INDIAN INSTITUTE OF MANAGEMENT BANGALORE
INVESTMENTS
PGP
III Term
Instructor:
Prof. R.Vaidyanathan
A.
Course Objective:
1.
To make you understand the setting
investors/institutions and instruments.
2.
To focus on various methods of valuation principles and practices.
3.
To develop your analytical and interpretative skills in evaluating different investments
using published information and understand “ numbers” in a financial newspaper
4.
To familiarise you with construction of portfolios
B.
Course Schedule is provided in the enclosed sheet
C.
The method of evaluation is as follows: 1
2
D.
Mid Term
Final Exam
40
60
Total
100
of
the
capital
market
involving
Required Reading (Chapter—References of 1 in the schedule)
1 Investment –Sixth Edition—Bodie Zvi, Alex Kane, Alan J Marcus,
Tata McGraw- Hill 2004 [Chapter-references in schedule]
2. Investment Analysis and portfolio Management - Prasanna Chandra - Tata McGraw
Hill Ltd--2002
2. Distributed Handouts.
E.
Suggested Reading
Prof R.Vaidyanathan.iimb 2005
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1. Investment Analysis and Management - Fifth Edition - J. C. Francis, McGraw HillInternational edition.
2. Investment Analysis and portfolio Management—Seventh edition – Frank Reilly
and Keith C Brown –Thomson
3. Security Analysis and Portfolio Management- Sixth Edition - Donald E Fischer and
Ronald J. Jordan - Prentice Hall of India.
4. Investment Science –David G. Luenberger –Oxford University Press
5. Modern Portfolio Theory and Investment Analysis: Elton and Gruber, 5th edition
John Wiley and Sons
6. Investment Management—Frank Fabozzi, Prentice Hall International
7. Equity Investment Strategy – Yasaswy—ICFAI, Hyderabad
8. Portfolio Selection - Markowitz Harry
The following journals /newspapers to be followed during the course
.
Bombay Stock Exchange Official Directory vol. 1&2
NSE—Indian Securities Market : A Review
Capital Market; Investment Week, I- investor
Chartered Analyst,
Web pages of NSE, BSE, SEBI, RBI DCA etc
Business Standard; Economic Times; Business Line; Financial Express
The Link to my Home Page where you can browse some of the articles mentioned in the
readings and other articles is
http://202.41.106.18:9999/IIMB/Members/vaidya
Prof R.Vaidyanathan.iimb 2005
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INVESTMENTS
COURSE OUTLINE
Instructor: Prof. R Vaidyanathan
Sessions 1-2
Module 1
SETTING
This module will focus on the nature of the Secondary market; it's
participants and emerging trends. This will also deal with the
functioning of the market.
Important terms: Primary market, secondary market, securities, brokers,
jobbers, forwardation (Badla), backwardation, bulls, bears, short-sales,
arbitrage, mark up price, current yield, BOLT, Book closure, Bad
delivery, insider trading, Investment, Speculation.
Readings :
1. Indian Economy: Salient Aspects
--Prof.R.Vaidyanathan
2. Emerging Trends in the Financial Markets
-do-3. Stock Market – Salient Features
- do –
4. Indian Stock Markets – The Setting
- do –
5. Financial Markets: Institutions and Regulations
--do-6. Stock Markets: Are they Barometers of our Economy - do 7. Indian Financial Sector: Need for Integration
--do-8. Financial Sector Reforms: Challenges ahead
--do-9. Whither DFI’s?
--do-10. DCA should be more Pro-active
--do—
11. Securities Market In India—an Overview
Indian Securities Market Vol VII—2004
--NSE-12. Market Design: Indian Securities Market Vol-VII
-- NSE-Chapters 1 to 3 of Ref. 1
Chapters 1 to 3 of Ref. 2
Sessions 3-4
Module 2
RISK RETURN AND ASSET PRICING MODELS
These sessions recapitulate the valuation and risk criteria dealt with
earlier. It explains the method of computing historical returns and risk.
It deals with the characteristic line, beta factor, and premium on risk. It
explains capital asset pricing, and discusses the assumptions as well as
implications. It explains the power of diversification.
