Security Analysis and Portfolio Management: School of Commerce
Security Analysis and Portfolio Management: School of Commerce
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
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:
Assignment:
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
• Rate of return
• Risk
• Marketability
• Convenience
• Tax benefit
• Capital appreciation
• Safety and Security
• Stability of income
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
• Asset type
• Usage
• Liquidity
• Value
• Divisibility
• Holding period
Stock Market Indicators
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
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”
• Systematic Risk
• Unsystematic Risk
• 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
• 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
• 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
• 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
Sources
Interest risk, purchasing power risk, Business risk, insolvency risk,
market risk financial risk
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
• 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
•
• 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
p
Expected Return of a Portfolio
ii
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
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