Nagar Yuwak Shikshan Sanstha’s
Datta Meghe Institute of Management Studies
Atrey Layout, Nagpur-440022
Security Analysis & Investment Management
Unit I - Investment Basics
Q1)Define Investment
Ans - An asset or item that is purchased with the hope that it will generate income or appreciate in the
future. In an economic sense, an investment is the purchase of goods that are not consumed today but
are used in the future to create wealth. In finance, an investment is a monetary asset purchased with
the idea that the asset will provide income in the future or appreciate and be sold at a higher price.
Q2)What are the various approaches to investment decision making?
Ans –
1) Fundamental approach - There is an intrinsic value of a security, which depends upon underlying
economic (fundamental) factors
2)Psychological approach - The psychological approach is based on the premise that stock prices are
guided by emotion rather than reason.
3)Academic approach - Stock markets are reasonably efficient in reacting quickly and rationally to the
flow of information. Hence, stock prices reflect intrinsic value fairly well.
4)Ecelectic approach - Combine fundamental and technical analyses to determine
which securities are worth buying, worth holding, and
worth disposing of. Respect market prices and do not show excessive zeal in
‘beating the market’.
Q3)What is security?
Ans – A security is an instrument of promissory note or a method of borrowing or lending or a source of
contributing to the funds needed by a corporate body or non-corporate body.
Q4)Define security analysis
Ans - Security analysis is the analysis of tradeable financial instruments called securities. These can be
classified into debt securities, equity, or some hybrid of the two. More broadly, futures and
tradeable credit derivatives are sometimes included.
Q5)What is portfolio?
Ans - The term portfolio refers to any collection of financial assets such as stocks , bonds, and cash.
Portfolios may be held by individual investors and/or managed by financial professionals, hedge funds,
banks and other financial institutions.
Q6)What is portfolio management?
Ans – Portfolio management postulates that maximization of return and or minimization of risk will yield
optimal returns and age and attitude are only starting points for investment decision and vigorous risk
return analysis is required for optimization of returns.
Q7)What are the four characteristics of an investment?
Ans –
1)Risk –If the principle investment can be recovered and creditworthiness of agency issuing securities.
2)Return – If it will give a desired rate of return for sacrificing present cash value.
3)Safety – Certainty of return on capital without loss of money or time involved.
4)Liquidity – If an asset is readily realisible, marketable in case of emergency of need of funds.
Q8)Define risk and return?
Ans - Income received on an investment plus any change in market price, usually expressed as a percent
of the beginning market price of the investment.
Risk - The variability of returns from those that are expected.
Q9)What are the phases of investor life cycle?
Ans –Accumulation:The accumulation phase is usually young adulthood to early middle age. During this
phase, assets are accumulated to satisfy immediate needs (a house, a car, furniture, and so forth)
Consolidation:The consolidation phase typically begins between the ages of 45 and 54. At this stage,
debt management gives way to asset accumulation, income tends to be high, and net worth should be
growing rapidly. The investment horizon, however, still might be 20-30 years, enabling the acceptance
of a moderate amount of risk.
Spending/Giving : The spending phase begins at retirement. Income declines and it becomes necessary
to live off of past investments. During this phase, the investor tends to become less tolerant of risk, but
must protect the real purchasing power of income.
Q10)What is systematic and unsystematic risk?
Ans – Systematic risk – It is a macro level risk, concerned with economy as whole.e.x. failure of
monsoon,change of government,change in credit policy, recession.
Unsystematic risk – It is micro level risk concerned with company or industry.
Unit II – Fundamental Analysis
Q1)What is fundamental analysis?
Ans – Evaluation of a security that measures its intrinsic value by examining related economic, financial
and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that
can affect the security's value, including macroeconomic factors (like the overall economy and industry
conditions) and company-specific factors (like financial condition and management).
Q2)What are the three constituents of fundamental analysis?
Ans –
1)Economic analysis - Effect of macro level economic factors on performance of the company.
2)Industry Analysis – Gives comparative understanding of company’s financial prospectus.Also helps
understand company’s position w.r.t peers.
3)Company Analysis – Non-financial – Management,corporate vision,external environment
Financial – Analysis of financial statements using accounting ratios.
Q3)What are the steps in fundamental analysis?
Ans – Steps in fundamental analysis are as follows:
1.
