SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

COURSE CODE: BAF604/BBI601

STUDY MATERIAL PREPARED BY

ASST.PROF SREELATHA S RAJARAM

M.Com (Finance) M. Phil, LL.B, UGC-NET

FOR PRIVATE CIRCULATION ONLY

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 TABLE OF CONTENTS
Description Page no
UNIT 1 INTRODUCTION TO INVESTMENT AND SECURITY ANALYSIS 3-15
Meaning of investment – speculation and Gambling – Investment avenues - Types
of investors – Investment objectives – The investment process
Security Analysis – Meaning of security – Types of securities – Meaning of security
analysis
Risk and Return – Computation of return – Meaning and definition of risk – Types:
(Systematic risk- Market risk, Purchasing power risk, Interest rate risk, Unsystematic
risk- Business risk (Internal, External), Financial risk) – Minimising risk exposure
Risk measurement - Standard deviation – Meaning of Beta – Computation and
interpretation – Use of beta in estimating returns. (Including simple problems)
UNIT 2 FUNDAMENTAL ANALYSIS AND TECHNICAL ANALYSIS 16-25
Fundamental Analysis: Economic analysis- meaning framework, approaches;
Industry Analysis-concept life cycle, industry characteristics; Company analysis
(practical questions on debt equity ratios total debt ratios, proprietary ratios,
coverage ratios profitability ratios, activity ratios)

Technical Analysis: Meaning, Principles and Assumptions- chart types-chart

patterns-Trends and trend reversals- Support and resistance level Reversal patterns
-Continuation patterns- oscillators- relative strength index-Distinguish between
fundamental and technical analysis

UNIT 3 FIXED INCOME SECURITIES 26-33

Fixed-Income Securities – Overview of fixed-income securities – Risk factors in
fixed-income securities (Systematic and unsystematic) – Bond analysis – Types of
bonds – Major factors in bond rating process – Bond returns –Concept of yield –
Current yield – Yield-to-Maturity – Price-yield relationship – Convexity - Term
structure of interest rates and yield curve – Duration.
UNIT 4 PORTFOLIO MANAGEMENT-INTRODUCTION AND PROCESS 34-40

Portfolio Management -Meaning, and phases Portfolio Management- valuation-

Portfolio Analysis – Selection and Evaluation –– Reasons to hold portfolio –
Diversification analysis – Markowitz’s Model – Assumptions – Specific model – Risk
and return optimization – Efficient frontier – Efficient portfolios – Leveraged portfolios
– Corner portfolios – Sharpe’s Single Index model – Portfolio evaluation measures
– Sharpe’s Performance Index – Treynor’s Performance Index – Jensen’s
Performance Index.
UNIT 5 EFFICIENT MARKET THEORY &CAPM 41-45

Dow Jones Theory- Elliot Wave Theory-Random walk hypothesis-Forms of market

efficiency-CAPM-Capital market line and security market line-Arbitrage pricing
theory-Distinguish between CAPM and APT.

Multiple choice Questions 46-75

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 UNIT I INTRODUCTION TO INVESTMENT AND SECURITY ANALYSIS

Learning Outcome:
On completion of this Module learners will have an understanding of
• Investment, speculation and gambling
• Investment avenues
• Security analysis
• Risk and return
• Risk measurement

➢ Investment
The meaning of word investment is to Commit money in order to earn a financial return
or to make use of the money for future benefits or advantages. People commit money
to investments with an expectation to increase their future wealth, by investing money
to spend in future years. Current Investment determines future productive capacity.
Investment means to produce a return.
Three concepts of Investment
1. Economic Investment includes net addition to the capital stock of the society
for production of other goods such as increase in residential commercial etc.
2. General Investment: It means buying a new house or flat or a new car
3. Financial Investments: It means exchange of financial claims.
Investment is different from Savings. Savings is the difference between income and
expenditure. Use of savings for the multiplication of savings are called investment.
That is why All savings are not investments, but all investments are savings.
Need/Importance/Usefulness /Factors affecting Investment.
1) Longer Life Expectancy: Investment decisions are important today because
people live longer than in the past. Life expectancies are rising in most
countries. Life expectancy after retirement is more than 15 years. In other
words, the investment decision made during one’s working life will be
responsible for a financially secured retirement.
2) Growth in personal Income: Higher investment increases, higher the increase
in employment generation. However, one should not merely rely on increasing
personal income to improve one’s present/future standard of living, but should
be based on careful investment.
3) No corporate paternalism: The old ideal of working in a company and being
there until retirement is no more prevalent. People have to rely more on their

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 personal resources and less on corporate paternalism, to meet their financial
goals.
4) Comfortable Life need: People wish to achieve all comforts within 5 to 7 years
of their employment.
5) Inflation Rate: Rising inflation in prices is a continuous problem since the
liberalization adopted by government of India since 1991.
6) Safety of principal Amount: One of the objectives is safety of principal amount
though the safety is not absolute or complete.
7) Liquidity and Marketability: Every investor requires a minimum fund to meet
emergencies. for an investment to be liquid, it must be reversible.
8) Income stability: Stability of income is an important factor for those investors
who depend closely o income.
9) Purchasing power stability with price-level inflation: An investor should
maintain a stable purchasing power in order to balance the portfolio.

➢ Types of Investors
1. No Risk (conservative investors)
No risk investors are mainly conservative investors. Usually, mid age investors fall
under this category. They are highly prone to be completely dependent on their
salaries/ business. No risk investors usually do not plan for very long- term
investments because their priorities are for short term goals. SIP investments in Mutual
Fund Schemes are good options for no risk investors. For them risk means danger
2)Moderately conservative (low risk)
Such investors usually prefer investing in low- risk assets. While investing in equity,
these investors look for fewer fluctuations and depend more on stable stocks.
however, they invest 20-25% in the market with the rest in safe savings or debt fund.
For them risk means uncertainty
3)Mediocre
Average investors are usually interested in market situations. They invest as per the
market situations and their financial needs. However, the smarter mediocre investors
invest in regular SIP for consistent investment habit and in ELSS for tax benefits. For
them risk means possibility
4)Equity runner
Equity runners are usually adequately informed about the markets. They sustain their
investments according to growth cycles. Such investors invest about 50% in the quality
stocks. However, their risk appetite is moderately high. For them risk means
opportunity
5)Aggressive investor

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Aggressive investors are the ones who invest up to 80% in equity. Their risk choices
are high with a direct approach to higher returns over a longer period of time.
Aggressive investors so not completely depend on their salary or debt investments.
Besides their growth with quality stock, they highly benefit due to compounded returns
over a long tenure of staying invested. For them risk means thrill

DIFFERENCE BETWEEN INVESTMENT AND SPECULATION

1.Meaning:
2.Technique used
3.time horizon
4.risk
5.profit
6.expectation of returns
7.funds
8.stabiliyy of income
9.psychological attitude

Key Differences Between Investment and Speculation

The basic difference between investment and speculation are mentioned in the points
given below:

1. MEANING: Investment refers to the purchase of an asset with the hope of

getting returns. The term speculation denotes an act of conducting a risky
financial transaction, in the hope of substantial profit.
2. SECURITY ANALYSIS TECHNIQUE: In investment, the decisions are taken
on the basis of fundamental analysis, i.e. performance of the company. On the
other hand, in speculation decisions are based on hearsay, technical charts,
and market psychology.
3. TERM: Investments are held for at least one year. Hence, it has a longer time
horizon than speculation, where speculators hold assets for short term only.
4. RISK: The quantity of risk is moderate in investment and high in case of
speculation.
5. The investors, expect profit from the change in the value of the asset. As
opposed to speculators who expect profit from the change in the prices, due to
demand and supply forces.
6. An investor expects the modest rate of return on the investment. On the
contrary, a speculator expects higher profits from the speculation in exchange
for the risk borne by him.

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 7. The investor uses his own funds for investment purposes. Conversely,
speculator uses borrowed capital for speculation.
8. In speculation, the stability of income is absent it is uncertain and erratic which
is not in the case of investment.
9. PSYCHOLOGICAL ATTITUDE: The psychological attitude of investors is
conservative and cautious. In contrast, speculators are daring and careless.

Distinction between Investment and Gambling

1. Meaning: Investment refers to the purchase of an asset with the hope of

getting returns. Gambling is betting or wagering money in an uncertain event
whose outcome may result either a gain or total loss of money put up.
2. Time horizon: Investment are normally done for a longer duration. Gambling
is for a very short time horizon
3. Level of Risk: Investment usually involves lower risk. Gambling involves very
high risk.
4. Attitude of Investors: Investors are cautious, conservative. Risk neutral or
averse. Gamblers are daring, careless and risk takers.
5. Decision making: Investment decisions are based on sufficient information and
analysis. Gambling is based on tips, rumours etc.
6. Returns: Investment usually generate stable returns. Returns are highly
uncertain and unstable in gambling.
7. Investment vehicle: Stocks, bonds, real estate etc.
Lottery, casinos, online betting race track etc.

5)Investment Alternatives/Avenues

It is broadly classified into two types

1.Non marketable
2.Marketable

There are various investment alternatives which are available to an Indian Investor.

1. Non -marketable Financial Assets:

It refers to those financial instruments that cannot be sold in the capital market. They
are

1. Post office savings scheme: It is one of the oldest and the largest saving
institution in the country with a network of more than 1.5 lakh post offices across
the country. Various schemes are post office savings account, post office
recurring deposit account, post office time deposit account, Post office monthly
income scheme, Kisan Vikas Patra, National Savings certificate.

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 2. Public Provident Fund (PPF): PPF is a saving-cum tax saving instrument in
India. The aim of this scheme is to mobilise small savings by offering an
investment with reasonable returns combined with income tax benefits. The
period of scheme is 15 years. Minimum deposit amount 500 and maximum
1,50,000 in a financial year.
3. Bank Deposits: It means the amount of money placed in a bank. There are
mainly four types of deposit schemes. Fixed deposit, current deposit, savings
deposit and Recurring deposit.
4. Company deposits: Fixed deposits accepted by companies in order to meet
their financial requirements. They offer higher returns than bank fixed deposits.

2.marketable investment avenues

i) Money Market Instruments: The financial instruments for raising short term funds
are called money market instruments. They are the temporary parking place for the
money. The maximum period of money market instruments are one year.

