Investment Analysis

&
Portfolio Management
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 Class BCom Hons) Semester VI

Course COH643A Course Title Investment Analysis and Portfolio

Code Management

Hours 60 Hours per 4

week

Faculty Dr Karthigai Prakasam [email protected]

name n
Dr Deepika Upadhay
[email protected]
Dr Sukanya R
[email protected]

Credits 4 Course Type DSE

 Syllabus
Unit 1: Introduction to Investment Hours: 08
Meaning of investment – Financial and economic meaning, Investment vs speculation - Importance of
investments –Reasons for investing, Essential features of a good investment Programme/Features-
Factors influencing the investment decision - Qualities of a successful investment – Contrary thinking -
Patience composure - Flexibility and openness and decisiveness - Portfolio Management Process -
Common Errors in Investment Management – Investment strategies.

Unit 2: Investment Schemes and Risk-Return Hours: 10

Non-Marketable Financial Assets: Bank Deposits- Company Deposits- Post-Office Deposits Schemes-
Employees Provident Funds. Money Market Investments: Treasury Bills- Certificate of Deposits-
Commercial Papers- Commercial Bills. Fixed Income Securities: Govt. Securities- RBI Relief
Bonds-debentures- Public Undertakings Bonds- Preference Shares- Equity Shares- Mutual Fund
Schemes- Life Insurance Schemes- The Distinctive features and advantages of each scheme in detail.
Risk- Risk and Uncertainty – Causes for risk – Types of Risk - Systematic and Unsystematic risk
Expected risk return trade-off - Calculation of expected return- calculation of risk- Beta
Unit 3: Security Analysis Hours: 10
Fundamental Analysis - Eicanalysis
Economy Analysis - Meaning, Key economic variables, Industry Analysis -Meaning, Industry life cycle,
characteristics of an industry and Porter’s model, Company Analysis - Analysis of financial statements,
future prospects of a company
Technical analysis-Meaning of Technical analysis and basic principles of technical analysis- Trends and
Chart patterns Eliot wave theory Dow Theory, support and resistance level different types of Charts
Efficient market theory Mathematical indicators and Market indicators. Fundamental Vs technical
analysis

Unit 4: Security Valuation Hours: 10

Time value of money - Concept of present value. Debt instruments and valuations, yield, Running yield,
YTM and bond durations convexity (simple problems). Equity instrument and valuations Earning
valuations revenue valuations yield valuation (simple problems)
Unit 5: Introduction to Portfolio Management Hours: 10
Meaning-The Portfolio management Process Categories. Investment strategy objectives—Risk and
Beta—Time value of money application to portfolio management—MPT and Dominance concept—SEBI
guidelines for portfolio managers-Portfolio managers portfolio management service. Asset Allocation:
Process, Types of asset allocation, Management style, Different approaches to allocation decision, and
overview of allocation techniques.

Unit 6: Portfolio Selection and Construction Hours: 12

Portfolios return Portfolio risk, Portfolio diversifications. Feasible set of portfolios, Efficient set of
portfolios, Selection of optimal portfolio, Markowitz model and its limitations, The sharp Index model
Single index model Measuring security and portfolio’s return and risk under single index model.
Capital Asset Pricing Theory, Assumptions, Efficient frontier with risk less lending and borrowing
security market line applications of the security market line The capital market line SML and CML,
Pricing of securities with CAPM and its arbitrage theory.
 CIA
CIA 1 CIA 2 CIA 3
MCQ & MSE Group
Individual Presentation
Assignment
Introduction
to Investment
 Investment
“today’s sacrifice for prospective gain tomorrow”
❖ Employment of funds on assets with the aim/hope of earning/genrating
income or capital appreciation in the future.

❖ Two attribites of investment are Risk and Time.

❖ Risk is undertaken with a view of reaping return from the investment.

❖ Commitment of funds made in anticipation of a positive rate of return.

