Established as per the Section 2(f) of the UGC Act, 1956

Approved by AICTE, COA and BCI, New Delhi

Security Analysis And Portfolio Management

School of Commerce
 Program:
Established as per the Section 2(f) of the UGC Act, 1956
M. Com.
Approved by AICTE, COA and BCI, New Delhi

Course Title: Security Analysis And Portfolio Management

Course Code: M19MC3250
Course Type: SC
Course Presenter: Dr. B. Diwakar Naidu
Course Mentor: Dr. B. Diwakar Naidu
Semester & Section: M.Com., 3rd Semester, Section A
Academic Year: 2020-2021
Course Pre-requisites: Basic knowledge about Mathematics and Stock
Markets
L T P: 2:0:1
Pedagogy: Direct Method / ICT and Case Method
Course Objectives:

The objective of this course is to enable students to:

1. To understand the basic concepts of Investment & Portfolio by
calculating their returns and risk.
2. To provide conceptual insights into the valuation of securities.
3. To familiarize the students with the Fundamental and Technical
Analysis.
4. To learn the theories of Portfolio Management and also the
tools and techniques for efficient Portfolio Management.
 Course Outcomes:

On successful completion of this course students shall be able

to:
1. Describe the process of Investment along with calculating the
risk and return of individual investment and portfolio.
2. Calculate the value of Bond, Preference and equity shares.
3. Recognize the Fundamental and Technical Analysis of the
Investments.
4. Interpret the various theories of Portfolio Management and
point out the tools and techniques for efficient Portfolio
Management.
 Syllabus:
Topics CO PO
1 Investment Management: Meaning, Nature and scope – Objectives - 1 1
Investment avenues – Investment Process-Types of financial assets and real
assets - Types of investments – Real investment Vs. Financial investments –
Stock Market Indicators- Stock Market Indicators- Types of stock market Indices,
Indices of Indian Stock Exchanges.- Risk and return- Systematic and
unsystematic risk - Sources of risk – Components of return- Calculation of return,
expected return, systematic and unsystematic risk - Calculation of Portfolio risk-
Portfolio with Two assets – Portfolio with more than Two assets . (Theory and
Problem).

2 Valuation of securities: Valuation of securities: Bond- Bond features, Types of 2 6

Bonds, Determinants of interest rates, Bond Management Strategies, Bond
Valuation, Bond yield, Bond Duration. Preference Shares- Concept, Features,
Yields. Equity shares- Concept, Valuation, Dividend Valuation models. (Theory
and Problem).
 Topics CO PO
3 Macro-Economic and Industry Analysis: Fundamental analysis-EIC Frame 3 6
Work, Global Economy, Domestic Economy, Business Cycles, Industry
Analysis. Company Analysis- Financial Statement Analysis, Ratio Analysis.
Technical Analysis – Concept, Theories- Dow Theory, Efficient Market
Hypothesis, Eliot wave theory. Charts-Types, Trend and Trend Reversal
Patterns. Mathematical Indicators – Moving averages, ROC, RSI, Market
Indicators. (Problems in company analysis & Technical analysis) (Theory and
Problem).

4 Modern Portfolio Theory: Markowitz Model -Portfolio Selection, Opportunity 4 6

set, Efficient Frontier. Beta Measurement and Sharpe Single Index Model
Capital Asset pricing model: Basic Assumptions, CAPM Equation, Security
Market line, Extension of Capital Asset pricing Model - Capital market line,
SML VS CML. Arbitrage Pricing Theory: Arbitrage, Equation, Assumption,
Equilibrium, APT and CAPM. Mutual Funds:, Mutual Fund types, Performance
of Mutual Funds-). NAV. Performance evaluation of Managed Portfolios-
Treynor, Sharpe and Jensen Measures (Theory and Problem)
 Program outcomes:
1. Perform accounting and financial activities as per standards
2. Perform banking related activities
3. Perform taxation and insurance activities
4. Evaluate environmental factors that influence business operations
5. Prepare and interpret financial statements
6. Use of tools for modelling and analysis of business data
7. Apply capital budgeting techniques for investment decisions
8. Analyse and apply cost accounting practices to aid effective managerial
decision
9. Lead a team to ensure that projects are completed satisfactorily on
time and within budget
10. Conform to cultural, environmental, sustainability and ethical issues
11. Communicate across teams verbally, visually and by writing
12. Choose an appropriate online educational programmes for further
learning, participate in seminars and conferences
Reference Books:
Security Analysis & Portfolio Management – Punithavathy Pandian,
2/e, Vikas Publishing House Pvt. Ltd., 2013.
Investment Management – Bhalla V. K, 17/e, S.Chand, 2011.
Investment Analysis and Portfolio Management, Prasanna
Chandra, 5/e, Tata McGraw Hill Publishing Co. Ltd., 2017.
Security Analysis & Portfolio Management – Fisher and Jordan, 6/e,
Pearson, 2011.