1. T-Bills 2. Certificate of deposits 3. Bankers’ Acceptance 4. Commercial bills

5. Call money

III)EQUITY SHARES
Equity investments represent ownership in a running company. By ownership, we
mean share in the profits and assets of the company but generally, there are no fixed
returns. It is considered as a risky investment but at the same time, depending upon
situation, it is liquid investments due to the presence of stock markets.
IV)DEBENTURES OR BONDS
Debentures or bonds are long-term investment options with a fixed stream of cash
flows depending on the quoted rate of interest. They are considered relatively less
risky. An amount of risk involved in debentures or bonds is dependent upon who the
issuer is. Eg: cumulative debentures non- cumulative convertible debentures
V)MUTUAL FUNDS-
Mutual funds are an easy and tension free way of investment and it automatically
diversifies the investments. A mutual fund is an investment only in debt or only in equity
or mix of debts and equity and ratio depending on the scheme. They provide with
benefits such as professional approach, benefits of scale and convenience. Further
investing in mutual fund will have advantage of getting professional management
services, at a lower cost, which otherwise was not possible at all.
VI)LIFE INSURANCE AND GENERAL INSURANCE
They are one of the important parts of good investment portfolios. Life insurance is an
investment for the security of life. The main objective of other investment avenues is
to earn a return but the primary objective of life insurance is to secure our families
against unfortunate event of our death. It is popular in individuals. Other kinds of
general insurances are useful for corporates. There are different types of insurances
which are as follows:

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▪ Endowment Insurance Policy
▪ Money Back Policy
▪ Whole Life Policy
▪ Term Insurance Policy
▪ General Insurance for any kind of assets.
VII)REAL ESTATE
Every investor has some part of their portfolio invested in real assets. Almost every
individual and corporate investor invest in residential and office buildings respectively.
Apart from these, others include:
▪ Agricultural Land
▪ Semi-Urban Land
▪ Commercial Property
▪ Raw House
▪ Farm House etc
VII)PRECIOUS OBJECTS
Precious objects include gold, silver and other precious stones like the diamond. Some
artistic people invest in art objects like paintings, ancient coins etc.
VIII)DERIVATIVES
Derivatives means indirect investments in the assets. The derivatives market is
growing at a tremendous speed. The important benefit of investing in derivatives is
that it leverages the investment, manages the risk and helps in doing speculation.
Derivatives include:

▪ Forwards
▪ Futures
▪ Options
▪ Swaps

Investment process
The investment process is generally described in four stages.

1. Investment Policy: The first stage determines and involves personal financial
affairs and objectives before making investment. It may also be called preparation
of the investment policy stage. In this stage various investment assets will be
identified and considering the various features
2. Investment analysis: In this stage analysis of the securities based on risk and
returns.
3. Valuation of securities
4. Portfolio construction

Risk and Return

The returns are dependent on varying degrees of risk. There are two types of risk
affecting investment systematic and unsystematic risk. The risk-return trade-off

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explains that the higher the risk factors, the greater the reward. wo types of risk
affect most, if not all, asset classes: systematic and unsystematic risk.

Systematic risks affect the financial market as a whole, whereas unsystematic

risks are unique to a specific company or investment.

Since both types of risk are inevitable in any financial decision, it’s important to
understand the differences between them and learn how to mitigate these risks.

Systematic risks are inherent risks that exist in the stock market. They’re also
called “non-diversifiable risk” or “market risks” since they impact the entire asset
class.

Non-diversifiable means that an organization can’t control, minimize, or avoid

systematic risks. These risks are typically due to various external factors like the
current geopolitical situation, monetary policy, and natural disasters. For example,
COVID-19 is a systematic risk because it impacts the entire stock market.

Types of systematic risks

Consider a few types of systematic risks:

• Interest rate risk results from a change in the market interest rate. It mainly
impacts fixed-income securities, like bond prices and asset-backed securities.
The yield on these securities is inversely related to the interest rate. As
interest rates go up, investors find it more attractive to pull their money out of
fixed-income securities.

• Market risk results from the general tendency of investors to behave as per
the market. For example, investors avoid investing in even the best -
performing companies during a financial crisis. Usually, market risk accounts
for about two-thirds of total systematic risk.

Here’s an example of systematic risk due to market risk: Amazon touched an

all-time high of $113 in 1999; however, when the dot-com bubble burst,
Amazon’s stock price dropped dramatically to $5.51 by 2001.

• Purchasing power risk or inflation risk results from the decline in the
purchasing power of money due to inflation. For example, if inflation is 5% per
year, you’d need $10.50 to buy the pack of pens next year that cost $10
today.

Unsystematic risks, also known as “non -systematic risk,” “specific risk,”

“diversifiable risk,” or “residual risk,” are unique to a specific company or
industry. These risks arise due to various internal factors or external factors that
affect only the particular organization but not the entire market.

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Some examples of unsystematic risk include labour unrest at a factory,
regulatory changes, and shortages of raw materials.

Unlike systematic risks, unsystematic risks can be controlled, minimized, and

even avoided by an organization.

Types of unsystematic risks

Unsystematic risks occur as two types:

• Business risk includes any internal factors that affect a company’s

revenue and performance. Business risks can also result from
company-specific external factors, such as the government banning a
product that a company produces.
• Financial risk relates to a company’s debt and equity. If a company
takes on too much debt, its debt-to-equity ratio may suffer. A negative
debt-to-equity ratio indicates that a company might be on the verge of
bankruptcy.

Distinguish between systematic and unsystematic risk

• Impact: Systematic risks can potentially affect the entire industry and the
overall economy, whereas unsystematic risks generally affect an
organization. Systematic risks are non-diversifiable, whereas
unsystematic risks are diversifiable.
• Nature: Systematic risks are unavoidable and uncontrollable, whereas
unsystematic risks are avoidable and controllable.
• Factors: Systematic risks result from external factors that occur at a
macroeconomic level, which is why they’re unavoidable and
uncontrollable. In contrast, unsystematic risks result from internal factors
occurring within an organization or externally but in a closely related
manner to the organization. They’re linked to microeconomic factors and
are avoidable and controllable.
• Protection: The effects of systematic risk can be mitigated through proper
asset allocation, whereas mitigating unsystematic risk relies on portfolio
diversification.
• Avoidability: Systematic risks can’t be avoided; however, unsystematic
risks can be mitigated or avoided.
• Types: Systematic risks include interest, inflation, purchasing power, and
mark

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Quantitative Analysis of Risk

1. Standard Deviation: The most useful method for calculating variability is the
standard deviation and variance. Risk arises out of variability. It is the measure
of total risk i.e systematic and unsystematic risk
2. Beta: It is the measure of systematic risk. It is used to describe the relation
between stock’s return and market index’s return.

Numerical Exercise

1. The return from security Z can be provided in different time periods: What
would be the average expected risk and return from the security.
Time period 2022 Return Probability
January 0.25 0.10
February 0.15 0.40
March 0.10 0.30
april 0.05 0.20

Ans: Expected return 12.5% Standard deviation: 5.59%

2. The return on two securities X and Z are given below Select the security
according to risk and return
Return x% Return z % Probability
5 1 0.5
4 3 0.4
0 3 0.1

Ans: Return x=4.1 Z= 2.0 Risk x=1.44 z=1.0

3..Calculate the expected return from the following (15.7%)

Economic conditions probability Rate of

return%
1 0.20 20
2 0.30 12
3 0.50 14

4.. . Find expected return of A Ltd., on the basis of following information ( 5.25%)

year Returns Probability

1 0.45 0.10
2 0.25 0.20
3 0.15 0.15
4 0.05 0.25

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 5 -0.05 0.04
6 -0.30 0.06
7 -0.35 0.15
8 -0.10 0.05

5. The rate of return on stocks of stork Ltd., and Kite Ltd., under the different states of economy
are presented below along with probability of the occurrence each state of the economy.

particulars boom normal Recession

probability 0.3 0.4 0.3
Returns stark Ltd 40 60 80
Returns Kite Ltd 90 60 40
Calculate expected return and standard deviation of both the companies. Also advise where to
invest.( 60 15.49 : 63 19.52)

6.. Mr.A a fund Manager produced the following returns for the last five years. Rate of return on
sensex are also for comparison

2003-04 2004-05 2005-06 2006-07 2007-08

Mr.A 6% 48% -15% 7% 11%
Sensex 12% 40% -6% 20% 3%
Calculate the average return and standard deviation of Mr.A s mutual fund. ( 20.42 15.73)

7..The following information relating to stock A and B Calculate expected return and standard
deviation.(13 4, 14 7.27)

State of nature probability Return A Return B

1 0.10 5% 0
2 0.30 10 8
3 0.50 15 18
4 0.10 20 26

8..The following information relating to stock A and B Calculate expected return and standard
deviation.(30.5 3.5, 35.5 3.5)

State of nature probability Return A Return B

Boom 0.5 30 35
normal 0.3 35 40
recession 0.2 25 30

9..The following information relating to stock A and B Calculate expected return and standard
deviation.(28 6.78 , 32 6.78)

State of nature probability Return A Return B

Boom 0.35 0.50 0.15
normal 20 30 40
recession 40 30 20

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10. Given below are the likely returns in case of shares of Sarus Ltd. Calculate expected return and
standard deviation ( 12.25 4.26 )

Economic conditions probability Rate of

returnsarus ltd
boom 0.25 7
Low growth 0.25 10
stagnation 0.30 14
recession 0.20 19

11.Mr.Ram wants to invest in company A to B. The return on stock A and B and probability are given

Return 6 Probability
Company A 6 , 7, 8,9,10 0.1,0.25,0.3,0.25,0.1
Company B 4,6,8,10,12 0.1,0.2,0.4,0.2,0.1
Calculate expected return and standard deviation ( 8, 1.13 8 , 2.19)

12. Following information about shares of ABC Ltd., and XYZ Ltd., under different economic
conditions . At present both shares are traded at Rs.100

Economic condition probability Expected of shares Expected price of

ABC ltd shares XYZ ltd
High growth 0.3 140 150
Low growth 0.4 110 100
stagnation 0.2 120 120
recession 0.1 100 80s

13. CALCULATION OF BETA

1. From the following information calculate Beta βof a security ( β=1.1)

year Returns on security % Return on market portfolio %

1 35 22
2 38 26
3 34 24
4 40 28
5 43 30
14..From the following information calculate Beta βof a security ( β=0.21)

year Returns on security % Return on market portfolio %

1 11 12
2 14 10
3 18 10
4 10 15
5 8 12
6 11 14
7 18 15
8 12 20

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 9 20 22
10 10 15

15...From the following information calculate Beta βof a security ( β=0.76 1.01)

year A LTD B LTD Market portfolio

1 10 14 12
2 6 2 5
3 13 19 18
4 -4 -12 -8
5 13 11 10
6 14 19 16
7 4 3 7
8 18 20 15
9 24 28 30
10 22 16 25

16.From the following information calculate Beta βof a security ( β=0.74 0.83)

year A LTD B LTD Market portfolio

1 25 30 26
2 -15 -18 -30
3 30 35 34
4 35 33 32
5 15 23 15

17.From the following information calculate Beta βof a security ( β=0.48)

year Returns on security % Return on market portfolio %

1 8 10
2 12 9
3 10 12
4 16 14
5 14 15
18.From the following information calculate Beta βof a security ( β=0.57 0.14)

year A LTD B LTD Market portfolio

1 20 18 18
2 20 20 14
3 16 16 13
4 24 18 15
19.From the following information calculate Beta βof a security ( β=0.57)

year Returns on security % Return on market portfolio %

1 13 15
2 14 16
3 15 17
4 13 14
5 12 12
20. From the following information calculate Beta βof a security ( β=0.615)

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 year Returns on security % Return on market portfolio %
1 25 22
2 25 20
3 25 18
4 21 16
5 25 20

21. From the following information calculate Beta βof a security ( β )

year Returns on security % Return on market portfolio %

1 10 12
2 12 11
3 15 14
4 10 12
5 8 11

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 UNIT 2 FUNDAMENTAL AND TECHNICAL ANALYSIS

Learning Outcome:
On completion of this module learners will be able to understand
• Fundamental analysis and its approaches
• To solve practical questions on ratios
• Technical analysis
• To understand and interpret the various chart patterns

It is a method of evaluating the intrinsic value of an asset and analysing the factors
that could influence its price in the future. This form of analysis is based on
external events and influences, as well as financial statements and industry trends.
In security selection process, a traditional approach of Economic Industry
Company analysis is employed. EIC analysis is the abbreviation of economic,
industry and company. The person conducting EIC analysis examines the
conditions in the entire economy and then ascertains the most attractive industries
in the light of the economic conditions. At last the most attractive companies
within the attractive industries are pointed out by the analyst.
EIC Analysis of a Company Below are the further details of the components of
EIC analysis, which analyst always consider before choosing or reaching any
decision about any business.
• Economic Analysis : It consists of Economic policy , Economic conditions and
economic system
• Industry Analysis : It is based on four stages of an industry in the life cycle.
They are Pioneering stage, growth stage, maturity stage and decline stage
• Company Analysis : In company analysis different companies are considered
and evaluated from the selected industry so that most attractive company can be
identified. Company analysis is also referred to as security analysis in which stock
picking activity is done. Different analysts have different approaches of
conducting company analysis like 1. Value Approach to Investing 2. Growth
Approach to Investing Additionally in company analysis, the financial ratios of
the companies are analyzed in order to ascertain the category of stock as value
stock or growth stock. These ratios include price to book ratio and price-earnings
ratio. Other ratios like return on equity etc. can also be analyzed to ascertain the
potential company for making investment.