❖ Conversion of cash or money into monetary asset or a claim on future
❖ Combination of various assets or instruments of investment is a
portfolio
 Financial Economic
Investment Investment
 FINANCIAL INVESTMENT
● Financial investment refers to the allocation of funds or resources to
financial instruments or assets with the expectation of generating a
return or profit over time.

● It involves the purchase of various financial products, such as stocks,

bonds, mutual funds, real estate, or other securities, with the goal of
increasing wealth or achieving specific financial objectives.
●
 Key features
1. Return on Investment (ROI):
Investors expect to earn a return on their investment, which can come in the form of capital
appreciation, interest, dividends, or rental income, depending on the type of financial
instrument.
1. Risk and Reward:
Financial investments inherently carry risk, and the potential for higher returns is often
associated with higher levels of risk.
Investors must assess their risk tolerance and investment goals when making financial
decisions.
1. Liquidity:
Financial investments can vary in terms of liquidity, with some assets being easily tradable in
the financial markets, while others may have restrictions on buying or selling.
1. Diversification:
Investors often diversify their financial portfolios to spread risk across different asset classes,
reducing the impact of poor performance in any single investment.
1. Time Horizon:
Financial investments may have different time horizons, ranging from short-term trading to
long-term investments.
The time frame depends on the investor's financial goals and risk preferences.
 ECONOMIC INVESTMENT
● Economic investment refers to the spending on capital goods, which are goods that
are used to produce other goods and services.
● It involves the creation or purchase of physical assets like machinery, buildings,
infrastructure, and technology, as well as investments in human capital such as
education and training.
● Economic investment is crucial for the growth and development of an economy, as
it contributes to increased productivity, efficiency, and innovation.
● In the context of macroeconomics, economic investment is a component of
aggregate demand, along with consumption, government spending, and net
exports.
● It plays a significant role in influencing the level of economic activity and overall
economic growth.
 Key Features
•
Creation of Physical Assets:
•Economic investment often involves the creation or acquisition of tangible assets such as machinery,
equipment, buildings, and infrastructure. These assets contribute to the production of goods and services.

•Human Capital Development:

•In addition to physical assets, economic investment includes investments in human capital, such as
education, training, and skill development. Enhancing the skills and knowledge of the workforce improves
overall productivity.

•Long-Term Focus:
•Economic investments typically have a long-term perspective. The benefits of these investments may not
be realized immediately but accrue over time as the economy becomes more efficient and productive.

•Productivity Improvement:
•The primary objective of economic investment is to improve the productivity and efficiency of an
economy. This can lead to increased output, economic growth, and improved standards of living for the
population.
•Job Creation:
•Investments in new projects, businesses, and industries can lead to job creation. As economic activities
expand, there is a potential for more employment opportunities, reducing unemployment rates.

•Multiplier Effect:
•Economic investments often have a multiplier effect on the economy. Initial investments can lead to
increased spending, income, and further economic activities, creating a positive feedback loop.

•Infrastructure Development:
•Investment in infrastructure, such as transportation, communication, and utilities, is a crucial component
of economic investment. Infrastructure development supports overall economic activities and enhances
the competitiveness of an economy.

•Technological Advancement:
•Economic investment often involves the adoption and development of new technologies. This can lead to
increased innovation, efficiency, and competitiveness in various sectors.
•Risk and Uncertainty:
•Like financial investments, economic investments also involve risks. Economic uncertainty,
changes in market conditions, and external factors can impact the success of investments in
physical and human capital.

•Government Role:
•Governments often play a significant role in economic investment through policies, incentives,
and public spending. Public investments in education, healthcare, and infrastructure contribute
to overall economic development.

•Capital Formation:
•Economic investment contributes to the process of capital formation, where savings are
channeled into productive assets. This, in turn, supports sustained economic growth.
 DIFFERENCE BETWEEN
ECONOMIC AND FINANCIAL
INVESTMENT
● Definition:
a. Financial Investment: This refers to the purchase of financial assets
like stocks, bonds, mutual funds, or other securities with the
expectation of earning a return in the form of capital gains, interest, or
dividends.
b. Economic Investment: This involves spending on physical and human
capital that contributes to the production of goods and services,
fostering economic growth.

