the ,basics?
of the business.
Technical analysis is a method used to evaluate the worth of a security by studying market
statistics. Unlike fundamental analysis, technical analysis disregards an issuer's financial
statements. nstead, it relies upon market trends to ascertain investor sentiment to predict
how a security will perform.
3. Portfolio Construction
This step identifies those specific assets in which to invest, as well as determining the
proportion of the investor?s wealth to put into each one. Here selectivity, timing and
diversification issues are addressed.
Selectivity refers to security analysis and focuses on price movements of individual
securities. Timing involves forecasting of price movement of stocks relative to price
movements of fixed income securities (such as bonds). Diversification aims at constructing a
portfolio in such a way that the investor?s risk is minimized.
The following table summarizes how the portfolio is constructed for an active and a passive
investor.
4. Portfolio Revision
This step is the repetition of the three previous steps, as objectives might change and
previously held portfolio might not be the optimal one.
5. Portfolio performance evaluation
This step involves determining periodically how the portfolio has performed over some time
period (returns earned vs. risks incurred).
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Q.2 From the website of BSE ndia, explain how the BSE Sensex is calculated.
SENSEX:ensex is the stock market index for BSE. t was first compiled in 1986. t is
made of 30stocks representing a sample of large, liquid and representative companies.
The base year of SENSEX is 1978-79 and the base value is 100.
The Bombay Stock Exchange SENSEX (acronym of Sensitive ndex) more commonly
referred to as SENSEX or BSE 30 is a free-float market capitalization-weighted index of 30
well-established and financially sound companies listed on Bombay Stock Exchange. The 30
component companies which are some of the largest and most actively traded stocks, are
representative of various industrial sectors of the ndian economy. Published since January
1, 1986, the SENSEX is regarded as the pulse of the domestic stock markets in ndia. The
base value of the SENSEX is taken as 100 on April 1, 1979, and its base year as 1978-79.
On 25 July, 2001 BSE launched DOLLEX-30, a dollar-linked version of SENSEX. As of 21
April 2011, the market capitalisation of SENSEX was about 29,733 billion (US$660 billion)
(42.34% of market capitalization of BSE), while its free-float market capitalization was
15,690 billion (US$348 billion).
The Bombay Stock Exchange (BSE) regularly reviews and modifies its composition to be
sure it reflects current market conditions. The index is calculated based on a free float
capitalization methoda variation of the market capitalisation method. nstead of using a
company's outstanding shares it uses its float, or shares that are readily available for trading.
The free-float method, therefore, does not include restricted stocks, such as those held by
promoters, government and strategic investors.
nitially, the index was calculated based on the 'full market capitalization' method. However
this was shifted to the free float method with effect from September 1, 2003. Globally, the
free float market capitalization is regarded as the industry best practice.
As per free float capitalization methodology, the level of index at any point of time reflects
the free float market value of 30 component stocks relative to a base period. The market
capitalization of a company is determined by multiplying the price of its stock by the number
of shares issued by the company. This market capitalization is multiplied by a free float
factor to determine the free float market capitalization. Free float factor is also referred as
adjustment factor. Free float factor represent the percentage of shares that are readily
available for trading.
The calculation of SENSEX involves dividing the free float market capitalization of 30
companies in the index by a number called index divisor.The divisor is the only link to
original base period value of the SENSEX. t keeps the index comparable over time and is
the adjustment point for all index adjustments arising out of corporate actions, replacement
of scrips, etc.
The index has increased by over ten times from June 1990 to the present. Using information
from April 1979 onwards, the long-run rate of return on the BSE SENSEX works out to be
18.6% per annum, which translates to roughly 9% per annum after compensating for
inflation.
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Following is the list of the component companies of SENSEX as on Feb 26, 2010.
Code Name Sector Adj. Factor Weight in ndex(%)
500410 ACC Housing Related 0.55 0.77
500103 BHEL Capital Goods 0.35 3.26
532454 Bharti Airtel Telecom 0.35 3
532868 DLF Universal Limited Housing related 0.25 1.02
500300 Grasim ndustries Diversified 0.75 1.5
500010 HDFC Finance 0.90 5.21
500180 HDFC Bank Finance 0.85 5.03
500182 Hero Honda Motors Ltd. Transport Equipments 0.50 1.43
500440 Hindalco ndustries Ltd. Metal,Metal Products & Mining 0.7 1.75
500696 Hindustan Lever Limited FMCG 0.50 2.08
532174 CC Bank Finance 1.00 7.86
500209 nfosys nformation Technology 0.85 10.26
500875 TC Limited FMCG 0.70 4.99
532532 Jaiprakash Associates Housing Related 0.55 1.25
500510 Larsen & Toubro Capital Goods 0.90 6.85
500520 Mahindra & Mahindra Limited Transport Equipments 0.75 1.71
532500 Maruti Suzuki Transport Equipments 0.50 1.71
532541? NT Technologies nformation Technology 0.15 2.03
532555 NTPC Power 0.15 2.03
500304? NT nformation Technology 0.15 2.03
500312 ONGC Oil & Gas 0.20 3.87
532712 Reliance Communications Telecom 0.35 0.92
500325 Reliance ndustries Oil & Gas 0.50 12.94
500390 Reliance nfrastructure Power 0.65 1.19
500112 State Bank of ndia Finance 0.45 4.57
500900 Sterlite ndustries Metal, Metal Products, and Mining 0.45 2.39
524715 Sun Pharmaceutical ndustries Healthcare 0.40 1.03
532540 Tata Consultancy Services nformation Technology 0.25 3.61
500570 Tata Motors Transport Equipments 0.55 1.66
500400 Tata Power Power 0.70 1.63
500470 Tata Steel Metal, Metal Products & Mining 0.70 2.88
507685 Wipro nformation Technology 0.20 1.61

Q.3 Perform an economy analysis on ndian economy in the current situation.
Q.4 dentify some technical indicators and explain how they can be used to decide
purchase of a company's stock.
Q.5 Compare Arbitrage pricing theory with the Capital asset pricing model.
Q.6 Discuss the different forms of market efficiency.
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Master in Business Administration - Semester 3
MF0010 Security Analysis and Portfolio Management - 4Credits
(Book ID: B1208)
Assignment Set- 2 (60 Marks)


Note: Each question carries 10 Marks. Answer aII the questions.

Q.1 Differentiate between ADRs and GDRs
Q.2 Using financial ratios, study the financial performance of any particular company of
your interest.
Q.3 As an investor how would you select an equity mutual fund scheme?
Q.4 Show how duration of a bond is calculated and how is it used.
Q.5 Show with the help of an example how portfolio diversification reduces risk.
Q.6 Study the performance of any emerging market of your choice.
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