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FORMULAS

1. LIQUIDITY RATIOS

• CURRENT RATIO CURRENT ASSETS/CURRENT LIABILITIES 2:1

• QUICK RATIO/LIQUID RATIO LIQUID ASSETS/CURRENT LIABILITIES

2:1

2. PROFITABILITY RATIO

• GROSS PROFIT RATIO GROSS PROFIT /NET SALES X100

• OPERATING PROFIT RATIO OPERATING PROFIT/ NET SALES X 100

• NET PROFIT RATIO Net profit /NET SALES X100

• RETURN ON INVESTMENT (RETURN ON CAPITAL EMPLOYED ROCE)

EBIT/CAPITAL EMPLOYED X100

• Return on Equity share= PAT – PREFERNCE DIVIDEND/EQUITY FUND

X100

• Earning per share EPS PAT- Preference dividend/Number of equity shares

• Dividend payout ratio DPS/EPS X100

• DPS= PROPOSED DIVIDED/NUMBER OF EQUITY SHARES

• DIVIDEND YIELD RATIO DPS/MPSX100

• PRICE EARNING RATIO PRICE /EARNING X100

3.CAPITAL STRUCTURE RATIOS

• DEBT EQUITY RATIO DEBT/ EQUITY

• PROPRIETORY RATIO= SHAREHOLDERS FUNDS/TOTAL ASSETSX100

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 PRACTICAL PROBLEMS ON FINANCIAL RATIOS

1. Following information is available relating to Sonu Limited and Monu

Limited.
Particulars Sonu limited Monu
Rs. In Lakhs Limited
Rs. In
Lakhs
Equity share capital @ Rs. 10 each 200 250
12% Preference share capital 80 100
Profit after tax 50 70
Proposed dividend 35 40
Market price per share 25 35
You are required to calculate
1. EPS ( 2.02/ 2.32)
2. P/E (12/15)
3. Dividend pay out ratio(86.63/68.96)
4. Return on equity(20.2/23.2)
5. Dividend yield ratio(7/4.57)

2. Following information is available relating to A Limited and B Limited.

Particulars B Limited
A limited Rs. In
Rs. In Lakhs Lakhs
Equity share capital @ Rs. 10 each 200 250
12% Preference share capital 80 100
Profit after tax 20 60
Proposed dividend 60 80
Market price per share 50 60
You are required to calculate
1.EPS
2.P/E
3.Dividend pay out ratio
4.Dividend yield ratio
5.Return on equity
3. Following information is available relating to A Limited and B Limited.
Particulars B Limited
A limited Rs. In
Rs. In Lakhs Lakhs
Equity share capital @ Rs. 10 each 200 250
10% Preference share capital 80 100
15% Debentures 20 60
EBIT 60 80
PROPOSED DIVIDEND 20 25
PROVISION FOR TAX 17 21
MARKET PRICE PER SHARE Rs.50 Rs.60

Calculate:

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 1. EPS 2. P/E RATIO 3. D/P RATIO 4. DIVIDEND YIELD RATIO 5.
RETURN ON EQUITY 6. RETURN ON CAPITAL EMPLOYED .

4.Toy Limited gives you the following information for the year ended 31st March,
2017
Profit before interest and taxes Rs. 16,50,000
Tax Rate 30%
Proposed Equity dividend 25%
Capital employed:
80000 equity shares of 10each 8,00,000
10% preference share capital 15,00,000
15% debentures of Rs. 100 each 7,00,000
Reserves and surplus 12,00,000
Total 42,00,000
CURRENT MARKET PRICE PER EQUITY SHARE IS 50/-
You are required to calculate
1. EPS 2. P/E RATIO 3. DIVIDEND PAY OUT RATIO 4, DIVIDEND YIELD RATIO 5.
RETURN ON CAPITAL EMPLOYED 6. RETURN ON EQUITY FUND 7. BOOK
VALUE PER SHARE

5. Veena Limited presented its financial information for the year ended 31st March
2007

Profit before interest and taxes Rs. 8,00,000

Tax Rate 30%
Proposed Equity dividend 20%
Capital employed:
1,00,000 equity shares of 10each 10,00,000
10% debentures 15,00,000
Reserves and surplus before adjustments 5,00,000
Market price per share 32/-
You are required to calculate 1. EPS 2. P/E RATIO 3. DIVIDEND PAY OUT RATIO
4, DIVIDEND YIELD RATIO 5. BOOK VALUE PER SHARE

6.Triveni Limited gives you the following information for the year ended 31st March,
2008
Profit before interest and taxes Rs. 16,50,000
Tax Rate 30%
Proposed Equity dividend 25%
Capital employed:
80000 equity shares of 10 each 8,00,000
10% preference share capital 15,00,000
15% debentures of Rs. 100 each 7,00,000
Reserves and surplus 12,00,000
Total 42,00,000

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Current market price of share 50 Rs.
You are required to calculate 1. EPS 2. P/E RATIO 3. DIVIDEND PAY OUT RATIO
4, DIVIDEND YIELD RATIO 5. RETURN ON CAPITAL EMPLOYED 6. RETURN ON
EQUITY FUND 7. BOOK VALUE PER SHARE

Following information is available relating to MEENA Limited and BEENA Limited.

Particulars MEENA limited BEENA
Rs. In Lakhs Limited
Rs. In
Lakhs
Equity share capital @ Rs. 10 each 200 250
12% Preference share capital 80 100
Profit after tax 50 70
Proposed dividend 35 40
Market price per share 200 280
You are required to calculate
EPS
P/E
Dividend pay out ratio
Return on equity
Dividend yield ratio
As an analyst which company is worth investing

10. M/S Green and Blue Limited has presented its financial information for the year
2016 as follows:
BALANCE SHEET AS ON 31ST MARCH 2016

LIABILITIES AMOUNT ASSETS AMOUNT

SHARECAPITAL 12,00,000 FIXED ASSETS 28,60,000
RESERVES AND 8,00,000 STOCK IN HAND 19,80,000
SURPLUS
LONG TERM 22,70,000 SUNDRY 16,50,000
DEBT DEBTORS
CURRENT 23,50,000 CASH AND BANK 1,30,000
LIABILITIES BALANCE
TOTAL 66,20,000 TOTAL 66,20,000

INCOME STATEMENT FOR THE YEAR ENDED 31ST MARCH 2016

AMOUNT
NET SALES 1,02,00,000
COST OF GOODS SOLD 79,20,000
SELLING AND ADMIN EXPENSES 15,45,6000
NET PROFIT 7,34,400

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 1. Tax rate 30%. Company’s capital is divided into 1,20,000 shares of 10 Rs.,
each
2. Company has declared divided of 25%
3. Market price per share is Rs.50
You are required to evaluate investment in the company in terms of
a) Dividend yield b) EPS c) P/E D) RETURN ON CAPITAL EMPLOYED.

TECHNICAL ANALYSIS
PRINCIPLES- CHARTS-CHART PATTERNS-TRENDS-DOW THEORY -ELLIOT
WAVE THEORY- MATHEMTICAL INDICATORS
FUNDAMENTAL VS TECHNICAL
Technical analysis
It is a means of examining and predicting price movements in the financial
markets, by using historical price charts and market statistics. It is based on the
idea that if a trader can identify previous market patterns, they can form a fairly
accurate prediction of future price trajectories.
Technical analysis is the analysis of the price movements in a market or of an
instrument over a period of time, which could range from short term to long term,
to reveal investor trends.
Investor sentiments and behaviour dictate prices which are set at the meeting
point of demand and supply at any given point in time.
To conduct technical analysis, one does not need to know the instrument or the
market in depth but needs the data of a freely-traded instrument or market because
price movements betray investor behaviour and can reveal the best time to buy or
sell for investors. Analysts focus on the following indicators while doing
technical analysis:
· Price trends
· Oscillators
· Moving averages
· Chart patterns
· Momentum and volume indicators
· Resistance and support levels

Assumptions of Technical Analysis/principles of technical analysis

Technical analysis theory is based on the following three assumptions:

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1)The market discounts everything: Analysts believe that the impact of all the factors
ranging from fundamentals to wider market psychology is already incorporated in the
stock price.
2)Price moves in trends: According to technical analysts, prices will exhibit trends even
in non-uniform market movements and this does not depend upon the time frame in
consideration.
3)History repeats itself: According to technical analysts, History is likely to repeat itself.
This is attributed to the usually predictable market psychology which affects price in a
repetitive nature.

Limitations of Technical Analysis

1)Critics of technical analysis argue that history does not exactly repeat itself thus the
assumption of the technical analysis itself is not accurate. Since, it is argued that
history does not repeat itself, the critics find study of price patterns useless. 2)Another
criticism is that technical analysis works only in some cases and the reason it works
is that it contains a self-fulfilling prophecy. Also, Technical analysis is limited to
studying market trends and lacks the ability to deep-dive into an instrument or an
industry to understand its workings.
3)Technical analysis is at its most relevant and insightful when the market has begun
to move a certain way, rather than predicting the movement which needs fundamental
background analysis.
CHARTING TECHNIQUES
The following are the types charts used in technical analysis
1. Line chart
• It represents only closing price of the securities over a period of time
• The line is formed by connecting the closing prices over a time frame
• X axis time/day y axis price
2. BAR CHART also known as OHLC (Opening high low closing)
• It is made up of a series of vertical lines that represents each data point
• The vertical lines Represents high and low for the trading day along with
closing price
• The close and the open are represented on the vertical line by a horizontal
dash. The opening price on a bar chart is illustrated by the dash that is
located on the left side of the bar. The close on the right side of the bar

3.Candle stick chart (Japanese candle stick chart)

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 • Four data points will be there – open high low and closing
• The hollow part or filled portion of the candle is called “the body”or “The
candle”
• The long thin line above and below the candle is called “ upper
shadow”and lower shadow.
• If the closing price is more than opening price ,it indicates rise in the stock
prices and the body is marked with white colour
• If the closing price is less than opening price, it indicates fall in the stock
price and the body is marked with black colour
Trendlines in Technical Analysis
Since price patterns are identified using a series of lines and/or curves, it is helpful to
understand trendlines and know how to draw them. Trendlines help technical analysts
spot areas of support and resistance on a price chart. Trendlines are straight lines
drawn on a chart by connecting a series of descending peaks (highs) or
ascending troughs (lows).