● Nature:
a. Financial Investment: It is more focused on the acquisition of
financial instruments and doesn't necessarily result in the creation of
new physical assets or improvements in productivity.
b. Economic Investment: It involves tangible and intangible assets that
directly contribute to the economy's productive capacity.
● Purpose:
a. Financial Investment: The primary goal is to generate financial returns for the
investor.
b. Economic Investment: The goal is to enhance the productive capacity of the
economy, leading to long-term economic growth.

● Assets Involved:
a. Financial Investment: Involves financial assets such as stocks, bonds, derivatives,
etc.
b. Economic Investment: Involves physical assets like machinery, equipment, buildings,
as well as investments in education and training.

● Time Horizon:
a. Financial Investment: Can be short-term or long-term, depending on the investor's
goals and strategy.
b. Economic Investment: Often has a longer time horizon, as the benefits may accrue
over an extended period as the productive capacity of the economy improves.
 SPECULATION, INVESTMENT AND GAMBLING
● Speculation
a. Price changes
b. Taking advantage of short term changes in the price of securities

● Investment
a. Longer time horizon
b. Investor analyses the situation and invest only of there is a reasonable capital appreciation
c. Analyses the risk return trade off before the investment decision

● Gambling
a. Process of betting on some event or activity with an capricious outcome.
b. High risk for high return

Sukanya Ram
DIFFERENCE BETWEEN
SPECULATION, INVESTMENT AND
GAMBLING
Criterion Investment Speculation Gambling

Time period Longer period Shorter Very short

One year or more Few month to a year Few seconds to few
hours

Risk Level Low o moderate High risk Very high risk

Only principal amount

Objective Capital appreciation, Short term gain by Additional income with

income preservation exploiting the market fun and entertainment

Sukanya Ram
 DIFFERENCE BETWEEN SPECULATION,
INVESTMENT AND GAMBLING
Criterion Investment Speculation Gambling
Basis of decision Based on fundamental Based on hearsay, Based on impulsive
factors, periodic technical charts, market action and unplanned
analysis of the company psychology, insider decision
performance information

Funds Deploys own funds and Borrow funds to Either own funds or
avoid borrowing supplement his personal borrowed funds
resources
Expectation of return Consistent and regular Quick delivery of Return depends on
returns with high risk rolling of the dice or
level turning of the wheel
Sukanya Ram
FEATURES OF INVESTMENT
1. Low volatility
2. High degree of diversification
3. Market expected consistent returns
4. Reasonable liquidity
5. Potential for capital Appreciation
6. Tax efficiency

Sukanya Ram
SELECTION OF INVESTMENT
1. Specification of investment objectives and constraints – regular income, capital appreciation, safety
of principal amount. Future constraints – liquidity, duration of investment, tax structure
2. Choice of Asset Mix – stock bond mix proportion
3. Formulation of strategy – market timing, selection of security, diversified portfolio, risk exposure
4. Selection of securities - fundamental and technical analysis
5. Portfolio execution – either buy or sell
6. Portfolio revision – respond to periodic changes, changes in the asset mix, existing composition of
stock and bonds
7. Performance evaluation – risk and return aspects, feedback to improve the quality of the portfolio
management

Sukanya Ram
Qualities of a successful
investment
Well-define Research
Risk Long-term Discipline
d financial and due
management perspective and patience
goals diligence

Diversificati Financial Continuous Focus on

Adaptability
on literacy learning value -

Regular
Tax Emotional Exit
monitoring
efficiency control strategy:
and review
• Well-defined financial goals - wealth accumulation, retirement planning, or funding
education

• Risk management - understand their risk tolerance and diversify their portfolios

• Research and due diligence - analyze the fundamentals of potential investments

• Long-term perspective - short-term market fluctuations are normal and focus on the
long-term growth

• Discipline and patience - avoid emotional decision-making, and resist the urge to make
impulsive changes to their portfolios based on short-term market movements.

