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PONDICHERRY UNIVERSITY

PONDICHERRY UNIVERSITY (A Central UNIVERSITY )DIRECTORATE OF DISTANCE EDUCATIONI nvestment and portfolio ManagementMBA - FINANCE Paper Code : MBFM 4001 MBA - GENERAL Paper Code : MBGN 4001 IV - SemesterAuthorDR. R. KasilingamReader,Department of management Studies, PONDICHERRY UniversityPuducherryAll Rights ReservedFor Private Circulation OnlyISBN 978-93-81932-13-1 TABLE OF CONTENTSUNITLESSONTITLEPAGE investment Security Analysis - Economic Market Asset Pricing Pricing Revision2631 MBA (Finance) IV Semester Paper code: MBFM 4001 Paper - XVII nvestment and portfolio management Objectives To have understanding on investment and avenues of investment To have exposure on analysis techniques of capital market and To understand various theories of portfolio managementUnit - I investment Basics of investment investment , Speculation and Gambling investment Categories investment avenues Non marketable Financial Assets Money Market Instruments Bond/Debentures Equity Shares Schemes of LIC Mutual Funds Financial Derivatives Real Assets Real Estate Art antiques and - II Fundamental Security Analysis Economic Analysis significance and Interpretation of the Economic Indicators Industry Analysis Industr

PONDICHERRY UNIVERSITY (A Central University) DIRECTORATE OF DISTANCE EDUCATION Investment and Portfolio Management MBA - FINANCE Paper Code : …

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1 PONDICHERRY UNIVERSITY (A Central UNIVERSITY )DIRECTORATE OF DISTANCE EDUCATIONI nvestment and portfolio ManagementMBA - FINANCE Paper Code : MBFM 4001 MBA - GENERAL Paper Code : MBGN 4001 IV - SemesterAuthorDR. R. KasilingamReader,Department of management Studies, PONDICHERRY UniversityPuducherryAll Rights ReservedFor Private Circulation OnlyISBN 978-93-81932-13-1 TABLE OF CONTENTSUNITLESSONTITLEPAGE investment Security Analysis - Economic Market Asset Pricing Pricing Revision2631 MBA (Finance) IV Semester Paper code: MBFM 4001 Paper - XVII nvestment and portfolio management Objectives To have understanding on investment and avenues of investment To have exposure on analysis techniques of capital market and To understand various theories of portfolio managementUnit - I investment Basics of investment investment .

2 Speculation and Gambling investment Categories investment avenues Non marketable Financial Assets Money Market Instruments Bond/Debentures Equity Shares Schemes of LIC Mutual Funds Financial Derivatives Real Assets Real Estate Art antiques and - II Fundamental Security Analysis Economic Analysis significance and Interpretation of the Economic Indicators Industry Analysis Industry Growth Cycle - Company analysis Marketing Accounting policies Profitability Dividend Policy Capital Structure Financial Analysis Operating Efficiency management Fundamental Security Analysis Changes in the Financing Patterns of Indian Companies Debt-Equity Ratio for India - III Technical Analysis Technical Tools - The Dow Theory Primary Trend The secondary Trend Minor Trends Support and Resistance Level Indicators Odd Lot Trading Moving Average Rate of Change Charts Technical indicators Charting Techniques Indicators of the Witchcraft Variety Efficient Market Theory Basic 2 Concepts Random-Walk Theory Weak Form of EMH Semi-strong Form Strong Form The Essence of the Theory Market - IV portfolio Analysis portfolio and Single asset Returns and Risk Mean Variance Criterion covariance Beta (simple problems) portfolio Markowitz Model simple Diversification Risk and Return with Different correlation Sharpe s Single Index Model Sharpe s Optimal portfolio Construction of the Optimal portfolio Optimum portfolio with short sales.

3 Unit - V Asset Pricing Model portfolio Evaluation Capital Asset Pricing Model (CAPM) Security Market Line Assumptions Arbitrage Pricing Model (APT) portfolio Performance Models Sharpe s Performance Index Treynor s Performance Index Jensen s Performance Punithavathy Pandian, SECURITY ANALYSIS AND portfolio management , Vikas Publications Pvt. Ltd, New Delhi. , SECURITY ANALYSIS AND portfolio management , PHI, Delhi, 20113. Yogesh Maheswari, investment management , PHI, Delhi, 20114. Bhalla V K, investment management : SECURITY ANALYSIS AND portfolio management , S Chand, New Delhi, 2009 5. Prasanna Chandra, portfolio MANAGEMET, Tata McGraw Hill, New Delhi, IUnit StructureLesson - InvestmentLesson - investment AlternativesLesson - Securities MarketLesson - Stock ExchangeLearning ObjectivesThis chapter is aimed at providing an understanding of Concept of Investments Securities market Stock exchanges and their trading systems Lesson - InvestmentIntroductionInvestment is the employment of funds on assets with the aim of earning income or capital appreciation investment has two attributes namely time and risk.