On daily charts, chartists often use closing prices, rather than highs or lows, to draw
trendlines since the closing prices represent the traders and investors willing to hold a
position overnight or over a weekend or market holiday. Trendlines with three or more
points are generally more valid than those based on only two points.

• Uptrends occur where prices are making higher highs and higher lows. Up
trendlines connect at least two of the lows and show support levels below price.
• Downtrends occur where prices are making lower highs and lower lows. Down
trendlines connect at least two of the highs and indicate resistance levels above
the price.
• Consolidation, or a sideways market, occurs where price is oscillating between
an upper and lower range, between two parallel and often horizontal trendlines.

Reversal Patterns
A price pattern that signals a change in the prevailing trend is known as a reversal
pattern. These patterns signify periods where either the bulls or the bears have run
out of steam. The established trend will pause and then head in a new direction as
new energy emerges from the other side (bull or bear).

When price reverses after a pause, the price pattern is known as a reversal pattern.
Examples of common reversal patterns include:

• Head and Shoulders, signaling two smaller price movements surrounding one
larger movement
• Double Tops, representing a short-term swing high, followed by a subsequent
failed attempt to break above the same resistance level
• Double Bottoms, showing a short-term swing low, followed by another failed
attempt to break below the same support level

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Head and Shoulders
Head and shoulders patterns can appear at market tops or bottoms as a series of
three pushes: an initial peak or trough, followed by a second and larger one and then
a third push that mimics the first.

An uptrend that is interrupted by a head and shoulders top pattern may experience a
trend reversal, resulting in a downtrend. Conversely, a downtrend that results in a head
and shoulders bottom (or an inverse head and shoulders) will likely experience a trend
reversal to the upside.

Double tops and bottoms signal areas where the market has made two unsuccessful
attempts to break through a support or resistance level. In the case of a double top,
which often looks like the letter M, an initial push up to a resistance level is followed
by a second failed attempt, resulting in a trend reversal.

A double bottom, on the other hand, looks like the letter W and occurs when price tries
to push through a support level, is denied, and makes a second unsuccessful attempt
to breach the support level. This often results in a trend reversal, as shown in the figure
below.

Triple tops and bottoms are reversal patterns that aren’t as prevalent as head and
shoulders or double tops or double bottoms. But, they act in a similar fashion and can
be a powerful trading signal for a trend reversal. The patterns are formed when a price
tests the same support or resistance level three times and is unable to break through.

Mathematical Indicators

1. Moving Average: It is the average price of the stock/market over any given
period of time. Moving average is calculated by adding the closing price of the
security for a number of time periods and then dividing this total by the number
of time period.

Oscillators

They are technical analysis tools which are used in discovering short-term over
purchased or oversold conditions.

The following are the different types of charts in technical analysis

1. Line charts: It represents closing price only over a set period of time. The line
is formed by connecting the closing prices over the time frame.
2. Bar chart:
3. Japanese Candle stick charts:

They are plotted by four points- open high low and close
The hollow filled portion of the candle stick is called “The body”
The long thin line in upper and lower part are called shadows
If the closing price is higher than opening means price rise- body shown by white
colour
If the closing price lower- means down market- shown by black colour

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 ➢ If the opening price is equal to closing price dojji will be formed

Long legged dojji indecision

Draggon fly dojji – bullish change in direction
Gravestone dojji – bearish change in direction
4 price doji ultimate indecision
Doji star indecision
Parameter of
Comparison Fundamental Analysis Technical Analysis

This type of analysis is done, This type of analysis is done while taking
taking into consideration the into consideration the future prices of
Meaning internal value of the stock. stock, i.e., external value.

Its purpose is to find the right time for

Its purpose is to find the internal entering/exiting the market and also to
value (intrinsic value) of the find out future price based on past
Purpose stock. performance

This type of analysis is used in

Function investing. This type of analysis is used for trading.

Takes into consideration data of

Focus the past as well as the present. It only considers past data.

Relevant for long term More relevant for shorter duration

Duration investments. investments.

In this type of analysis, decisions In this type of analysis, decisions are

Basis of are made based on available made on the prices of stock and the
Decision information and evaluated statics. trends of the market.

Fundamental analysis is 90% Technical analysis is 90% psychological

Investor thinking logical and 10% Psychological and 10% logical

Ratio analysis
Common size statements
Comparative statements
Fund flow Graphs
Economic analysis Charts
Tools used Industry analysis Statistics

basis Three tier EIC Three assumptions

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 UNIT III FIXED INCOME SECURITIES

Learning Outcome:
On completion of this Module learners will be able to understand
• Fixed income securities and the risk factors associated with it
• Bond analysis
• Yield and YTM
• Convexity
• Term structure of interest rates and yield curve
• Duration

A fixed-income security is an investment that provides a return in the form of fixed

periodic interest payments and the eventual return of principal at maturity. Unlike
variable-income securities, where payments change based on some underlying
measure—such as short-term interest rates—the payments of a fixed-income security
are known in advance.
Fixed-Income securities are debt instruments that pay a fixed amount of interest—in
the form of coupon payments—to investors. The interest payments are typically made
semi-annually while the principal invested returns to the investor at maturity. Bonds
are the most common form of fixed-income securities. Companies raise capital by
issuing fixed-income products to investors.
Fixed income risks occur based on the volatility of the bond market environment. Risks
impact the market value of the security when it is sold, cash flow from the security
while it is held, and additional income made by reinvesting cash flows. By
understanding the risks involved, investors can be more informed as to the best fixed
income security to purchase.
Interest rate risk

The two types of interest rate risk are the level risk and yield curve risk. Both have a
potentially negative effect on the value of a bond. As interest rates increase, the
value/price of the bond decreases. This is known as the inverse relationship between
bond value and interest rates.

Reinvestment risk

Reinvestment risk arises when reinvesting the income received from securities. To
reduce reinvestment risk, it is beneficial if interest rates increase. When reinvesting
proceeds from investments, it is beneficial to have a higher interest rate, as the
investor will then obtain higher returns. Therefore, reinvestment risk is the risk that
interest rates will decrease.

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Call/prepayment risk

This type of risk arises when the issuer of a bond has a right to “call” the bond. This
means the issuer can take back the bond before the maturity date. There are three
main disadvantages for investors in purchasing a bond with a provision like this.

First, there is uncertainty with the cash flow of the bond because an expected five-
year cash flow might end early. Second, if the bond is called when the interest rate is
low, then the investor is subject to reinvestment risk.

Since the investor will receive payment for the bond that is called, they will likely
reinvest the proceeds, a practice which is unfavourable in a low interest rate
environment. Finally, the appreciation of bond price will not exceed the price at which
the issuer may call the bond.

Credit risk

Credit risk includes default risk and inferior performance. Default risk is the possibility
that the issuer will not pay the principal or coupon for the bond. The risk of inferior
performance depends on the performance of other, similar bonds.

Inflation risk

Inflation or purchasing power risk is the risk that the cash flow from securities will lose
value due to inflation. For example, if the coupon rate for a bond is 5% but the inflation
rate is 8%, then the coupon will have relatively less value. Since the interest rate or
coupon rate of the securities is fixed, they are heavily influenced by inflation rates.

Liquidity risk

The liquidity risk is the risk that a bond owner may have to sell a bond below its true
value. Liquidity can be defined as the size of the spread between the ask price and
the bid price. The ask price is the minimum price a seller is willing to sell a security for,
while the bid price is the maximum price a buyer is willing to spend on a security. The
higher the spread between the bid and ask price, the lower the liquidity and the higher
the liquidity risk.

Exchange rate risk

Exchange rate risk is the risk that cash flows from securities lose value after
exchanging them for a different currency. For example, if an investor has an
international bond that pays in British pounds, the investor would only know the cash
flow in dollars.

This is because the exchange risk is constantly changing. If the pound depreciates
against the U.S. dollar, then fewer dollars will be received. On the other hand, if the
pound appreciates against the dollar, then the investor will receive more dollars.

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Volatility risk

The volatility risk is the risk that a security will lose value due to a change in volatility.
This occurs when a bond is embedded with an option. As volatility increases, the value
of the option increases as well. In the case of a callable bond, as the value of a call
option increases, the value of the bond decreases. So, the bond is exposed to volatility
risk.

Political or legal risk

Political or legal risk arises when actions by the government adversely affect the value
of a security. For example, the government can either change the tax rate or declare
a bond as taxable when it was previously tax-free. If an investor has a tax-exempt
bond, then the bond will be more valuable if the tax rate is high, as people will have
more incentive to have a tax-exempt investment.

However, if the government lowers the tax rate, then the tax-exempt bond will lose
value. Also, if the government announces the bond is no longer tax exempt, then the
bond’s value will decline as well.

Event risk

An event risk refers to an unexpected event that decreases the value of a bond. The
two types of event risks are a natural or industrial accident, or corporate restructuring.
An example of a natural event is the tsunami that hit Japan in 2011 that damaged a
nuclear reaction plant. Even though other utility companies using nuclear power were
not directly impacted, they were negatively impacted through the spillover effect.

Sector risk

This is the risk that an event that occurs within a sector will adversely affect the value
of bonds. For example, if there was an exceptionally big forest fire, the forestry sector
will be adversely impacted. This type of risk is different for each sector and the

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Bond
A bond is a security that is issued in connection with a borrowing arrangement. The
bond is IOU (I owe YOU) of the borrower.
Features of bond
1.Face value: Every bond has some basic denomination on the basis of which interest
is paid. The issue price of the bond may be same as its face value or different from
its face value. It can be par, premium or discount .
2.Coupon rate: It is the rate of interest paid to the bond holder on the face value of
the bond .
3.Maturity period: It is the time horizon for which the bond is issued to the bond holder.
4.Redemption value: It is the value of the bond paid by the company to the bondholder
at the time of maturity . The bond can be redeemed at par, premium or discount.
5. Bond indenture: It refers to all those terms and conditions agreed upon by the
issuer of the bond and the bond holder.
6. Collateral: Bonds may be secured by some asset or security. Collateral is the
security or asset against which bonds are issued.
7. No voting rights: Bond holders of a company do not have any voting right. They
are the creditors of the company.
8. Priority in payment in times of liquidation: Since bondholders are creditors of the
company they have prior claim over the assets of the company in times of liquidation.

Types of Bonds
1.Convertible and non-convertible bonds
2.Secured premium notes
3.Redeemable and irredeemable bonds
4.Secured and unsecured bonds
5.zero coupon bonds
6.Deep discount bonds
7.Junk bonds

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Valuation of Bonds
1. If X purchases a 5 year Rs. 1000 bond at par value and rate of interest is 7% .What
should the investor willing to pay now to get a required rate of return at 8% p.a
?Calculate the value of bond( 960.49)
2. Calculate the duration of the following bond: Bond z has a maturity period of 5 years
. The rate of interest is 6% p.a. and the maturity value is Rs. 1000 and has a face
value of 100 rupees . the bond is currently selling at Rs. 950.( 4.81 years)
3. A bonds current market price is 9000 rupees it will mature in four years time. The
face value of the bond is rs. 10000 and its coupon rate is 8% Investor yield is 10% .
Calculate intrinsic value of the bond. Should the investor purchase it ? ( bond is
underpricedat 9000 the intrinsic value is 9366 hence the investor should purchase it)
4.A bond has a face value of 1000 rupees . it has a coupon rate of 12%. It will mature
after 7 years . What is the value of the bond if discount rate is 12% and 15%(999.68
1,000)
5. A deep discount bond has a maturity of 10 years . It has the face value of 1,00,000.
Find out the value of the bond if required rate of return is 15%( 247)

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 UNIT IV PORTFOLIO MANAGEMENT -INTRODUCTION AND PROCESS
Learning Outcome:
On completion of this module learners will understand
• Portfolio Management and its steps
• Portfolio analysis
• Portfolio selection
• Portfolio evaluation

The portfolio is a collection of investment instruments like shares, mutual

funds, bonds, FDs and other cash equivalents, etc.It is the combination of
physical assets and financial assets. Portfolio management is the art of selecting
the right investment tools in the right proportion to generate optimum returns with
a balance of risk from the investment made.
Investment portfolio composing securities that yield a maximum return for given
levels of risk or minimum risk for given levels of returns are termed as “efficient
portfolio”.