Important terms: HPY, HPR, total risk, systematic risk, unsystematic
risk, beta factor, risk premium, risk less security, characteristic line,
index models, excess returns.
Prof R.Vaidyanathan.iimb 2005
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Readings :
1. Time Value of Money
2. Return and Risk
3. Computation of risk and return: an illustration
4. Estimation of Market risk of Securities
Prof. R.Vaidyanathan
-do- do Prof. R Vaidyanathan
and Mr. Subrata Ray
P Suresh, R Sandeep
and V Bharat
Prof. R Vaidyanathan
5. Diversification and the Optimal Portfolio size:
The Indian Context:
6. Capital Asset Pricing Model (CAPM):
The Indian Context.
7. Risk and Return in Emerging and Developed Markets: Uma Shasikant &
Some Stylised Facts
B. Ramesh\
8. An Introduction to Risk and Return
Franco Modigliani and
Gerald A Pogue
9. Risk Management :Indian Securities Market Vol –VII-2004
--NSEChapters 6 & 9 of Ref. 1
Chapters 4,5 &8 of Ref 2
Sessions 5-6
Module 3
ANALYSIS OF ALTERNATE INVESTMENTS
This deals with options/ futures on stock and the derivative market. It
explains the distinction between option trading and share trading and
elaborates on option pricing and hedging strategies using options. It also
discusses futures and their usefulness.
Important terms: Call, put, buyer, writer, strike price, premium, expiry
date, European and American options, hedge, warrants, convertibles,
futures, stock futures, index-futures.
Readings :
1. Stock Derivatives
- Prof. R Vaidyanathan
2. Futures
-do3. Options
- do 4. Working of a Futures / Options Contract
- do 5. Payoff Diagrams & Tables for Option Strategies
- do 6. A better Option
CFA—March 2001
7. Executive summary of Derivatives Committee
SEBI
[L.C. Gupta Committee]
8.Derivatives Market: :Indian Securities Market Vol –VII-2004 --NSEChapters 20 & 22 of Ref. 1
Chapters 14 &15 of Ref. 2
Prof R.Vaidyanathan.iimb 2005
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Sessions7-10
Module 4
BOND VALUATION AND DURATION
These sessions deal with aspects pertaining to valuation of bonds and
theorems in valuation. It illustrates the relationships of life of bonds and
fluctuation in prices for change in market interest rates It deals with
Macaulay duration and method of computing the same.
The concept of interest rate elasticity and lock-in-period is explained.
Also the mechanics of different swaps and immunisation are discussed.
It explains the relationship between coupon rate, yield, maturity and
duration. It discusses Indian Bond instrument and indexes. It also
discusses the rating mechanism adopted by S & P, Moody’s, CRISIL etc.
It also deals with term structure of interest rate and the various theories
regarding the same. The discussion will focus on expectations theory,
liquidity premium theory and theory of market, segmentation. It
discusses the Indian market and ytm curves for the same.
Important terms: Nominal return, effective return, YTM, console, current
yield, duration, lock in period, immunisation, swap, basis points, rating
symbols, investment grade, speculative grade. Spot rates; forward rates;
zero coupon bonds, striped coupon bonds, yield curves; yield spread,
expectation theory, liquidity premium, segmented markets.
Readings :
1. Bond Valuation
Prof. R Vaidyanathan
2. Yield and Duration
- do 3. Bond Duration
- do 4. Immunisation
- do 5. YTM and Valuation
RBI
6. Credit Rating
R.Vaidyanathan
7. India’s Debt Wish
-do8. Debt Markets: The Tiger could wake up
-do9. Debt Market: Indian securities Market Vol VII—2004 NSE
Chapters 14, &15 of Ref. 1
Chapters 10
of Ref 2.
Mid Term--- [40%]
Sessions 11-12
TERM STRUCTURE OF INTEREST RATES
This deals with term structure of interest rate and the various theories
regarding the same. The discussion will focus on expectations theory,
liquidity premium theory and theory of market, segmentation. It deals
with Indian market and ytm curves for the same.
Important terms:
Spot rates; forward rates; zero coupon bonds,
striped coupon bonds, yield curves; yield spread, expectation theory,
liquidity premium, segmented markets.