4 Present consumption is sacrificed to get a return in the future. The sacrifice that has to be borne is certain but the return in the future may be uncertain. This attribute of investment indicates the risk factor. The risk is undertaken with a view to reap some return from the investment . For a layman, investment means some monetary commitment. A person s commitment to buy a flat or a house for his personal use may be an investment from his point of view. This cannot be considered as an actual investment as it involves sacrifice but does not yield any financial To the economist, investment is the net addition made to the nation s capital stock that consists of goods and services that are used in the production process. A net addition to the capital stock means an increase in the buildings, equipments or inventories. These capital stocks are used to produce other goods and services. Financial investment is the allocation of money of assets that are expected to yield some gain over a period of time.

5 It is an exchange of financial claims such as stocks and bonds for money. They are expected to yield returns and experience capital growth over the years. The financial and economic meanings are related to each other because the savings of the individual flow into the capital market as financial investments, to be used in economic investment . Even though they are related to each other, we are concerned only about the financial investment made on securities. Thus, investment may be defined as a commitment of funds made in the expectation of some positive rate of return . Expectation of return is an essential element of investment . Since the return is expected to be realized in future, there is a possibility that the return actually realized is lower than the return expected to be realized. This possibility of variation in the actual return is known as investment risk. Thus, every investment involves return and of InvestmentAll investments are characterized by certain features.

6 Let us analyse these characteristic features of investments are characterized by the expectation of a return. In fact, investments are made with the primary objective of deriving a return. The return may be received in the form of yield plus capital appreciation. The difference between the sale price and the purchase price is capital appreciation. The dividend or interest received from the investment is the yield. Different types of investments promise different rates of return. The return from an investment depends upon the nature of the investment , the maturity period and a host of other factors. 5 RiskRisk is inherent in any investment . This risk may relate to loss of capital, delay in repayment of capital, non-payment of interest, or variability of returns. While some investments like government securities and bank deposits are almost riskless, others are more risky. The risk of an investment depends on the following The longer the maturity period, the larger is the The lower the credit worthiness of the borrower, the higher is the The risk varies with the nature of investment .

7 Investments in ownership securities like equity shares carry higher risk compared to investments in debt instruments like debentures and bonds. Risk and return of an investment are related. Normally, the higher the risk, the higher is the safety of on investment implies the certainty of return of capital without loss of money or time. Safety is another feature which an investor desires for his investments. Every investor expects to get back his capital on maturity without loss and without investment which is easily saleable or marketable without loss of money and without loss of time is said to possess liquidity. Some investments like company deposits, bank deposits, Deposits, NSC, NSS, etc. are not marketable. Some investment instruments like preference shares and debentures are marketable, but there are no buyers in many cases and hence their liquidity is negligible. Equity shares of companies listed on stock exchanges are easily marketable through the stock exchanges.

8 An investor generally prefers liquidity for his investments, safety of his funds, a good return with minimum risk or minimization of risk and maximization of of investment An investor has various alternative avenues of investment for his savings to flow to. Savings kept as cash are barren and do not earn anything. Hence, savings are invested in assets depending on their risk and return characteristics. The objectives of the investor are minimizing the risk involved in investment and maximize the return from the investment . Our savings kept as cash are not only barren because they do not earn anything, but also loses its value to the extent of rise in prices. Thus, rise in prices or inflation erodes the value of money. Savings are invested to provide a hedge or protection against inflation. If the investment cannot earn as much as the rise in prices, the real rate of return would be negative. Thus, if inflation is at an average annual rate of ten percent, then the return from an investment should be above ten percent to induce savings to flow into investment .

9 Thus, the objectives of an investor can be stated as: Maximisation of return. Minimization of risk Hedge against , in general, desire to earn as large returns as possible with the minimum of risk. Risk here may be understood as the probability that actual returns realized from an investment may be different from the expected return. If we consider the financial assets available for investment , we can classify them into different risk categories. Government securities would constitute the low risk category as they are practically risk free. Debentures and preference shares of companies may be classified as medium risk assets. Equity shares of companies would form the high risk category of financial assets. An investor would be prepared to assume higher risk only if he expects to get proportionately higher returns. There is a trade-off between risk and return. The expected return of an investment is directly proportional to its risk.

10 Thus, in the financial market, there are different financial assets with varying risk-return Vs SpeculationInvestment and speculation are two terms which are closely related. Both involve purchase of assets like shares and securities. Traditionally, investment is distinguished from speculation with respect to three factors, viz. (1) risk, (2) capital gain and (3) time refers to the possibility of incurring a loss in a financial transaction. It arises from the possibility of variation in returns from an investment . Risk is invariably related to return. Higher return is associated with higher investment is completely risk free. An investor generally commits his funds to low risk investment , whereas a speculator commits his funds to higher risk investments. A speculator is prepared to take higher risks in order to achieve higher GainThe speculator s motive is to achieve profits through price charges, he is interested in capital gains rather than the income from the investment .


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