The investors, through portfolio management, attempt to maximize their expected

return consistent with individually acceptable portfolio risk.

Portfolio management thus refers to investment of funds in such combination of

different securities in which the total risk of portfolio is minimized while
expecting maximum return from it.

As returns and prices of all securities do not move exactly together, variability in
one security will be offset by the reverse variability in some other security.
Ultimately, the overall risk of the investor will be less affected.

Steps/Phases involved in Portfolio management process

Portfolio management involves complex process which the following steps to be
followed carefully.

1. Identification of objectives and constraints.

2. Selection of the asset mix.
3. Formulation of portfolio strategy
4. Security analysis
5. Portfolio execution
6. Portfolio revision
7. Portfolio evaluation.
Now each of these steps can be discussed in detail.

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1. Identification of objectives and constraints
The primary step in the portfolio management process is to identify the
limitations and objectives. The portfolio management should focus on the
objectives and constraints of an investor in first place. The objective of an
Investor may be income with minimum amount of risk, capital appreciation or
for future provisions. The relative importance of these objectives should be
clearly defined.

2. Selection of the asset mix

The next major step in portfolio management process is identifying different
assets that can be included in portfolio in order to spread risk and minimize loss.

In this step, the relationship between securities has to be clearly specified.

Portfolio may contain the mix of Preference shares, equity shares, bonds etc. The
percentage of the mix depends upon the risk tolerance and investment limit of the
investor.

3. Formulation of portfolio strategy

After certain asset mix is chosen, the next step in the portfolio management
process is formulation of an appropriate portfolio strategy. There are two choices
for the formulation of portfolio strategy, namely

i. an active portfolio strategy; and

ii. a passive portfolio strategy.
An active portfolio strategy attempts to earn a superior risk adjusted return by
adopting to market timing, switching from one sector to another sector according
to market condition, security selection or an combination of all of these.

A passive portfolio strategy on the other hand has a pre-determined level of

exposure to risk. The portfolio is broadly diversified and maintained strictly.

4. Security analysis
In this step, an investor actively involves himself in selecting securities.

Security analysis requires the sources of information on the basis of which

analysis is made. Securities for the portfolio are analyzed taking into account of
their price, possible return, risks associated with it etc. As the return on
investment is linked to the risk associated with the security, security analysis
helps to understand the nature and extent of risk of a particular security in the
market.

Security analysis involves both micro analysis and macro analysis. For example,
analyzing one script is micro analysis. On the other hand, macro analysis is the

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analysis of market of securities. Fundamental analysis and technical analysis
helps to identify the securities that can be included in portfolio of an investor.

5. Portfolio execution
When selection of securities for investment is complete the execution of portfolio
plan takes the next stage in a portfolio management process. Portfolio execution
is related to buying and selling of specified securities in given amounts. As
portfolio execution has a bearing on investment results, it is considered one of the
important step in portfolio management.

6. Portfolio revision
Portfolio revision is one of the most important step in portfolio management. A
portfolio manager has to constantly monitor and review scripts according to the
market condition. Revision of portfolio includes adding or removing scripts,
shifting from one stock to another or from stocks to bonds and vice versa.

7. Performance evaluation
Evaluating the performance of portfolio is another important step in portfolio
management. Portfolio manager has to assess the performance of portfolio over
a selected period of time. Performance evaluation includes assessing the relative
merits and demerits of portfolio, risk and return criteria, adherence of the
portfolio management to publicly stated investment objectives or some
combination of these factors.

The quantitative measurement of actual return realized and the risk borne by the
portfolio over the period of investment is called for while evaluating risk and
return criteria. They are compared against the objective norms to assess the
relative performance of the portfolio.

Performance evaluation gives a useful feedback to improve the quality of the

portfolio management process on a continuing basis.

OBJECTIVES OF PORTFOLIO MANAGEMENT

1. Safety: Investment safety is one of the important objectives of portfolio management.

The motive should be absolute safety of the investment.
2. Consistency of Returns: Portfolio Management involves to ensure stable returns by
investing in good portfolios
3. Capital growth: PM guarantees the growth of capital by reinvesting in growth securities
or by purchase of growth securites
4. Marketability/ Liquidity/ transferability. PM should always ensure the investor’s
liquidity requirements.
5. Diversification: Principle of portfolio management is diversification. I.e Don’t put all
eggs in one basket.

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 6. Favourable tax returns.: By reducing the tax burden yield can be increased.
7. Minimising Risk: Risk means the possibility of loss. The objective is to maximise
returns with minimum portfolio risk

4) PORTFOLIO ANALYSIS

It is the process of reviewing or assessing the elements of the entire portfolio of securities .
Portfolio analysis is conducted at regular intervals.

Components of portfolio analysis

1. Return
2. Risk
3. Liquidity
4. Tax Benefits
5. Convenience.
6. Safety
7. Liquidity
8. Profitability.

PORTFOLIO SELECTION

The process of finding out optimal portfolio is called portfolio selection. Feasible set of
portfolio is defined as possible set of investments chosen from the available alternatives within
the limits of the investors’ capital resources, risk apetite, and investment objectives

PORTFOLIO REVISION
The art of changing the mix of securities in a portfolio is called as portfolio revision. The
objective of portfolio revision is same as the portfolio selection. The ultimate aim of portfolio
revision is maximization of return and minimization of risk. Portfolio revision involves
changing the existing mix of securities.

This may be affected either by changing the securities currently included in the portfolio or by
altering the proportion of funds invested in the securities.

Need for Portfolio Revision

The primary factor necessitating portfolio revision is changes in the financial markets since the
creation of the portfolio.

The need for portfolio revisions may arise some because of some investor-related factors also.
These factors may be listed as:

1. Availability of additional funds for investment.

2. Change in risk tolerance.
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 3. Change in investment goals.
4. Need to liquidate a part of the portfolio to provide funds for some alternative use.

The portfolio needs to be revised to accommodate the changes in the investor’s position.

Portfolio Revision Strategies

Two different strategies may be adopted for portfolio revisions which are as follows:

1. Active Revision Strategy

Active revision strategy involves frequent and sometimes substantial adjustments to

the portfolio.

Active portfolio revision is essentially carrying out portfolio analysis and portfolio
selection all over again.

It is based on an analysis of the fundamental factors affecting the economy, industry,

and company has also the technical factors like demand and supply.

Consequently, the time, skill, and resources required for implementing an

active revision strategy will be much higher.

The frequency of trading is likely to be much higher under active revision strategy
resulting in higher transaction costs.

2. Passive Revision Strategy

A passive revision strategy, in contrast, involves only minor and not frequent
adjustments to the portfolio over time.

The practitioners of passive revision strategy belive in market efficiency and

homogeneity of expectation among investors. They find a little incentive for actively
trading revising portfolios periodically.

Under passive revision strategy, adjustment to the portfolio is carried out according
to certain predetermined rules and procedures designed as formula plans.

These formula plans help the investor to adjust his portfolio according to changes in
the securities marke

Portfolio Evaluation
Sharpe Treynor and Jenson’s measure of evaluation
NUMERICALS

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1. Compare the portfolio performance using Sharpe and Treynor measure for the
following portfolio.
Average Return Standard Deviation Beta
Portfolio X 14% 0.25 1.25
Portfolio Y 10% 0.15 1.10
Market Index 12% 0.25 1.20
Risk free return 8%
( 24% 13.33 16 ) ( 4.8 1.82 3.33) portfolio x has outperformed the market index as
per sharpe and treynor ‘s measure

2. Following information given in respect of three mutual funds and market

Mutual funds Average return Standard Deviation Beta
P 12% 18% 1.1
Q 10% 15% 0.9
R 13% 20% 1.2
MARKET INDEX 11% 17% 1.0
Risk free return 6% calculate sharpe and treynor and rank the portfolio

3 Following information given in respect of three mutual funds and market

Mutual funds Average return Standard Deviation Beta
A 12% 0.25 1.3
B 15% 0.30 0.8
C 10% 0.20 1.2
MARKET INDEX 12% 0.25 1.4
Risk free return 6% calculate sharpe and treynor and rank the portfolio

4. Following information given in respect of three mutual funds and market

Mutual funds Average return Standard Deviation Beta
SPARROW LTD 14% 0.16 1.10
HERON LIMITED 12% 0.15 1.20
VULTURE 11% 0.11 0.85
LIMITED
RISK FREE RETURN 8% CALCULATE SHARPE AND TREYNOR

5.Following information is given in respect of three portfolios

PORTFOLIO AVERAGE RETURN BETA
X 12% 0.67
Y 16% 0.85
Z 20% 0.90
MARKET INDEX 10% 1.0

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 Risk free return 8% Calculate Jenson’s alpha and rank them.

6.The given below are the information relating to three portfolios

PORTFOLIO AVERAGE RETURN% BETA
X 10 0.67
Y 12 0.90
Z 15 1.25
MARKET INDEX 10 1.00
Risk free return 5% Calculate Jenson’s alpha and rank them

7.Information relating to three portfolio are given below

PORTFOLIO AVERAGE RETURN% BETA
1 15 1.5
2 12 0.9
3 10 1.2
MARKET INDEX 12 1.0
Risk free return 7%. Calculate jenson alpha and rank them.

8.Based on the following data decide whether the portfolio has outperformed the
market in term of Sharpe treynor and jenson bench mark evaluation measure.
particulars portfolio Market
Average return 7% 10%
Beta 0.4 1.0
Standard deviation 3 8
Risk free rate 6% 6%

37 | P a g e
 UNIT V EFFICIENT MARKET THEORY AND CAPM

Learning outcome :
On completion of this module learners will be able to understand
• Dow jones theory
• Elliot wave
• Random walk
• CAPM
• CML
• SML

The Dow theory is an approach to trading developed by Charles H. Dow who,

with Edward Jones and Charles Bergstresser, founded Dow Jones & Company,
Inc. and developed the Dow Jones Industrial Average in 1896. Dow fleshed out
the theory in a series of editorials in the Wall Street Journal, which he co-
founded

• The Dow Theory is a technical framework that predicts the market is in

an upward trend if one of its average advances above a previous
important high, accompanied or followed by a similar advance in the other
average.
• The theory is predicated on the notion that the market discounts
everything in a way consistent with the efficient market hypothesis.
• In such a paradigm, different market indices must confirm each other in
terms of price action and volume patterns until trends reverse.
The theory explains how the stock market can be used by investors to understand
the health of the business environment. It was the first theory to explain that the
market moves in trends. And while a lot has changed in the stock markets over the
years, the basic tenets of Dow Theory still hold water.