Prof R.Vaidyanathan.iimb 2005
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Readings
1.Term Structure of Interest Rates: R.Vaidyanathan
2. Instruments Brief ICICI-sec/SBI.Tex and Indexes
Chapters 15 and 16 of Ref 1
Chapters 10
of Ref 2.
Sessions 13-18
Module 5
EQUITY ANALYSIS
Fundamental Analysis:
This focus on economic analysis, industry
analysis and company analysis. Financial Statement Analysis, recasting
the earnings statement, normalising e.p.s for bonus and rights issue and
using it for forecasting. The importance of price earnings multiple and
limitations.
Important terms: Recasting earnings, adjusting/normalising e.p.s. Priceearnings ratio, growth shares, discount shares, volatile shares, cyclical
shares, earnings multiplier, estimating growth.
Technical Analysis: The sessions are spent on discussing various
aspects of technical analysis including assumptions. Dow theory is
elaborated and charts are discussed. We also focus on contrary opinion
theories and other indicators like breadth of the market, confidence index
and relative strength analysis.
Important terms:
Dow chart, primary trends and secondary
movements, technical correction, abortive recovery, profit taking, line
and bar charts, contrarians, odd-lot rule, advances and declines, relative
strength.
Efficient market hypotheses (EMH): Weakly efficient market hypothesis is
examined and its applicability in our context is explored. Some of the tests like
run-test, serial correlation test etc. are explained. Also semi-strong and strongly
efficient market hypothesis are discussed with evidence from our data and
abroad.
`
Important terms:
Efficient market, weakly efficient, semi-strong and strongly efficient. Random
walk, run tests, serial correlation tests and filter rules, insider information and
efficiency. The role of market indices is explained.
Readings:
1. Fundamental Analysis
Prof. R Vaidyanathan
2. Technical Analysis
- do 3. P/E Ratios and Stock Returns
Prof.R Vaidyanathan &
Mr.Ranadev Goswamy
4. Stock Return and Price to Book value Ration Prof. R. Vaidyanathan &
Sudhir Chava
5. Efficiency of the Indian Capital Market
Prof. R. Vaidyanathan &
Prof R.Vaidyanathan.iimb 2005
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6. Share Buy back aspects and implications
Kanti Kumar Gali
Profs. D. Kare &
R. Vaidyanathan
Chapter -- 12/13 & 17/18 of Ref. 1
Chapter -- 11,12 & 13
of Ref 2
Sessions 19-24
Module -6
PORTFOLIO MANAGEMENT
This module discusses the advantages of diversification and the
concept of an efficient portfolio. Capital Market line is explained.
Markowitz and Sharpe models are developed and optimal portfolios
delineated. Performance appraisal of MF’s is explained using standard
measures of appraisal. It also deals with International diversification. It
discusses Pension /PF Funds and Investment regulations
Important terms: Utility Axioms, Dominant security; legitimate security,
Markowitz criteria, iso-mean lines, iso-variance ellipses, critical line,
efficient set, SML, CML, CAPM, Sharpe Measure, Treynor Measure.
Fama Decomposition. Prescriptive and Prudential Investment Regulation
Readings :
1. Portfolio Management
- Prof. R Vaidyanathan
2. Portfolio Management Delineating the efficient set of portfolios
- do 3. Portfolio Management - Optimal portfolio
with risk free and two risky assets
- do 4 Capital Asset Pricing Model (CAPM)
- do 5 Evaluation of Portfolio Performance
- do 6. Risk Return Diversification:Illustration
--do-7. Distribution of Stock Returns
Prof. S. Sehgal
8.Regulatory Framework for Investments
Profs. R. Vaidyanathan &
Insurance and Pension Funds In India
K. Sriram
9. Mandatory retirement Schemes.
Prof.R.Vaidyanathan
10.Voluntary Pension Markets: Untapped Potential Prof.R.Vaidyanathan
11. Assets -Liability Management:Issues andTrends.
Prof.R.Vaidyanathan
Chapter - 7, 8 & 24 of Ref. 1
Chapter - 16,17 &18 of Ref 2
F I N A L E X AM – [60%]
Prof R.Vaidyanathan.iimb 2005
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