2.
3.
4.
5.
Macroeconomic analysis, that involves considering commodities, currencies, and indices.
Industry sector analysis that involves the analysis of companies which are a part of the sector.
Situational analysis of the company.
Financial analysis of a company.
Valuation
Q4)What are the two approaches in fundamental analysis?
Ans - While carrying out fundamental analysis, investors can use any of the following approaches:


Top-down approach: In this approach, an analyst investigates both national and international
economic indicators, like energy prices, GDP growth rates, inflation and interest rates. The
analysis of total sales, price levels and foreign competition in a sector is also done in order to
identify the best business in the sector.
Bottom-up approach: In this method, an analyst starts the search with specific businesses,
irrespective of the industry or region.
Q5)What are factors considered in macroeconomic analysis?
Ans - 1)Growth rate of GDP – Total production of goods and services in the economy during a year.
2)Industrial growth rate – IIP dataWeightage of IIP data –manufacturing,electricity, Mining ,coal,oil
metals
3)Agriculture and monsoons
4)Savings and investment – Domestic savings + Inflow of foreign capital – Investment abroad
5)Govt. budget and deficit
6)Money supply –
M1 = currency with public + demand deposits with bank+ other deposits
M3 = M1 + time deposit with banks
7)Interest rate – Treasury bills,G-secs
8)Balance of Payments
Balance of trade + Balance on invisibles like tourism,software services and interest rates + Balance on
account of capital account
BOP deficit depletes forex reserves and has adverse impact on exchange rate.
9)Infrastructural facilities and arrangements
Q6)What factors does industry analysis analyze?
Ans –
A)Sensitivity to business cycle.
B) B)Industry life cycle analysis.
C) Study of structure and characteristics of industry.
D)Profit potential of Industries – Porter model.
Q7)How does qualitative appraisal happen in company analysis?
Ans –
1)Availability and cost of inputs
2)Order position
3)Licensing policy,regulatory framework
4)Technological and production capabilities
5)Marketing and distribution –Image loyalty,how deep is network?
6)Human resources.
Q8)What are tools utilized in fundamental analysis?
Ans –
1)Earnings per Share
Earnings per share (EPS) is arrived at by dividing the net earnings by number of outstanding
shares.
2)Price to Earning Ratio
The Price to Earnings Ratio (P/E) indicates the relationship between stock prices and company
earnings. It is computed by dividing the share price by the Earnings per Share. The P/E indicates
how much investors are willing to pay for a particular company's earnings.
3)Price to Sales Ratio
When a company is having no earnings, there are other tools that help investors judge its worth.
New companies in particular mostly have no earnings, but that does not indicate that they are
bad investments. Price to Sales ratio (P/S) is very helpful for judging new companies. It is
calculated by dividing the market cap (stock price times the number of outstanding shares) by
the total revenues.
4)Price to Book Ratio
Book value is calculated by subtracting liabilities from assets. Value of a growing company would
always be greater than book value owing to the potential for future revenue. The P/B ratio is the
value that the market places on book value of the company and is calculated by dividing
currentprice per share by book value per share (i.e. book value / number of outstanding shares).
Companies having a low P/B are good and often chosen bylong term investors who see the
company’s potential.
5)Dividend Yield
Dividend yield is helpful for determining the percentage return that a company pays in form of
dividends. Dividend yield is calculated by dividing annual dividend per share by stock's price per
share.
Q9)What are the benefits of fundamental analysis?
Ans –
a)The intrinsic value of a security can be identified using fundamental analysis
b)It also helps in identifying long-term investment opportunities, as it involves real- time data.
Q10)What are drawbacks of fundamental analysis?
Ans –
1)Since there are too many economic indicators and extensive macroeconomic data, it can
confuse novice investors.
2)The same set of information based on macroeconomic indicators may have varied effects on
same currencies at different times.
3)It is useful only for long-term investments.
Unit III – Efficient Capital Markets
Q1)What is efficient market hypothesis?
Ans - An investment theory that states it is impossible to "beat the market" because stock
market efficiency causes existing share prices to always incorporate and reflect all relevant
information. According to the EMH, stocks always trade at their fair value on stock exchanges,
making it impossible for investors to either purchase undervalued stocks or sell stocks for
inflated prices.