E-Resources:
1. www.investopedia.com
2.www1.nseindia/np/nse_paathshaala.htm
Suggested Readings Unit wise:
Unit 1 & 2: Security Analysis and Portfolio Management, Punithavathy
Pandian, Second Edition, Vikas publications
Unit-3 & 4: Security Analysis and Portfolio Management, S. Kevin, Second
Edition, PHI.
Presentation Topics:

1. Stock Market Indicators

2. Types of stock market Indices
3. Indices of Indian Stock Exchanges

Assignment:

Calculation of Risk and Return for Individual Stocks

Calculation of Risk and Return for Portfolio

Unit - 1
 Investment

Introduction:
• Refers to purchase of financial assets.
• While Investment Goods are those goods, which are used
for further production.
• The production of new capital goods, plants and
equipment's.
•  John Keynes refers investment as real investment and not
financial investment.
 Meaning

General Meaning:
• The employment of funds with the aim of getting return
on it.
• The use of money in the hope of making more money.
Finance point of view:
• An allocation of monetary resources to assets that are
expected to yield some gain or return over a given period
of time.
Economic point of view:
• Addition to the capital stock of the society.
• The goods which are used in the production of other
goods.
 Definition

• An investment is an asset or item acquired with the goal of

generating income or appreciation. 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
will later be sold at a higher price for a profit.
 Nature and Scope of Investment

• To understand the exact meaning of investment

• To find out different avenues of investment
• To maximize return and minimize risk
• To make a programme for investment through evaluating
securities, constructing a portfolio and reviewing a portfolio
• To find out a time period for investments to take place
• To evaluate through various techniques to get the best return
for the investor
• To understand various investment decision rules
 Nature and Scope of Investment Cont’d

• To know what are the good investments decisions rules

• To know the category of investment decision rules
• To take investment decision only after analyzing entire
process of investment
• The investment decision rules allow formalizing the process
and specifying what condition or conditions need to be met
to accept the project
• Take decision only after ensuring that the required
expectations in terms of returns are ensured at any cost.
 Types or kinds of investment

Different types or kinds of investment are:

• Autonomous Investment
• Induced Investment
• Financial Investment
• Real Investment
• Planned Investment
• Unplanned Investment
• Gross Investment
• Net Investment
 Attributes of Investment

• Rate of return
• Risk
• Marketability
• Convenience
• Tax benefit
• Capital appreciation
• Safety and Security
• Stability of income
 Investment Avenues

EQUITY SHARES DEBENTURES OR

• Blue chip scrip BONDS
• Growth scrip • Government securities
• Income scrip • Savings bonds
• Cyclical scrip • Public Sector Units
• Speculative scrip  bonds
• Debentures of private
sector companies
Preference Shares
 Investment Avenues
LIFE INSURANCE AND
GENERAL INSURANCE
MONEY MARKET • Endowment Insurance
INSTRUMENTS Policy
• Treasury Bills • Money Back Policy
• Commercial Paper • Whole Life Policy
• Certificate of Deposits • Term Insurance Policy
MUTUAL FUNDS • General Insurance for any
• Equity Schemes kind of assets.
• Debt Schemes REAL ESTATE
• Balanced Schemes • Agricultural Land
• Sector Specific Schemes etc. • Semi-Urban Land
• Commercial Property
• Raw House
• Farm House etc
 Investment Avenues

PRECIOUS OBJECTS
DERIVATIVES
• Forwards
• Futures
• Options
• Swaps
NON-MARKETABLE SECURITIES
• Bank Deposits
• Post Office Deposits
• Company Deposits
• Provident Fund Deposits
 Investment Objectives

Main Objectives:
I. Rate of return
II. Risk
Other Objectives:
III. Liquidity / Marketability
IV. Hedge against inflation
V. Safety
VI. Regularity of income
VII.Capital Growth
VIII.Tax Minimization
 Investment Process

The main steps involved in investment process.