38 | P a g e
Six tenets of Dow Theory

• The market discounts all news

This principle explains that any information available in the market is already
reflected in the price of stocks and indices. This includes all data such as earnings
announcements by companies, rise (or fall) in inflation or even sentiments of
investors.

As a result, it is better to analyse price movements instead of studying earnings

reports or balance sheets of companies.

• The market has three trends

This theory was the first to propound that the market moves in trends. The trends
are:

• Primary trend is the major trend for the market. It indicates how the market
moves in the long-term. A primary trend could span many years.

• Secondary trends are considered to be corrections to a primary trend. This

is like an opposite movement to the primary trend. For example, if the primary

39 | P a g e
 trend is upward (bullish), the secondary trend(s) is downward. These trends
could last anywhere between a few weeks to a few months.

• Minor trends are fluctuations to the market movement on a daily basis.

These trends last for less than three weeks and go against the movement of
the secondary trend. Some analysts consider minor trends to mirror market
chatter.

• Trends have three phases

The theory says that there are three phases to each primary trend: accumulation
phase, public participation phase and panic phase.

The beginning of a primary upward (or downward) trend in a bull (or bear) market is
known as the accumulation phase. Here, traders enter the market to buy (or sell)
stocks against common market opinions.

In the public participation phase, more investors enter the market as business
conditions improve and positive sentiments become evident. This results in higher
(or lower) prices in the market.

The panic phase is marked by excessive buying by investors. This could result in
great speculation. At this stage, it is ideal for investors to book profits and exit.

o Indices confirm each other

A trend in the market cannot be verified by a single index. All indices should reflect
the same opinion. For example, in case of a bullish trend in India, the Nifty, Sensex,
Nifty Midcap, Nifty Smallcap and other indices should move in the upward direction.
Similarly, for a bearish trend, all indices should move in a downward direction.

o Trends are confirmed by volume

The trend in the market should be supported by trading volumes. For instance, in
an upward trend, the volume rises with increase in price and falls with decrease in
price. And in a downward trend, the volume increases with fall in price and
decreases with price rise.

40 | P a g e
 o Trends continue until definitive signals indicate otherwise
The theory says that market trends exist despite any noise in the market. That is,
during an upward trend, a temporary trend reversal is possible but the market
continues to move in the upward direction. In addition, the status quo remains until
a clear reversal happens in the market.

Conclusion
Even though it is more than a hundred years old, the Dow Theory is still
relevant in the current trading market.
This is because by understanding Dow Theory, traders can benefit from
spotting and exploiting trends in the market.

What Is Elliott Wave Theory?

The Elliott Wave Theory was developed by Ralph Nelson Elliott to describe
price movements in financial markets, in which he observed and identified
recurring, fractal wave patterns. Waves can be identified in stock price
movements and in consumer behavior. Investors trying to profit from a market
trend could be described as "riding a wave."1 A large, strong movement by
homeowners to replace their existing mortgages with new ones that have better
terms is called a refinancing wave.

How Elliott Waves Work

Some technical analysts try to profit from wave patterns in the stock market
using the Elliott Wave Theory. This hypothesis says that stock price movements
can be predicted because they move in repeating up-and-down patterns called
waves that are created by investor psychology.

The theory identifies several different types of waves, including motive waves,
impulse waves, and corrective waves. It is subjective, and not all traders
interpret the theory the same way, or agree that it is a successful trading
strategy. The whole idea of wave analysis itself does not equate to a regular
blueprint formation, where you simply follow the instructions, unlike most other
price formations. Wave analysis offers insights into trend dynamics and helps
you understand price movements in a much deeper way.

The Elliott Wave principle consists of impulse and corrective waves at its
core.
Impulse Waves
Impulse waves consist of five sub-waves that make net movement in the same
direction as the trend of the next-largest degree. This pattern is the most
common motive wave and the easiest to spot in a market. Like all motive waves,
it consists of five sub-waves; three of them are also motive waves, and two are
41 | P a g e
corrective waves. This is labeled as a 5-3-5-3-5 structure, which was shown
above.

However, it has three rules that define its formation. These rules are
unbreakable. If one of these rules is violated, then the structure is not an impulse
wave and one would need to re-label the suspected impulse wave. The three
rules are: wave two cannot retrace more than 100 percent of wave one; wave
three can never be the shortest of waves one, three, and five.

Corrective Waves
Corrective waves (sometimes called Diagonal waves) consist of three, or a
combination of three, sub-waves that make net movement in the direction
opposite to the trend of the next-largest degree. Like all motive waves, its goal
is to move the market in the direction of the trend.

Random Walk Theory

Random walk theory is a financial model which assumes that the stock market moves
in a completely unpredictable way. The hypothesis suggests that the future price of
each stock is independent of its own historical movement and the price of other
securities.Random walk theory assumes that forms of stock analysis -
both technical and fundamental - are unreliable.

Random walk theory was first coined by French mathematician Louise Bachelier, who
believed that share price movements were like the steps taken by a drunk;
unpredictable.

Random walk theory has been likened to the efficient market hypothesis (EMH), as
both theories agree it is impossible to outperform the market. However, EMH argues
that this is because all of the available information will already be priced into the stock’s
price, rather than that markets are disorganised in any way.

What Is the Efficient Market Hypothesis (EMH)?

The efficient market hypothesis (EMH), alternatively known as the efficient market
theory, is a hypothesis that states that share prices reflect all information and
consistent alpha generation is impossible. EMH theory was developed by Eugene
Fama

According to the EMH, stocks always trade at their fair value on exchanges, making it
impossible for investors to purchase undervalued stocks or sell stocks for inflated
prices. Therefore, it should be impossible to outperform the overall market through
expert stock selection or market timing, and the only way an investor can obtain higher
returns is by purchasing riskier investments.

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Defining the Forms of EMH

There are three forms of EMH: weak, semi-strong, and strong1 . Here's what each says
about the market.

• Weak Form EMH: It implies that the market is efficient , reflecting all market
information . As per this, past rates of return have no effect on future rates .
The tests of weak form of market efficiency are 1) statistical tests for
independence like auto correlation test and runs test 2) trading tests such as
filter rule
• Semi-Strong Form EMH: Implies that neither fundamental analysis nor
technical analysis can provide an advantage for an investor and that new
information is instantly priced in to securities. It implies that the market is
efficient , reflect all publicly available information .The tests for the semi strong
form of market efficiency are 1) Event test 2) regression or time series
• Strong Form EMH. Says that all information, both public and private, is priced
into stocks and that no investor can gain advantage over the market as a whole.
Strong Form EMH does not say some investors or money managers are
incapable of capturing abnormally high returns because that there are always
outliers included in the averages.

EMH does not say that no investors can outperform the market; it says that there are
outliers that can beat the market averages; however, there are also outliers that
dramatically lose to the market. The majority is closer to the median. Those who "win"
are lucky and those who "lose" are unlucky.

CAPM
The capital Asset Pricing Model was developed by three researchers William sharpe,
John Lintner, and Jan Mossin idependently. Consequently the model is often
referred to as Sharpe-Lintner -Mossin CAPM
The capital market theory is the major extension of the portfolio theory of Markotwitz.
The CAPM is the relationship explaining how asset should be priced in the capital
markets.

Capital Market Line is a theoretical concept that represents all the portfolios that
optimally combine the risk-free rate of return and the market portfolio of risky assets.
Security Market Line measures the risk through beta, which helps to find the security’s
risk contribution to the portfolio.

The differences between the capital market line and the security market line:

Capital market line:

▪ CML shows the tradeoff between expected return and total risk.
▪ CML considers both systematic and unsystematic risk.

43 | P a g e
 ▪ CML is the graphical presentation of the equilibrium relationship between
expected return and total risk for efficiency diversified portfolios.
▪ The slope of the CML shows the market price of risk for efficient portfolios.
▪ The CML is a line that is used to show the rates of return, which depends on
risk-free rates of return and levels of risk for a specific portfolio.
▪ Slope of the CML = (Rm – Rf) / σm

Security market line:

▪ SML shows the tradeoff between the required rate of return and systematic
risk.
▪ SML considers only systematic risk.
▪ SML is the graphical presentation of CAPM.
▪ The slope of the SML shows the differences between the required rate of
return on the market index and the risk-free rate.
▪ SML is a graphical representation of the market’s risk and returns at a given
time.
▪ The slope of the SML = (Rm – Rf).

What Is the Arbitrage Pricing Theory (APT)?

Arbitrage pricing theory (APT) is a multi-factor asset pricing model based on the idea
that an asset's returns can be predicted using the linear relationship between the
asset’s expected return and a number of macroeconomic variables that capture
systematic risk. It is a useful tool for analyzing portfolios from a value
investing perspective, in order to identify securities that may be temporarily
mispriced.

PROBLEMS
1. Following are the detail of three portfolio:
Porfolio Average Standard deviation Beta
1 13% 0.25 1.25
2 12% 0.25 1.75
3 11% 0.20 1.0
Market Index 11% 0.25 1.1
Risk free return 8%. Compute expected return as per CAPM.

2. The expected return and Beta factors of three securities are as follows.
Securities Average Return Beta factor
Parrot Ltd 17% 1.6
Dove Ltd 10% 0.7
Eagle Ltd 16% 1.3
If the risk free rate is 8% and market returns are 15%. Calculate returns for each
security under CAPM

44 | P a g e
 Mutlple choice questions -Try your self
1. ____ is an asset purchased with the hope of that it will generate income

A. Investment
B. Speculation
C. Gambling,
D. Mutual Funds

2. A ___ is professionally managed income scheme

A. Investment
B. Speculation
C. Gambling
D. Mutual Funds

3. Section___ is most widely used section for claiming income tax return

A. 80G
B. 70
C. 80C
D. 80D

4. More the ____ more is the profit

A. Risk
B. Return
C Liquidity
D. Marketability

5. ____ means marketability of an investment.

A. Risk
B. Return
C Liquidity
D. Profit

6. ___ means loss of principal amount of an investment

A. Risk
B. Return
C Liquidity
D. Profit

7. ____ activity includes buying and selling of financial assets and marketable assets in
primary and secondary market.
A. Investment
B. Speculation
C. Gambling
D. Mutual Funds

45 | P a g e
8. _____ means combination of physical assets and financial assets.
A. Investment
B Savings
C Gambling
D. Portfolio

9. Which of the following is a tax saving investment.

A. Fixed Deposit
B. Shares
C. PPF
D. Post office savings

10. The object of portfolio is the reduce ____ by diversification

A. Return,
B. Risk,
C. Uncertainty,
D. Percentage

11. The fundamental analysis (Investment) approach has been associated with____
A. Uncertainties
B. Certainties
C. Ratios
D. Balance sheet

12. Portfolio____ is the process of reviewing or assessing the elements of the entire portfolio
of securities or products in a business
A. Analysis,
B. Evaluation,
C. Management,
D. Revision

13. ___ risk can be avoidable through proper diversification

A. systematic risk
B. market risk
C. purchasing power risk,
D. Unsystematic risk

14. A statistical measure of the degree to which two variables move together.
A. Co-efficient of variation
B. Variance
C. Co Variance
D. Certainty equivalent

46 | P a g e
15. The greater the beta, ____ of the security involved
A. Greater the unavoidable risk,
B. greater the avoidable risk,
C. Less the unavoidable risk,
D. less the avoidable risk

16. A measure of risk per unit of expected return

A. Standard Deviation,
B. Co-efficient of variation,
C. Correlation coefficient,
D. Beta

18. ____ is the measure of total risk

A. Standard deviation
B. Coefficient of variation
C. co-variance
D. Beta
19. ____ is the measure of systematic risk
A. Standard deviation
B. Coefficient of variation
C. Co-variance
D. Beta

20. An aggressive common stock would have a beta

A. Equal to zero,
B. Greater than one,
C. Equal to one ,
D. Less than one

22. ____ risk is the risk of loss because of a drop in the market price of shares
A. Equity Risk,
B. Purchasing power risk
B. Interest rate risk
C. operational risk

23. ____ risk applies when you own foreign investment

A. Credit risk
B. Market risk
C. Purchasing power risk
D. Currency risk

24. ___ risk is the risk of being unable to sell your investment at a fair price and get your
money out when you want to.
A. Market risk

47 | P a g e
 B. Concentration risk
C. Liquidity risk
D. Currency risk

25. ___ risk is the risk of outliving your savings

A. Credit risk
B. default risk
C. longevity risk
D. Interest rate risk

26. The ____ is the result of external uncontrollable variables

A. Unsystematic risk
B. Systematic risk
C. Business risk
D. Financial risk

27. ___ risk is undiversifiable risk because investors cannot avoid or reduce it

A. Unsystematic risk
B. Systematic risk
C. Business risk
D. Financial risk

28. _____ developed single index model

A. William Sharpe
B. Treynor
C. Jenson
D. Markowitz

29. ____ developed Multi index Model.