Q2)How does a market become efficient?
Ans - A market has to be large and liquid. Information has to be widely available in terms of
accessibility and cost and released to investors at more or less the same time. Transaction costs
have to be cheaper than the expected profits of an investment strategy. Investors must also
have enough funds to take advantage of inefficiency until, according to the EMH, it disappears
again. Most importantly, an investor has to believe that she or he can outperform the market.
Q3)How has information technology impacted EMH?
Ans - Markets all over the world are gaining greater efficiency. IT allows for a more effective,
faster means to disseminate information, and electronic trading allows for prices to adjust more
quickly to news entering the market. However, while the pace at which we receive information
and make transactions quickens, IT also restricts the time it takes to verify the information used
to make a trade. Thus, IT may inadvertently result in less efficiency if the quality of the
information we use no longer allows us to make profit-generating decisions.
Q4)What are the forms of market efficiency?
Ans –
1) Strong efficiency - This is the strongest version, which states that all information in a market,
whether public or private, is accounted for in a stock price. Not even insider information could
give an investor an advantage.
Semi-strong efficiency - This form of EMH implies that all public information is calculated into a
stock's current share price.
3) Weak efficiency – All past prices are reflected in current price.
2)
Q5)Why the markets ought to be efficient?
Ans – a)Marginal investor determines prices
b)Smart money dominates trading
c)Survival of fittest.
Q6)What are the tenets of Dow theory?
Ans –
1)Three movements – Primary,secondary,minor.
2)Three phases – Accumulation,participation,distribution.
3)Stock markets discount all news.
4)Stock averages must confirm each other.
5)Trends are confirmed by value.
6)Trends exist until definitive signals prove that they have ended.
Q7)What are advantages of Dow Theory?
Ans - Exit strategy,scientific approach,study of patterns,time frame,no attention to market
rumours,’inside info’.
Q8)What are disadvantages of Dow Theory?
Ans - Analyst bias,open to interpretation,difficult to time the market.
Q9)What are implications of EMH?
Ans - All past information, including past prices, are incorporated in current prices.
Leads to the Random Walk theory of stock prices.
The efficient markets hypothesis is weakened if:
Information is hard to obtain.Trading is difficult.Trading is costly.Prices are sticky.Individuals
over-react to information.
Thus, market organization has an impact on stock prices and how quickly the incorporate information.
i.e., only current prices are needed to predict future prices. Past prices are of no additional help.
Q10)What are anomalies of EMH?
Ans - The “Small Firm Effect:” Portfolios of stocks of small firms tend to out
of large firms.
perform those
The “Weekend Effect:” Returns tend to be smaller on Mondays.
The “January Effect:” Returns tend to be larger in January.
Unit IV - Markowitz portfolio theory
Q1)What are the assumptions in Markowitz model?
Ans –
1)Investors are rational and behave in a manner as to maximize their utility for given level of money.
2)Investors have free access to correct and fair information on returns and risk.
3)The markets are efficient and absorb the information quickly.
4)Investors are risk averse and try to minimize the risk and maximize return.
5)Investors base decisions on expected returns and variance of these returns from the mean.
6)Investors prefer high return for given level of risk.
Q2)What does the Markowitz theory of diversification state?
Ans - An investor can reduce portfolio risk simply by holding combinations of instruments which are not
perfectly positively correlated . In other words, investors can reduce their exposure to individual asset
risk by holding a diversified portfolio of assets. Diversification may allow for the same portfolio
expected return with reduced risk.
Q3)What is an efficient frontier?
Ans – Every possible combination of the risky assets, without including any holdings of the risk-free
asset, can be plotted in risk-expected return space, and the collection of all such possible portfolios
defines a region in this space. The left boundary of this region is a hyperbola and the upper edge of this
region is the efficient frontier in the absence of a risk-free asset .
Q4)What are the parameters of Markowitz diversification?
Ans –
1)Expected return.
2)Variability of returns measured by standard deviation.
3)Covariance between assets.
Q5)What is utility concept?
Ans – Utility of a portfolio is risk adjusted return.It is equal to portfolio return – risk penalty ..
Q6)What do you infer from an efficient frontier?
Ans - It generates an efficiency frontier which is a set of efficient porfolios.
A portfolio is efficient if it offers maximum expected return for agiven level of risk or offers
minimumlevel of risk for a given level of rate of return.