• Adaptability - strategies based on changing market conditions, economic trends, and

personal circumstances.
• Diversification - different asset classes, industries, and geographic regions to reduce
concentration risk and enhance the overall risk-return profile of their portfolios.

• Financial literacy - enables them to make informed decisions, evaluate risks, and
interpret market trends.
• Continuous learning - stay informed about market developments, economic indicators,
and emerging investment opportunities.
• Focus on value - focus on the long-term value of assets rather than short-term market
fluctuations.
• Tax efficiency
• Regular monitoring and review
• Emotional control - avoiding panic during market downturns and not getting overly
exuberant during bull markets.
• Exit strategy:
 Contrary thinking
Contrary thinking, also known as contrarian investing or contrarianism,
is an approach where an individual deliberately goes against prevailing
market sentiments, trends, or consensus opinions.

Contrary thinking involves challenging popular beliefs and making

investment decisions that differ from the majority.
 Key aspects

Independent Against the Herd Buying at Market Selling at Market

Analysis Mentality Pessimism Euphoria

Patience and
Value Investing Focus on
Long-Term Risk Management
Principles Fundamentals
Perspective

Critical Evaluation
Emotional Opportunistic Continuous
of News and
Discipline Approach Learning
Information
 Patience composure
Patience and composure are qualities that are highly valuable in various aspects of life,
including personal development, relationships, and professional endeavors. Here's a closer
look at each of these qualities:

Patience

Endurance in Long-Term Tolerance for Emotional Building Achieving

Adversity Perspective Uncertainty Regulation Relationships Mastery

Composure
Effective
Maintaining Conflict
Decision-Makin Leadership Professionalism Adaptability
Calmness Resolution
g

Resilience
 Flexibility, Openness & Decisiveness
Flexibility

The ability to adapt and adjust to changing circumstances,

new information, or unexpected challenges without losing
effectiveness.

Markets can move quickly, and decisive actions are essential

to capitalize on opportunities or manage risks.

Helps in avoiding hesitation and making timely investment

decisions.
Openness:
Willingness to consider new ideas, perspectives, and information
without prejudice; maintaining an open mind.
Openness facilitates diverse thinking, helping investors consider a wide
range of investment options.
Encourages continuous learning and adaptation to new market trends
and information.
Decisiveness:
The ability to make prompt and firm decisions,
especially in situations where time is critical.

Markets can move quickly, and decisive actions are

essential to capitalize on opportunities or manage risks.

Helps in avoiding hesitation and making timely

investment decisions.
 Integration of Flexibility, Openness,
and Decisiveness in Investment
Flexibility in Investment:

Adaptability: Flexibility allows investors to adapt to changes in market conditions, economic trends,
and regulatory environments.

Eg: Adjusting Portfolio: A flexible investor might shift from high-risk to low-risk assets during
periods of economic uncertainty.

Portfolio Adjustment: Flexible investors may adjust their portfolio allocation based on shifts in asset
classes or industry trends.

Eg: Alternative Investments: Being open to alternative investments, such as cryptocurrencies or

new industries, demonstrates flexibility.
 Integration of Flexibility, Openness,
and Decisiveness in Investment
Openness in Investment:

Diverse Perspectives: Open-minded investors consider a variety of investment options, not limiting
themselves to traditional or popular choices.

Eg: Exploring New Markets: An open-minded investor might explore emerging markets or
industries that are not mainstream but show growth potential.

Continuous Learning: Openness fosters a culture of continuous learning, encouraging investors to

stay informed about new financial instruments and market dynamics.

Eg: Considering ESG Factors: An investor open to environmental, social, and governance (ESG)
considerations incorporates a broader set of criteria into decision-making.
 Integration of Flexibility, Openness,
and Decisiveness in Investment
Decisiveness in Investment:

Timely Decision-Making: Decisive investors make timely decisions, allowing them to take advantage
of market opportunities or mitigate risks promptly.

Eg; Selling Underperforming Assets: A decisive investor may sell underperforming

stocks promptly to cut losses.