A. Sharpe
B. Treynor
C. Jenson
D. Markowitz

30. ____ model is also called Mean variance model

A. Sharpe
B. Treynor
C. Jenson

48 | P a g e
 D. Markowitz

31. ____ is an alternative to single index model

A. CAPM
B. Efficient frontier
C. Multi Index Model
D. Sharpe’s Model

32. Markotwitz model is also called ________

A. Single index
B. Covariance model
C. HM Model
D. Multi Index

33. ___ model is more complex and requires more data estimates for its application

A. Sharpe
B. Treynor
C. Jenson
D. Markowitz

34. ____ risk arises due to micro factors

A. Unsystematic risk
B. Systematic risk
C. Business risk
D. Financial risk

36. ____ risk arises due to Macro factors

A. unsystematic risk
B. Systematic risk
C. Business risk
D. Financial risk

37. A measure of risk per unit of expected return

A. Standard Deviation
B. Co-efficient of variation
C. Co-variance
D. Beta
.
38. For ____investor risk means danger
A. Conservative

49 | P a g e
 B. Aggressive
C. Balanced Investor
D. Moderately conservative

39. For ____ investor the term risk means possibility

A. Conservative
B. Aggressive
C. Balanced Investor
D. Moderately conservative

40. For ____ investor risk means thrill

A. Conservative
B. Aggressive
C. Balanced Investor
D. Moderately conservative

41. ____ is an act of conducting a risky financial transaction, in the hope of substantial profit.
A. Investment
B. Speculation
C. Gambling
D. Trading

42. ____ guides the investor in a method of selecting the best securities that will provide the
expected rate of return for any given degree of risk

A. Portfolio analysis
B. Portfolio Diversification
C. Portfolio Management
D. Portfolio Evaluation

43. HPR of a security is 72.85 and holding period is 3 years. What is the annualised return
A. 23.486%
B. 24.286%
C. 75.86%
D. 69.85%

44. Price as on 31/03/2019 is 100 /- Price as on 31/03/2020 is 150/-, dividend 20/-. Calculate
HPR.
A. 60%
B. 70%
C. 80%
D. 90%

50 | P a g e
45. Returns of shares of Sun Ltd. Are 15%, 13%, 9% and 6% on various stages of the
economy. Probability is 0.3, 0.4,0.2 and 0.1 respectively. Calculate Expected return.
A. 11.1
B. 13.1
C. 12.1
D. 14.1

46. Variance of security X is 8.49, what is its standard deviation?

A. 1.1913
B. 2.9137
C. 3.1913
D. 4.1913

47. Covariance of security x is 12.67, Market variance is 18.67, what is the Beta of this
security
A. 1.1687
B. 0.6786
C. 1.6786
D. 0.7686

48.Covariance of Security is 0.67. Market variance is 0.67. What is the beta

A. 0.134
B. 0.144
C. 1
D. 1.134

49. Portfolio Beta is _____ of beta of securities in the portfolio.

A. Simple mean
B. Weighted mean
C. Aggregate
D. median

____________is a financial model which assumes that the stock market moves in a
completely unpredictable way
• Dow Theory
• Elliot Wave Theory
• Random Walk Theory
• Efficient market theory

Random walk theory was first coined by

• Louis bachhelier
• Stephen Rose

51 | P a g e
 • Welles wildier
• William sharpe

As per ___ theory changes in stock prices are independent of each other.

• Dow Theory
• Elliot Wave Theory
• Random Walk Theory
• Efficient market theory

Which theory believes that consistent Alpha generation is impossible

• Dow Theory
• Elliot Wave Theory
• Random Walk Theory
• Efficient market theory

Efficient market hypothesis is popularly known as the ____ theory

• Sharpe
• Markowitz
• Dow
• Random walk theory

Which theory states that neither fundamental or technical analysis would enable the investor
to outperform the market

• Dow Theory
• Elliot Wave Theory
• Random Walk Theory
• Efficient market theory

Which theory assumes that nobody has better knowledge or insider information

• Dow Theory
• Elliot Wave Theory
• Random Walk Theory
• Efficient market theory

Who developed EMH(efficient market hypothesis )

• Louis bachhelier
• Stephen Rose

52 | P a g e
 • Welles wildier
• Eugene fama

As per ___ form of efficient market hypothesis all public information is reflected in the
current market prices in stock markets.
• weak
• Strong
• Semi-Strong
• Market
As per ___ form of efficient market hypothesis all public or private information is reflected in
the current market prices in stock markets.
• weak
• Strong
• Semi-Strong
• Market

As per ___ form of efficient market hypothesis current prices only reflect past price
movements
• Weak
• Strong
• Semi-Strong
• Market

_____ test is used to examine weak form of market efficiency

• Correlation /event tests

• Regression
• Time series
• Insider

___ test is used to examine the semi-strong form of market efficiency

• Correlation
• Regression/TIME SERIES
• Trading tests
• Insider

___ is a relationship explaining how asset should be priced in the capital markets.

53 | P a g e
 • CAPM
• APT
• CML
• SML

___ is more accurate in short term and assumes that there is a linear relationship between the
assets

• CAPM
• APT
• CML
• SML

___ is more accurate in long term and assumes that there is a linear relationship between the
risk factors.

• CAPM
• APT
• CML
• SML

APT is a multi_______________________model/CAPM is a one factor model

• Factor
• Index
• Output
• None of the above

___ theory stipulates relationship between expected return and risk.

• CAPM
• APT
• Both A and B
• None of the above.

CAPM model is founded by____

• Stephen Rose
• Markowitz
• William Sharpe/lintner/mossin
• Jenson

APT theory is founded by _____

• Stephen Rose

54 | P a g e
 • Markowitz
• William Sharpe
• Jenson

According to CAPM the correct measure of risk is termed as

• Business Risk
• Financial Risk
• Beta
• Credit Risk

The beta of the market portfolio is

• 0.5
• 0
• -1.0
• 1.0

The formula for calculating Expected return as per CAPM is _____

• Rf+β(Rm-Rf)
• Rf-β(Rm-Rf)
• Rfxβ(Rm-Rf)
• Rf+βxRm-Rf

___ is used to show the rate of return and level of risk for a portfolio

• CAPM
• APT
• CML
• SML

____ is a graphical representation of market risk and return at a given time.

• CAPM
• APT
• CML
• SML

____ is also called as characteristic line

• CAPM
• APT
• CML
• SML

55 | P a g e
In ___ risk is defined as total risk and is measured by Standard deviation

• CAPM
• APT
• CML
• SML

In ____ risk is defined as systematic risk and is measured by Beta

• CAPM
• APT
• CML
• SML

___ graph defines only efficient portfolio

• CAPM
• APT
• CML
• SML

____ graph defines both efficient and non-efficient portfolios

• CAPM
• APT
• CML
• SML

___ is the virtual representation of capital asset pricing model

• CAPM
• APT
• CML
• SML

According to Security market line , the expected return of any security is the function of

• Total risk
• systematic Risk
• Diversifiable risk

56 | P a g e
 • Unique risk

According to Capital Market line, the expected return of any security is the function of
• Total risk
• systematic Risk
• Diversifiable risk
• Unique risk

The beta of the risk- free asset is ________

• 1.00
• 2.00
• 0.50
• 0
Bull market is _____ market /bear market is weak market

• Strong
• Semi strong
• Weak
• None of the above

1. The art of changing the mix of securities in a portfolio is called

A. Portfolio Management
B. Portfolio Evaluation
C. Portfolio Revision
D. Portfolio strategies

2. The sale and purchase of assets in an existing portfolio over a certain period is called
A. Portfolio Management
B. Portfolio Evaluation
C. Portfolio Revision
D. Portfolio strategies

3. The ultimate aim of ____ is maximization of returns and minimization of risk.

A. Portfolio Management
B. Portfolio Evaluation
C. Portfolio Revision
D. Portfolio strategies

4. ___ strategy involves frequent and substantial adjustment to the portfolio

A. Passive strategy
B. Active strategy
C. Mixed strategy

57 | P a g e
 D. Management strategy

5. Under____ strategy, adjustment to the portfolio is carried out according to certain

predetermined rules & procedures

A. Passive strategy
B. Active strategy
C. Mixed strategy
D. Management strategy

6. ____ is the last step in portfolio management

A. Portfolio Management
B. Portfolio Evaluation
C. Portfolio Revision
D. Portfolio strategies

7. Portfolio evaluation refers to the evaluation of the ____ of the portfolio

A. Revision
B. Performance
C. Strategy
D. Management

8. ____ index is a ratio of return generated by the fund over and above risk free rate of
return, during a given period and systematic risk associated with it beta.
A. Sharpe
B. Treynor
C. Jenson
D. Markowitz

9. According to _____ measure, it is the total risk of the fund that the investors are
concerned about. So the model evaluates funds on the basis of reward per unit of total
risk.