Q7)When is a portfolio termed ‘not efficient’?
Ans – A portfolio is not efficient if there is another portfolio with
1)A higher expected value of return and less standard deviation(risk).
2)Higher expected value of return and same standard deviation(risk).
3)Same expected value but lower standard deviation.
Q8) What could be termed as optimal investment?
Ans – For a given graph between expected return and risk there are a series of indifference curves
depending upon varied combination of portfolio mix.The point at which indifference curve is tangent
to the efficient frontier is termed as optimal investment.
Q9)What does this optimal investment signify?
Ans – The point signifies risk level acceptable to achieve expected rate of return and at same time
provide maximum return for bearable level of risk.
Q10)How do we compare the various points on an efficient frontier?
Ans –Efficient frontier makes approximate C-shaped curve when plotted for Return(Y axis) ver.Risk(Xaxis).Higher you go up the curve it signifies higher returns but also higher amount of risk.Lower it
moves,it signifies low risk levels but also lesser returns.
Unit V – Capital Market Theory
Q1)What are the assumptions of capital market theory?
Ans – 1) All Investors are Efficient Investors - Investors follow Markowitz idea of the efficient frontier
and choose to invest in portfolios along the frontier.
2) Investors Borrow/Lend Money at the Risk-Free Rate - This rate remains static for any amount of
money.
3) The Time Horizon is equal for All Investors - When choosing investments, investors have equal time
horizons for the chosen investments.
4) All Assets are Infinitely Divisible - This indicates that fractional shares can be purchased and the stocks
can be infinitely divisible.
5) No Taxes and Transaction Costs -assume that investors' results are not affected by taxes and
transaction costs.
6) All Investors Have the Same Probability for Outcomes -When determining the expected return,
assume that all investors have the same probability for outcomes.
7) No Inflation Exists - Returns are not affected by the inflation rate in a capital market as none exists in
capital market theory.
8) There is No Mispricing Within the Capital Markets - Assume the markets are efficient and that no
mispricing within the markets exist.
Q2)What happens when a risk free asset is combined with risky portfolio?
Ans – When a risk free asset combines with risky portfolio,standard deviation is linear proportion of
risky asset portfolio as standard deviation of risk free asset and correlation coefficient between risky and
risk-free asset is zero.
Q3)What is capital market Line?
Ans - The market portfolio consists of the combination of all risky assets and the risk-free asset, using
market value of the assets to determine the weights. The CML line is derived by the CAPM, solving for
expected return at various levels of risk.
Markowitz' idea of the efficient frontier, however, did not take into account the risk-free asset. The CML
does and, as such, the frontier is extended to the risk-free rate as illustrated below:
Q4) What effect a risk-free asset actually has when added to a portfolio of risky assets?
Ans -To begin, the risk-free asset has a standard deviation/variance equal to zero for its given level of
return, hence the "risk-free" label.
Given its lower level of return and its lower level of risk, adding the risk-free asset to a portfolio
acts to reduce the overall return of the portfolio.
Q5) What is Systematic and Unsystematic Risk?
Total risk to a stock not only is a function of the risk inherent within the stock itself, but is also a function
of the risk in the overall market. Systematic risk is the risk associated with the market. When analyzing
the risk of an investment, the systematic risk is the risk that cannot be diversified away.
Unsystematic riskis the risk inherent to a stock. This risk is the aspect of total risk that can be diversified
away when building a portfolio.
Q6)If risk-free rate rf is 8%,expected return on risky portfolio rm is 20% with a standard deviation  is
25%.If investor would like to invest 20% of his portfolio in risk free asset and balance in risky
asset,calculate expected return and standard deviation.
Ans - Expected rate of return E(r) =
Wf(rf) + (1 – Wf)E(rm)
Wf – proportion of investment in risk free asset.
E(r) = 0.20* 8 +(1-.20)* 20
=17.6%
standard deviation  =(1 – Wf)σm
= 0.8 * 25
= 20%
Q7)What is differentiation between beta and standard deviation?
Ans – Beta measures the relative risk of a stock when compared to market risk unlike standard deviation
which measures risk only around its own mean.
Q8) How is beta calculated?
Ans -
Where n – number of data points
x – benchmark returns
y – stock returns.