1. Investment Policy
2. Investment Analysis
3. Valuation of Securities
4. Portfolio Construction.
• Diversification
• Allocation
• selection
5. Portfolio Evaluation
• Appraisal
• Revision
 Types of financial assets

Financial assets are called paper securities

• Shares
• Bonds
• Debentures
• Bills
• Loans
• Derivatives
• Fixed deposits
 Types of Real Assets

Real assets are used to produce goods or services

• Land
• Buildings
• Furniture
• Gold
• Silver
• Diamonds
• Plant and Machinery
 Distinction between Real and Financial Assets

• Asset type
• Usage
• Liquidity
• Value
• Divisibility
• Holding period
 Stock Market Indicators

Generally there are two types of stock market index

• Broad Market Index
• Specialized Index
 Indices of Indian Stock Exchanges

There are two stock exchanges

• Bombay Stock Exchange (BSE)
The BSE has been in existence since 1875. BSE 30 or simply
the SENSEX, is a free float market weighted stock market
index of 30 well established and financially sound
companies
• National Stock Exchange (NSE)
The NSE has been in existence since 1992. The NIFTY 50
covers 13 sectors of the Indian economy and offers
investment managers exposure to the Indian market in one
portfolio. Nifty is the market indicator of NSE
 Types of stock market Indices

• Bombay Stock Exchange (BSE)

BSE LargeCap
BSE AllCap
BSE MidCap
BSE SmallCap
• National Stock Exchange (NSE)
NIFTY Next 50 Index
NIFTY 100 Index
NIFTY 200 Index
NIFTY 500 Index
NIFTY Midcap 150 Index
 Risk

Introduction:
“Risk” is derived from the Latin word “RESCUM” which means
danger at sea or the thing that which cuts.
In broad terms, risk involves exposure to some type of danger and
the possibility of loss or injury. In general, risks can apply to your
physical health or job security.
 Introduction Cont’d

In finance and investing, risk often refers to the chance an outcome

or investment's actual gains will differ from an expected outcome or
return. Risk includes the possibility of losing some or all of an
original investment
 Introduction Cont’d

Quantifiably, risk is usually assessed by considering historical

behaviors and outcomes. In finance, standard deviation is a common
metric associated with risk.
 Meaning of Risk

The uncertainty that a future event with a favourable

outcome will occur

Risk is the probability that an investment will not

perform as expected and the investor will lose the
money invested
 Definition of Risk

The traditional definition of risk was “will the investor get their
money back”
In the finance literature risk is more specifically defined as
“variability of returns”

“Risk implies future uncertainty about deviation from expected

earnings or expected outcome. Risk measures the uncertainty that
an investor is willing to take to realize a gain from an investment”
 Meaning of Uncertainty

• Uncertainty simply means the lack of certainty or sureness of

an event.

• In accounting, uncertainty refers to the inability to foretell

consequences or outcomes because there is a lack of
knowledge or bases on which to make any predictions.
Difference between Risk & Uncertainty
Difference between Risk & Uncertainty Cont’d
Types or Classes of Risk
 Types or Classes of Risk

• Systematic Risk

• Unsystematic Risk

• Total Risk = Systematic Risk + Unsystematic Risk

 Systematic Risk

• Systematic risk is due to the influence of external factors

on an organization. Such factors are normally
uncontrollable from an organization's point of view

• It affects a large number of organizations operating under

a similar stream or same domain
 Systematic Risk Cont’d

• Interest rate risk

 Systematic Risk Cont’d

• Market risk
 Market Risk Cont’d

• Absolute Risk
The probability or chance of an event. It is usually used for
the number of events (such as a disease) that occurred in a
group, divided by the number of people in that group

• Relative Risk / The risk ratio

Relative-risk from a foreign exchange fluctuation may be
higher if the maximum sales accounted by an organization
are of export sales
 Absolute Risk Vs. Relative Risk

• Relative risk is the likelihood of an event occurring in a group of

people compared to another group with different behaviors or
environments, whereas absolute risk is the likelihood of an event
occurring under specific conditions
• Absolute risk numbers are needed to understand relative risk
• Absolute risk is micro in nature, whereas relative risk is macro in
nature
• Absolute risk is first stage and relative risk is second stage
• Absolute risk is independent. Relative is dependent
 Market Risk Cont’d

• Directional Risk
The loss arises from an exposure to the particular assets of a
market. For e.g. an investor holding some shares experience
a loss when the market price of those shares falls down

• Non-Directional Risk
Non-Directional risk arises where the method of trading is
not consistently followed by the trader. For e.g. the dealer
will buy and sell the share simultaneously to mitigate the risk
 Market Risk Cont’d