Risk Management: Decisiveness is crucial in risk management, enabling investors to cut losses or
reallocate assets when necessary.

Eg: Seizing Opportunities: When a market presents a short-term opportunity, a decisive

investor takes quick action to capitalize on the trend.
 Portfolio
Management
 Portfolio management
Portfolio management is the art and science of
making decisions about investment mix and policy,
matching investments to objectives, and allocating
assets for individuals and institutions.

It involves the management of various securities

and other assets to achieve a specified investment
goal.

The primary objective of portfolio management is

to maximize returns while minimizing risk.
 Key components of portfolio management

Investment Asset Security

Risk Tolerance Diversification
Objectives Allocation Selection

Portfolio Monitoring and Performance Risk Reporting and

Construction Rebalancing Evaluation Management Communication

Continuous
Improvement
 Types of Portfolio Management

Active Portfolio Passive Portfolio Strategic Portfolio Tactical Portfolio

Management: Management: Management: Management:

frequent trading and Focuses on long-term Involves short- to

active objectives and medium-term
"buy and hold"
decision-making to maintaining a strategic adjustments to the
strategy,
outperform the asset allocation over portfolio based on
market. time. current market
conditions or
economic trends.
buy and sell securities
The goal is to match Adjustments are made
in an attempt to
the returns of the periodically in
achieve superior
overall market. response to changes in This approach aims to
returns.
the investor's goals or capitalize on
market conditions. short-term
opportunities.
 Portfolio Management Process
Defining
Developing an
Investment Security
Investment Asset Allocation
Objectives and Selection
Policy
Constraints

Portfolio
Reporting and Performance Portfolio
Monitoring and
Communication Evaluation Construction
Rebalancing

Review and
Adjustment
1. Defining Investment Objectives and Constraints:
Objective Setting: Identify and define the investor's financial goals, such as capital
appreciation, income generation, or wealth preservation.

Constraints: Consider constraints such as risk tolerance, time horizon, liquidity needs, and
regulatory restrictions.

2. Developing an Investment Policy:

Strategic Asset Allocation: Determine the optimal mix of asset classes (e.g., stocks,
bonds,cash, real estate) based on the investor's objectives and constraints.

Policy Statement: Create an investment policy statement (IPS) outlining the investment
strategy, asset allocation targets, and risk parameters.
3. Asset Allocation:
Strategic Allocation: Establish the long-term target allocation to different asset classes
based on the IPS.

Tactical Allocation: Periodically adjust the allocation based on short-term market

conditions and economic outlook.

4. Security Selection:
Equities: Choose specific stocks or equity instruments that align with the portfolio's
objectives and strategy.

Fixed Income: Select bonds or fixed-income securities based on factors like credit quality,
maturity, and yield.
5. Portfolio Construction:
Diversification: Spread investments across different asset classes, industries, and geographies to
reduce risk.

Optimization: Use quantitative tools to optimize the portfolio for the desired risk-return profile.

Risk Management: Implement risk management strategies to protect the portfolio from adverse
market movements.

6. Portfolio Monitoring and Rebalancing:

Monitoring: Regularly review the portfolio's performance, considering economic conditions, market
trends, and any changes in the investor's financial situation.

Rebalancing: Adjust the portfolio by buying or selling assets to bring it back to the target asset
allocation. This ensures alignment with the investor's long-term goals.
7. Performance Evaluation:
Benchmarking: Compare the portfolio's performance against relevant benchmarks.

Risk-Adjusted Returns: Evaluate how well the portfolio performs relative to the level of
risk taken.

8. Reporting and Communication:

Client Reporting: Provide clear and transparent reports to clients, summarizing the
portfolio's performance, asset allocation, and any adjustments made.

Communication: Keep clients informed about market conditions, changes in the

portfolio strategy, and any adjustments made in response to evolving circumstances.
9. Review and Adjustment:
Continuous Improvement: Regularly review and assess the portfolio
management process itself, incorporating lessons learned and adapting strategies
based on market dynamics and evolving investor goals.