Q9)What is capital asset pricing model?
Ans - The capital asset pricing model is a model that calculates expected return based on expected rate
of return on the market Rmarket, the risk-free rate Rf and the beta coefficient of the stock ß.
E(R) = Rf + ß( Rmarket - Rf )
Q10)What is security market line?
Ans – It expresses risk return relationship. Expected return on y axis and beta on x – axis.
It is a line which passes through risk free return and expected return of a market portfolio.
Section B
Unit VI – Technical Analysis
Q1)What is technical analysis?
Ans - Technical analysis is the study of human psyche as prices of shares/indexes move in certain trends
often repeating past movements reflecting sentiments of investors involved.
Q2)How are the trends of investor confidence manifested?
Ans - Trends of investor confidence is manifested through 4 aspects
a)Price – Change in investor attitude.
b)Time- Recurrence & length of cycles.
c)Volume-Strength of investor sentiment.
d)Breadth –Measure of extent of emotion.
Q3)What are the assumptions in technical analysis?
Ans – 1)Prices move in trends.
2)History repeats itself.
3)It interpretes what the market is doing,it doesn’t worry about “why” it is doing so?
4)Price discounts everything,anything that could affect price has already been accounted for.
Q4)How does technical analysis help in trading ?
Ans –Technical analysis is about riding a trend and identifying trend reversal at a relatively early
stage. It just helps increase your chances of gains. It is about probability and not possibility.
Q5)What are drawbacks of technical analysis?
Ans –
1)Not a perfect science.
2)Interpreted differently by different technical analysts.
3)Knowledge of history never makes anybody rich.
4)Market affected by too many variables to worry about technicals.
Q6) What are the types of charts for observing price trends?
Ans – Line charts, bar charts,Japanese candlesticks and point and figure charts.
Q7) What is a trend?
Ans – Trend refers to general direction of price movement.Prices move in series of ups and downs.
There are three types of trends – upward trend,downward trend and flat trend.
Q8)What are moving averages?
Ans – Zigzag movement of prices often make it difficult to judge the underlying trend.Moving averages
help identify the trend .There are three types of moving averages
1)Simple
2)Weighted.
3)Exponential
Q9)What is support and resistance?
Ans – When in a downtrend stock price reaches to a level where they tend to not fall further or reverse
there trend i.e. buyers find price attractive enough for buying the stock it is called as support and when
in a uptrend prices resist going beyond a particular level and have a tendency to reverse trend from
there i.e. buyers find stock attractive to sell it is called as resistance.
Q10)Mention some of the reversal patterns.
Ans
1)Head and Shoulders Top
2)Head and Shoulders Bottom
3)Double Top
4)Double bottom
5)Triple top
6)Rounded top/bottom
Unit VII – Security Valuation
Q1) What is a bond?
Ans - BOND –
1)Represents a security issued in connection with a borrowing arrangement.
2)It obligates the issuer to make specified payments at future dates.
Q2)Explain the terms associated with bonds?
Ans - Par Value – Value stated on the face of the bond.
Promise of amount to be paid on the maturity.
Coupon rate – Interest payable to the bondholder.
Maturity date – Date when principal is to be paid to the bondholder.
Indenture – Legal instrument which contains restrictions, pledges and promises of contract.
Q3)What are various types of bonds?
Ans –
A) Government Bonds (G-secs) –Medium to long term.
Issued by RBI on behalf of government of India.
B)Corporate Bonds – Issued by private companies,also known as debentures.
1)Straight Bonds – Fixed periodic coupon (interest)over its life and returns the principal on a
maturity date.
2)Zero coupon bonds – Offers a steep discount over its face value and redeemed at face value
on maturity.
3)Floating rate bonds –Floating rate bonds pay an interest rate linked to a benchmark rate.
4)Bonds with embedded options
Convertible – To equity shares
Callable – Gives the issuer right to redeem prematurely.
Putable – Gives investor the right to prematurely sell them back .
5)Convertible & Non-convertible bonds
6)Mortgage or secured bonds – Mortgage refers to a lien on property or buildings.
Open ended –Can issue additional bonds only if certain tests of earnings and asset coverage are
met.
7)Serial Bonds – Maturing at different times.
8)Collateral trust Bonds – Secured by intangibles like shares & bonds.