• Basis Risk
Basis risk is due to the possibility of loss arising from
imperfectly matched risks. For e.g. the risks which are in
offsetting positions in two related but non-identical markets

• Volatility Risk
It is of a change in the price of securities as a result of
changes in the volatility of a risk-factor
 Systematic Risk Cont’d

• Purchasing power or inflationary risk

It is not desirable to invest in securities during an
inflationary period
 Inflationary Risk Cont’d

• Demand inflation risk

Arises due to increase in price, which result from an excess
of demand over supply
• Cost inflation risk
Arises due to sustained increase in the prices of goods and
services caused by higher production cost
 Systematic Risk Cont’d

• Exchange Rate Risk

• Sovereign Risk
• Political Risk
• Legal Risk – Changes in Act or Law
• Pure Risk - cannot be controlled and has two outcomes:
complete loss or no loss at all. Pure risk is generally
prevalent in situations such as natural disasters, fires, or
death. These situations cannot be predicted and are beyond
anyone's control.
Personal Risk
Property risks
Liability Risk
 Unsystematic Risk

Unsystematic risk is due to the influence of internal factors

prevailing within an organization. Such factors are normally
controllable

It is micro in nature as it affects only a particular organization.

It can be planned, so that necessary actions can be taken by the
organization to reduce the risk
 Types of Unsystematic Risk

• Business Risk
• Liquidity Risk
• Financial Risk
• Credit Risk
• Recovery Rate Risk
• Credit Event Risk
• Settlement Risk
• Operational Risk
• Model Risk – Valuation of securities
• People Risk
 Types of Unsystematic Risk

• Operational Risk
The Basel Committee defines the operational risk as the
"risk of loss resulting from inadequate or failed
internal processes, people and systems or from
external events“
Human error, fraud and malice, failures of information
systems, problems related to personnel management,
commercial disputes, accidents, fires, floods
 Types of Unsystematic Risk Cont’d

• Legal Risk – Entering contract with Minor

• Objective risk or degree of risk - relative variation of
actual loss from expected loss. Objective risk can be
statistically calculated by standard deviation or the
coefficient of variation. The law of large numbers states
that as the number of exposure units increases, the more
closely the actual loss experience will approach the
expected loss experience
 Types of Unsystematic Risk Cont’d

• Subjective Risk - Based on a person’s mental condition or

state of mind – Drunkard person may attempt to drive
home. He may be uncertain whether he will arrive home
safely
• Non-financial Risk - Related to compliance failures,
misconduct, technology, Theft, fire or operational
challenges
• Speculative Risk - Has opportunities for loss or gain and
requires the consideration of all potential risks before
choosing an action
 Sources of Risk

• Speculative Risk
• Business Risk
• Liquidity Risk
• Financial Risk
• Credit Risk
• Recovery Rate Risk
• Credit Event Risk
• Settlement Risk
• Operational Risk
• Model Risk – Valuation of securities
• People Risk
 Sources of Risk

• Exchange Rate Risk

• Sovereign Risk
• Political Risk
• Interest rate risk
• Inflationary risk
• Market Risk
• Relative Risk
Difference between Systematic and Unsystematic
Risk
  Systematic Risk Unsystematic Risk

Refers to risk associated with a

Refers to risk associated with a market or
Meaning specific instrument, firm or
entire segment
sector

Factors responsible External Internal

Controllability Cannot be controlled Can be controlled

Large number of instruments in the

Affects Only a specific firm or sector
market

Hedging Allocation of assets Diversification of portfolio

Sources
Interest risk, purchasing power risk, Business risk, insolvency risk,
market risk financial risk

Can be avoided or dealt with

Avoidance Cannot be avoided
quickly
Return & risk

• The amount which an investor actually earned on an

investment during a certain period.
• Interest, dividend and capital gains
• Risk -the uncertainty associated with a particular task.
• Chance or probability that a certain investment may or may not
deliver the actual/expected returns.
• The risk and return trade off
 Meaning and Definition of Return

Meaning:
Return expresses the amount which an investor actually
earned on an investment during a certain period

Definition:
Return can be defined as the actual income from
investment as well as appreciation in the value of
investment
 Types of Return

• Realized Return - Return that was earned

• Expected Return – Return expected over future
• Holding Period Return - Investment's return over the
time it is owned by a particular investor
• Nominal Return - Net profit or loss of an investment
expressed in nominal terms
• Real Return - A real rate of return is adjusted for changes
in prices due to inflation or other external factors. This
method expresses the nominal rate of return in real terms
 Components of Return