Client Review Meetings: Conduct periodic meetings with clients to review

their financial objectives, assess any changes in circumstances, and ensure ongoing
alignment with their goals.
 Common errors of Investment
Ignoring Risk Lack of
Lack of Research Market Timing
Tolerance Diversification

Emotional Chasing Overlooking Fees Failure to

Decision-Making Performance and Costs Rebalance

Not Having a Clear

Short-Term Focus
Investment Plan
Investment Strategies
 Passive strategies
❖ Passive investing involves constructing a portfolio that closely mimics a specific market
index or benchmark.

❖ The goal is to replicate the performance of the overall market rather than trying to
outperform it.
 Passive strategies

❖ These funds hold a diversified portfolio of assets that mirrors the composition of the
chosen index.

Advantages: Invest in
❖ Lower Costs
❖ Index funds - S&P 500.
❖ Diversification
❖ Exchange traded funds
❖ Efficiency
❖ Buy and Hold strategy
❖ Smart Beta strategies
1. Passive Investment Strategies:
2. Index Funds:

a. Example: Investing in an S&P 500 index fund. The fund mirrors the performance of the S&P 500 index, providing exposure to
the entire market rather than trying to select individual stocks.
3. Exchange-Traded Funds (ETFs):

a. Example: Buying shares of a bond ETF that tracks a specific bond index. This allows investors to gain exposure to a diversified
portfolio of bonds without actively managing individual bond holdings.
4. Buy and Hold Strategy:

a. Example: Investing in a diversified portfolio of stocks and holding onto them for the long term, regardless of short-term market
fluctuations. This strategy requires minimal trading activity.
5. Smart Beta Strategies:

a. Example: Investing in a smart beta ETF that follows a rules-based approach, weighting stocks based on factors such as
dividends, earnings, or volatility. This is a passive strategy that still deviates slightly from traditional market-cap weighting.
1. Active Investment Strategies:
2. Stock Picking:

a. Example: Actively researching and selecting individual stocks based on fundamental analysis, technical analysis, or a
combination of both. The goal is to outperform the market by identifying undervalued or promising stocks.
3. Market Timing:

a. Example: Attempting to predict market trends and adjusting asset allocation accordingly. For instance, an active investor may
increase exposure to equities during a perceived bull market and reduce exposure during a bear market.
4. Hedging Strategies:

a. Example: Using derivative instruments such as options to hedge against potential losses. An active investor might employ
options to protect a portfolio from adverse market movements.
5. Sector Rotation:

a. Example: Adjusting portfolio holdings based on the expected performance of different sectors. An active investor may
increase exposure to sectors believed to outperform in the current economic environment.
6. Active Bond Management:

a. Example: Actively managing a bond portfolio by adjusting the duration, credit quality, and types of bonds based on interest
rate expectations and economic conditions.
 Active Strategies
❖ Active investing involves making specific investment decisions with the
aim of outperforming the market or a benchmark index.

❖ Active investors rely on research, analysis, and market timing to identify

undervalued securities or take advantage of market trends.
 Active Strategies
❖ Active portfolio managers or individual investors actively buy and sell
securities based on their analysis of market conditions, economic trends,
company performance, and other factors.

❖ Advantages: Examples
❖ Potential for Outperformance ❖ Stock Picking
❖ Adaptability ❖ Market timing
❖ Selective Investing ❖ Hedging strategies
❖ Sector rotation
❖ Active bond mgt
 Growth investing
❖ Growth investing is an investment style and strategy that is focused on increasing an
investor's capital.

❖ Growth investors typically invest in growth stocks—that is, young or small companies
whose earnings are expected to increase at an above-average rate compared to their
industry sector or the overall market.

❖ Growth investors tend to favor smaller, younger companies poised to expand and
increase profitability potential in the future.

❖ Growth investors often look to five key factors when evaluating stocks: historical and
future earnings growth; profit margins; returns on equity (ROE); and share price
performance.