Q4)What are the reasons for issuing bonds?
Ans - 1)To reduce cost of capital –Fixed rate of return.
2)To effect tax saving – Interest on bond is tax deductible for income tax purpose.
3)To widen source of funds –Institutions not permitted for investing in equity shares.
4)To preserve control – Increase in debt does not diminish voting power.
Q5) what is the value of a bond?
Ans –Its a present value of all future cash inflows arising on account of the bond.Its present
value is calculated using yield to maturity as discount rate.
Q6)What is current yield and yield to maturity?
Ans – current Yield = Annual interest based on coupon rate/current market price.
Yield to maturity (YTM) measures the annual return an investor would receive if he or she held a
particular bond until maturity.
Q7)How is yield to maturity calculated?
Ans -
Where:
P = price of the bond
n = number of periods
C = coupon payment
r = required rate of return
F = maturity value
t = time period when payment is to be received.
Q8)What are preference shares?
Ans - Hybrid security which incorporates some features of bond and some of equity.
1)Legally represents ownership of company,shown in balance sheet with equity shares.
2)Return to holders are discretionary ,no obligation to pay dividends as is for bonds
3)Limited return
4)Prior claim on assets before equity shares.
Q9)What are equity shares?
Ans - Represents ownership.
Residual claim,after creditors,preference share holders.
In bankruptcy,can have a claim for assets only after all prior claimants have been satisfied.
Features
1)High potential for profit
2)Limited liability
3)Free transferability
4)Share in growth
5)No long term capital gains tax.
Q10) What are some of equity valuation techniques?
Ans –
1)Price earnings growth model
2)Book value method
3)Replacement cost technique.
4)Discounted cash flow.
5)Earnings multiplier.
Unit VIII – Equity Portfolio Management
Q1)What are phases of portfolio management?
Ans –
1)
2)
3)
4)
5)
6)
7)
Specification of investment objectives & constraints.
Choice of asset mix
Formulation of portfolio strategy
Selection of securities
Portfolio Execution
Performance evaluation
Portfolio revision
Q2)What are objectives in first step of portfoliomanagement and risk factors?
Ans - Objectives –
1)Income – To provide a steady stream of income.
2)Growth – Capital appreciation.
3)Stability – To protect principal amount from losses.
First two are about RETURN and last one is about RISK.
Risk bears on three key factors
A)Financial situation – Earning capacity,major expenses.
B)Temperament – Ability to bear loss.conservative or aggressive.
C)Stage of life cycle – Age bears direct effect on risk taking capability as possibility of recovering
losses by regulat other income diminishes.
Q3)What are possible constraints in portfolio management?
Ans –
1)Liquidity – Speed with which assets can be sold for cash requirement in near future.
2)Investment horizon –How long the portfolio has to yield desired results?
3)Taxes – Post tax returns.
4)Regulations – applicable only for institutional investors.
5)Unique circumstances – Funds having philosophy of not investing in alcohol and tobacco
companies.
Q4) What should be asset mix of equity: fixed income?
Ans-90% variation returns come because of this decision.
10% because of sector rotation or stock selection.
1)Investor with greater risk tolerance:Stocks
Investor with lesser risk tolerance :Bonds
2)Longer time horizon : stocks as risk reduces with lengthened investment period.(Time
diversification)
For young people with a regular income source and enough time at hand 70 : 30 equity debt
investment is possible and for aging people 60:40 or 70:30 in favour of debt is recommended.
Q5)What are active and passive portfolio strategies?
Ans - Active Portfolio Strategy –
a)Market timing – Buying in at good phases and exiting at change of sentiment.
Staying away when market is bad.
b)Sector rotation – Rate cuts imply favourable movement for bank stocks, fuel price rise or higher
loan rates bad for auto stocks.
c)Security selection – search for under priced securities.
d)Investment philosophy – Growth,value,asset-rich,cyclical,momentum,technology.
Focus on certain kind of stocks ,avoid distraction.
Passive Portfolio Strategy – Buy and hold well diversified portfolio resembling index.
Q6)How does portfolio execution happen?
Ans - Overall state of market- Base upon whether market is riding on a positive sentiment and
approaching short term highs,It would be better off if portfolio manager waits for correction to
happen .
If it has already corrected and is in consolidation phase,it presents a great opportunity to park his
funds reserved for equity allocation.