• Periodic income on the investment – Revenue gain

• Change in the price of the asset – Capital gain

• Total Return - Revenue gain + Capital gain

 Calculation of Return

• Ex–post
Ex–post refers to past. Using historical data, returns are
calculated by taking average. It is mean return or average
return

• Ex–ante
Ex–ante refers to future. Expected returns are calculated
by forecasting returns for the future with their
probabilities
•

Source: Text Book- Security Analysis And Portfolio Management-

Punithavathy Pandian
 Calculation of Risk

• Ex–post
Ex–post refers to past. Variance from the mean value
measures the ex-post risk using historical data. The
statistical measure of variance uses the returns of an asset
to measure the risk. The value of variance indicates the
risk of that stock

• Ex–ante
Ex–ante refers to future events. When risk is measured
ex-ante, variance is calculated with the help of probable
returns
Source: Text Book- Security Analysis And Portfolio Management-
Punithavathy Pandian
 Portfolio -Introduction

• The future return expected from a security is variable

• Variability of returns is termed as risk
• Individual securities have risk return characteristics of
their own
• It is rare to find investors investing their entire wealth in a
single security
• Most investors have an aversion to risk
• The loss in one will be compensated by the gain in others
• Minimize risk by not putting all eggs in one basket
 Meaning – Portfolio

• Invest in a group of securities rather than a single

security
• Group of securities held together known as a portfolio
• The process of creating such a portfolio is called
diversification
• Minimization of risk in investment is achieved by
holding different types of securities across different
industry groups
 Portfolio Analysis

• Any number of portfolios can be constructed

• A rational investor attempts to find the most efficient of
these portfolios
• Expected return and risk of the portfolio as such.
• A primary step in portfolio management.
• This step is designated as portfolio analysis
 n

p
Expected Return of a Portfolio
ii

• The weighted average of the return of the individual

securities held in the portfolio
• The weight applied to each return is the fraction of
the portfolio invested in that security

n
rp = ∑ xi ri
i=1
Where
rp = Expected return of the portfolio
xi = Proportion of funds invested in security i.
ri = Expected return of security i.
n = Number of securities in the portfolio n

Source: Text book- DR. R. Kasilingam-Investment and Portfolio Management .

 Risk of a Portfolio
• The variance or standard deviation
• The riskiness of each security within the context of the overall
portfolio has to be considered.
• Individual & Overall Portfolio
Covariance:
• The statistical measure that indicates the interactive risk of a
security relative to others in a portfolio of securities.
Covxy =[Rx – Rx][Ry - Ry]
N
Where:
Covxy = Covariance between x and y. Rx= Return of security x.
Ry = Return of security y Rx = Expected or mean return of security x.
Ry = Expected or mean return of security y. N = Number of observations.
Source: Text book- DR. R. Kasilingam-Investment and Portfolio Management .
 covariance

• Measure of how returns of two securities move together.

• Positive-If the returns of the two securities move in the same direction
consistently
• Negative- If the returns of the two securities move in opposite direction
consistently
• Zero- If the movements of returns are independent of each other

Rxy= Covxy/ Sd X * Sd Y
where
rxy= Coefficient of correlation between x and y.
Covxy = Covariance between x and y.
σx= Standard deviation of x.
σy= Standard deviation of y.
Source: Text book- DR. R. Kasilingam-Investment and Portfolio Management .
 The variance (or risk) of a portfolio
• A weighted average of the variances of the individual securities in the
portfolio.
• The variance of a portfolio with only two securities in it may be calculated
with the following formula.
σ2p = WA2 σA2 + WB2 σB2 + 2 WA WB rAB σA σB
Where:
σ2p = Portfolio variance
WA = Proportion of funds invested in security A
WB = Proportion of funds invested in security B
σA2 = Variance of security A
σB2 = Variance of security B
σA = Standard deviation of security A
σB = Standard deviation of security B
rAB = Correlation coefficient between the returns of security A and security B
σp = √ Portfolio variance
 Portfolios With More Than Two Securities

Source: Text book- DR. R. Kasilingam-Investment and Portfolio Management .

 Diversification

• Ensure that you have a diversified portfolio.

• This means ensuring that you spread your capital
amongst different investments
• You are not reliant upon a single investment for all
of your returns.
• The key benefit of diversification is that it helps to
minimise risk of capital loss to your investment
portfolio
• Benefits:
i. Minimising risk of loss
ii. Preserving capital
iii. Generating returns
THANK YOU