A. Sharpe
B. Treynor
C. Jenson
D. Markowitz

10. In ___ measure, the surplus between the two returns is called Alpha.

A. Sharpe
B. Treynor

58 | P a g e
 C. Jenson
D. Markowitz

11. ____ is a debt instrument

A. Equity shares
B. Preference shares
C. Bonds
D. Promissory notes

12. A bond’s terms and conditions are contained in a legal contract between the buyer and
the seller known as the____

A. Memorandum
B. Prospectus
C. Indenture
D. Articles

13. The ____ of a bond is the price at which the bond is sold to investors when first issued

A. Face Value
B. Discount Value
C. Market Value
D. Share Value

14. A bond’s ____ is the length of time until the principal is scheduled to be repaid

A. Maturity
B. Yield to Maturity
C. Duration
D. Indenture

15. ____ is the measure of the weighted average life of a bond, which considers the size
and timing of each cash flow

A. Maturity
B. Yield to Maturity
C. Duration
D. Indenture

59 | P a g e
 16. The rate of interest used to discount the bond’s cash flow is known as
A. Maturity
B. Yield to Maturity
C. Duration
D. Indenture

17. The ____ on a bond is the rate of return that an investor would earn if he bought the
bond at its currency market price and help it until the maturity
A. Maturity
B. Yield to Maturity
C. Duration
D. Indenture

18. Average Return of portfolio X is 14% , Standard Deviation is 0.25 and Risk free return
is 8%. What is the return of portfolio based on Sharpe’s measure
A. 20%
B. 21%
C. 25%
D. 24%

19. Average Return of Portfolio Y is 10%, Standard Deviation is 10% and risk-free return
is 8%. What is the portfolio return as per Sharpe’s measure
A. 10%
B. 11.33%
C. 12.33%
D. 13.33%

20. As per Sharpe’s measure Portfolio X return is 24%, Portfolio Y is 13.33% & Market
Index is 16%. Which portfolio has out performed
A. Portfolio X
B. Portfolio Y
C. Market Index
D. None of the above

21. Portfolio X Average Return 14% Beta 1.25 Risk free return 8%, what is the portfolio
return as per Treynor’s measure
A. 5.8%
B. 4.8%
C. 6.8%
D. 7.8%

22. ------- involves changing the existing mix of security

A. Portfolio Management

60 | P a g e
 B. Portfolio Evaluation
C. Portfolio Revision
D. Portfolio Strategies

23. The objective of Portfolio revision is the same as the objective of -------

A. Portfolio Management
B. Portfolio Evaluation
C. Portfolio Selection
D. Portfolio Strategies

24.The decomposition of the total return is useful in identifying the different skills involved in
------ portfolio management

A. Active
B. Passive
C. Behavioural
D. Social

25. ------ measure is based on Beta

A. Sharpe
B. Treynor
C. Jenson
D. Markowitz

26. ------ measure believes in standard deviation

A. Sharpe
B. Treynor
C. Jenson
D. Markowitz

27. ------ measure believes in CAPM

A. Sharpe
B. Treynor
C. Jenson
D. Markowitz

28. Treynor’s measure is based on --------

A. Beta
B. Standard deviation

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 C. CAPM
D. Market Index

29. Sharpe’s measure is based on -------

A. Beta
B. Standard deviation
C. CAPM
D. Market Index

30. Jenson’s measure is based on --------

A. Beta
B. Standard deviation
C. CAPM
D. Market Index

31. Bond Prices & Yields move in

A. Same direction
B. Opposite direction
C. Positive direction
D. Negative direction

32. Long terms Bonds have more ------ risk that short term bonds

A. Currency risk
B. Default risk
C. Selection risk
D. Interest rate risk

1. Attempts to measure intrinsic value of a security by examining EIC factors

A. Technical Analysis
B. Fundamental Analysis
C. Efficient Market Theory
D. Random walk Theory

2. The study that affects the security’s value including macroeconomic factors are
called
A. Technical Analysis
B. Fundamental analysis
C. Efficient Market Theory
D. Random walk Theory

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 3. First Stage of start-up of an industry
A. Pioneering Stage
B. Rapid Growth stage
C. Decline Stage
D. Diversification

4. Demand for product in the industry increases at fast pace in this stage
A. Pioneering Stage
B. Rapid Growth stage
C. Decline Stage
D. Diversification

5. In this stage poor performers start winding up their businesses

A. Pioneering Stage
B. Rapid Growth stage
C. Decline Stage
D. Diversification

6. A_____ is the study of variables which influences the future price of a company’s
share
A. Economic Analysis
B. Technical Analysis
C. Company Analysis
D. Industry Analysis

7. Leverage related to investment activity

A. Operating Leverage
B. Financial Leverage
C. Combined Leverage
D. Company Leverage

8. Leverage helps to examine the relation between EBIT and EPS

A. Operating Leverage
B. Financial Leverage
C. Combined Leverage
D. Company Leverage

9. Which Analysis provides a simplified picture of price behavior of a share

A. Technical Analysis
B. Fundamental analysis
C. Efficient Market Theory
D. Random walk Theory

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 10. Return on Investment is determined by

A. Net Profit
B. Capital Employed
C. Net worth
D. Net Profit and Capital employed

11. ----- is the relation between current assets & current liabilities

A. Current Ratio
B. Quick Ratio
C. Gross Profit Ratio
D. Net Profit Ratio

12. ----- ratios are measure to find out Company’s ability to pay off its short- term debt

A. Liquidity Ratio
B. Solvency Ratio
C. Profitability Ratio
D. Efficiency Ratio

13. ___ ratios are called Financial leverage ratios

A. Liquidity Ratio
B. Solvency Ratio
C. Profitability Ratio
D. Efficiency Ratio

14. ____ ratios show how well a company can generate profits from its operations.

A. Liquidity Ratio
B. Solvency Ratio
C. Profitability Ratio
D. Efficiency Ratio

15. ___ ratios are called activity ratios

A. Liquidity Ratio
B. Solvency Ratio
C. Profitability Ratio
D. Efficiency Ratio

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 16. ___ ratio measure a company’s ability to make the interest payments and other
obligations.

A. Liquidity Ratio
B. Solvency Ratio
C. Profitability Ratio
D. Coverage Ratio

17. The ideal current ratio is

A. 1: 1
B. 2:1
C. 1:2
D. 2:2

18. Gross profit 2,00,000 Net Sales 5,00,000. What is the Gross Profit Ratio.

A. 70%
B. 40%
C. 30%
D. 10%

19. Net Profit =91,000 and Net sales 5,00,000. Net Profit Ratio is

A. 18.2%
B. 18%
C. 81%
D. 2%

20. Current Assets 40,000 and Current Liabilities 28000. Current Ratio is

A. 2:1
B. 1:2
C. 1: 1.43
D. 1.43:1

21. Debt funds= 32,000 and Equity Funds= 60,000. Debt Equity ratio is

A. 1: 0.53

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 B. 0.53:1
C. 1:1
D. 0.53:0.53

22. Gross profit 7.50,000 Net Sales 15,00,000. What is the Gross Profit Ratio

A. 50%
B. 75%
C. 15%
D. 80%

23. MPS = 25 and EPS= 2.02 what is Price Earning

A. 27.02
B. 23.02
C. 12
D. 50.02

24. Profit After Tax= 50 lakhs, Preference dividend = 9.6 lakhs and Number of equity
shares are 20lakhs. Earnings per share is

A. 2.02
B. 1.02
C. 0.02
D. 9.6
1. Analysis focuses on charts of price movements and various analytical tools to
evaluate a security’s strength or weakness and forecast future price changes.
A. Technical Analysis
B. Fundamental analysis
C. Efficient Market Theory
D. Random walk Theory

2. Analysis believe past trading activity and price changes of a security are better
indicators of the future price movements
A. Technical Analysis
B. Fundamental analysis
C. Efficient Market Theory
D. Random walk Theory

3. Analyst believe history is going to repeat

A. Technical Analysis
B. Fundamental analysis
C. Efficient Market Theory
D. Random walk Theory

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 4. ____ chart is the simplest form of charting
A. Line Graph
B. Bar Chart
C. Candle Stick Chart
D. Support Charts

5. ____ are the series of technical indicators used by traders to predict the direction of
the major financial indexes
A. Relative Strength Index
B. Market Indicators
C. Support Indicators
D. Resistance Level

6. Upper price level at which supply for shares gains momentum

A. Relative Strength Index
B. Market Indicators
C. Support Indicators
D. Resistance Level

7. ___ reflect resistance and support level in an upward moving market.

A. Head and shoulders
B. Inverse Head and Shoulders
C. Support Level
D. Resistance Level

8. ___ reflect resistance and support level in a downward moving market.

A. Head and shoulders
B. Inverse Head and Shoulders
C. Support Level
D. Resistance Level

9. ___ is identified as the narrow movement of the market either after an upward or
down trend
A. Head and shoulders
B. Inverse Head and Shoulders
C. Flag
D. Oscillator

10. Technical analysis tool banded between two extreme values

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 A. Head and shoulders
B. Inverse Head and Shoulders
C. Flag
D. Oscillator

11. ____ theory attempts to develop a rationale for a long-term pattern in the stock price
movements
A. Dow Theory
B. Elliot Wave Theory
C. Random Walk Theory
D. Efficient market theory

12. Theory which believes in fundamental analysis

A. Dow Theory
B. Elliot Wave Theory
C. Random Walk Theory
D. Efficient market Theory

13. ___ is the lowest price at which demand for shares gains momentum

A. Support Level
B. Resistance Level
C. Break Even Level
D. Margin Level

14. ___ is the highest price at which supply for shares gains momentum

A. Support Level
B. Resistance Level
C. Break Even Level
D. Margin Level

15. ____ reflects the resistance and support level in upward swing market

A. Head and Shoulder

B. Inverse Head and Shoulder
C. Triangle
D. Flag

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 16. Tool used in the technical analysis

A. Graphs
B. Ratios
C. Waves
D. Statements.

17. ___ is the long term view of security pricing

A. Fundamental
B. Technical
C. Combination
D. Leverage.

18. ___ found Relative Strength Index

A. Sharpe
B. Treynor
C. Jenson
D. Welles Wilder

19. ___ theory is based on industrial averages

A. Elliot waves
B. Random walk
C. Dow
D. Sharpe

20. ____ is a trading tool employed to evaluate securities

A. Technical Analysis
B. Fundamental Analysis
C. Economic Analysis
D. Company Analysis

21. ____ analysis was formed out of basic concepts gleaned from Dow theory.

A. Technical
B. Fundamental
C. Economic
D. Company

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 22. ____ analysis believes that history is going to repeat

A. Technical
B. Fundamental
C. Economic
D. Company

23. ___ theory states that major moves takes place in five successive steps.

A. Elliot waves
B. Random walk
C. Dow
D. Sharpe

24. _ are trading tools that offer indications when a currency is over bought or sold.

A. Technical Analysis
B. Charts
C. Dojji
D. Oscillators

25. ___ is concerned with determining the future share price based on past performance.

A. Technical Analysis
B. Charts
C. Dojji
D. Oscillators

26. ____ is identified as a narrow movement in the market either after an uptrend or
down trend

A. Head and Shoulder

B. Inverse Head and shoulder
C. Triangle
D. Flag

27. Technical analysts believe that the price of a share depend upon____ in the stock
market.

A. Supply
B. Demand
C. Demand and Supply
D. Volume

28. Which analysis provides a simplified behaviour of a share

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 A. Technical
B. Fundamental
C. Economic
D. Company
29. Which charting technique records only closing price

a. Line chart
b. Bar chart
c. Point and figure chart
d. Candle stick chart

30. ____ is also called as OHLC chart

a.Line chart
b.Bar chart
c.Point and figure chart
d.Candle stick chart
31. In candle stick chart , the colour of the candle will be black

a. If opening price = closing price

b. If closing price> opening price
c. If closing price< opening price
d. None of the above
32.In candle stick chart , the colour of the candle will be white
a. If closing price> opening price
33. In a candle stick chart if opening price= closing price it will lead to the formation of
_______ dojji

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 EVALUATION PATTERN

Internal Assessment :40 Marks

1. Test : 20 Marks
2. Assignment/Presentation/Overall: 20 Marks

Semester End Examination: 60 Marks

Q.1 Multiple choice/ True or False/ Fill in the blanks. Match the column 15 Marks
Q.2 Attempt any two full length questions 8 marks each 16 marks
Q.3 Attempt any two full length questions 7 Marks each 14 marks
Q.4 Attempt any 3 short notes/short problems 5 marks each 15 marks

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