If it is in beaten down state, it gives him an opportunity of value buying in really good stocks and if
he anticipates & analysis suggests a turnaround,growth stocks also present a viable option.
Q7)What are value and growth strategies?
Ans – Value companies are those which have a very good book value (possibly higher then market
price) but are not favoured in market.Backed by strong fundamentals this are expected to realize
their true potential and reach P/E ratios matching those of peers or the industry.
Growth companies are those which have shown tremendous growth in actual performance.They
possibly have higher P/E ratios then peers or 9ndustry but still are attractive as earning will rise with
higher growth and justify valuations.
Q8)What are the measures of portfolio evaluation?
Ans- 1)Sharpe ratio
2)Treynor ratio
3)Jensen’s measure
Q9)What factors affect client in portfolio revision?
Ans - 1)Change in wealth – With increasing riches(returns), investor may turn more conservative and
risk appetite decreases.
2)Change in time horizon.
3)Change in liquidity needs – Higher need for ready cash means more investment in liquid assets
and less scope for better returns.
4)Adapting to change in market sentiment –Shifting from equity to fixed income in downtrend.
5)Transaction cost barrier.
Q10)What are factors under consideration while asset mix rebalancing?
Ans
1)Drifting mix – Day to day changes in stock prices drifts the asset mix policy. However sensible
rebalancing can help adhere to appropriate asset mix(within equity class)
2)Disciplined rebalancing – Based on market upheaval and interest rate changes.
3)Burden of excess cash – Falling interest rates play havoc with returns on cash.
4)Availability of new investment avenues
Investment in metals,gold ETFs present a new opportunity for changing asset mix while portfolio
revisioning.
5)Change in asset risk attributes.
Unit IX – Derivatives
Q1)What is stock index arbitrage?
Ans – If price of index futures is out of line with suggested theoretical price,then
Arbitrage happens by
1)Buying a portfolio which is identical to the index
2)Going short on index futures.
Q2)What is asset allocation strategy using futures?
Ans – If an asset mix is to be changed by reducing exposure to equity and increasing for debt then
instead of actual buying and selling of deliveries which leads to time waste and higher costs ,same
could be done through selling equity futures and buying treasury bond futures
Q3)Why are futures good substitute for passive strategy?
Ans- 1)Tracking error can be avoided.It is difficult to invest in a portfolio which mimics index.
2)Periodic rebalancing because of receipt of dividends is avoided as there is no dividend in futures.
3)Transaction costs are less.
Q4)How can systematic risk be modified using index futures?
Ans – Suppose a portfolio manager has 10 lacs worth of portfolio and beta of 1 and 10 lacs in
cash.He wants to increase beta to 1.2. Instead of selling low beta stocks and buying high beta stocks
with higher transaction costs he adds index futures in such a number to his portfolio that beta of
new portfolio is converted to 1.2.
Q5)How are futures used in hedging?
Ans- Suppose markets have reached a certain higher level and manager fears that there could be a
sharp fall in prices from ther.. So as a hedge,he sells futures worth his portfolio (or possibly worth
less also) to hedge loss in his portfolio. If the market rises then his portfolio value increases which
will get offset by equal or lesser loss in futures depending upon complete or partial hedge.
Q6)What are options?
Ans – An option is a contract that gives its owner right but not the obligation to buy or sell an
underlying asset.
Q7) What are salient features of futures?
Ans – 1)Exchange traded (no liquidity or default risk)
2)Standard maturities.
3)Fixed quantity.
4)Ability for smaller trader to buy/trade in higher value securities.
Q8)What are straddles and strangles?
Ans – Both are option strategies
Straddle- When you buy call put of same strike price and same maturity
Strangle – When you buy out of money call and put(to reduce your risk) of same strike price and
same maturity.
Both are executed when you expect markets to go up or down drastically.
Q9)What is a bull spread?
Ans – When one is bullish ,you buy a lower strike price(higher premium) call and sell a higher strike
price(lower premium) call to constitute a bull spread.
Q10)Which type of users generally participate in derivatives market?
Ans –
1)Hedgers – Those who want to hedge their risk.
2)Speculators – To make speculative gains.
3)Arbitragers – Make gains arising out of market inefficiencies.
Unit X – Evaluation of portfolio performance
Q1
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