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Master of Business Administration
Paper Code: MB FM– 201
Paper Title: Security
analysis and portfolio management
Q. 1. Short answer type questions: Limit 100 – 150
(i)
What are securities? Write any two features of securities.
Answer: Securities
commonly refers to any form of negotiable financial instrument that holds some
type of monetary value.Its legal definition varies by jurisdiction where in
some cases the term excludes financial instruments other than equities and
fixed income instruments and in some areas it includes some instruments that
(ii) Who are brokers? Write its important
role in security market.
Answer: The role of a
stock broker is to facilitate the buying and selling of stocks at the stock
markets, on behalf of investors. There are many prominent stock brokerage firms
in India through which you can trade in stock exchanges.
(iii)
What do you understand by efficient portfolio & efficient frontier?
Answer: Optimal
Portfolio
An optimal portfolio is
one that occupies the ‘efficient’ parts of the risk-return premium spectrum. It
satisfies the requirement that no other collection exists with a higher
expected return at the same standard deviation of the return (risk measure).
The optimal portfolio
does not focus on
(iv) What do you understand by systematic and
non-systematic risk?
Answer: Systematic Risk
It is the risk that
highlights the possibility of a collapse of the entire financial system or the
stock market causing a
(v) What do you understand by over the counter
exchange (OTCEI)?
Answer: Over The
Counter Exchange of India (OTCEI) can be defined as a stock exchange without a
proper trading floor. All stock exchange have a specific place for trading
their securities through counters. But the OTCEI is connected through a
computer network and the transactions are taking place through computer
operations.
(vi) Broker is an agent who executes
the order of his client, yet he can act many roles.
Explain any two different roles of a
broker?
Answer: 1)Suggest
best deals
Mostly a broker deals
in all different types of securities. Brokers suggest the best deal to buy or
sell stocks and may also advise traders when to buy or sell stocks. But they
are not licensed investment advisers.
(vii) Explain the concept of undervalued and
overvalued portfolio
Answer: Undervalued Stocks?
Buying undervalued
stocks and securities is one of the key investment strategies for value
strategies. Investors actively pick out stocks that are undervalued in the
market.
However, this strategy
of
(viii) Investor are risk averse what do you
understand by this assumption?
Answer: Every investor
wants to maximize the investment returns for a given level of risk. Risk refers
to the uncertainty of future outcomes. Risk aversion relates to the notion that
investors as a rule would rather avoid risk. Given a choice of two investments with
equal returns, risk-averse investors will select the investment with
(ix) Difference between shares and debentures?
Answer:
1.
The holder of shares is known as a shareholder
while the holder of debentures is known as debenture holder.
2.
Share is the capital of the company, but
Debenture is the debt of the company.
3.
The shares represent ownership of the
shareholders in the company. On the other hand, debentures represent
indebtedness of the company.
4.
The income earned on shares is the dividend,
but the income earned on debentures is interest.
(x) Write short notes on
(a) Relative strength index
Answer: The relative strength index (RSI) is a
momentum indicator used in technical analysis that measures the magnitude of
recent price changes to evaluate overbought or oversold conditions in the price
of a stock or other asset. The RSI is displayed as an oscillator (a line graph
that moves between two extremes) and can have a
(b) Rate of change?
Answer: The rate of change (ROC) is the speed at
which a variable changes over a specific period of time. ROC is often used when
speaking about momentum, and it can generally be expressed as a ratio between a
change in one variable relative to a corresponding change in another;
graphically, the rate of change is represented by the slope of a line. The ROC
is often illustrated by the Greek letter delta.
A rate of change is
a rate that describes
(Word limits 500)
Q. 2. Risk free return is at 6% and expected
return of market portfolio is 18% wit standard deviation 2.5%.draw CML
Let us take hypothetical value of
standard deviation portfolio as 0, 1, 1.5, 2, 2.5, 3, 3.5 and 4.
Answer: First, we calculate the expected return
under the various hypothetical values;
at 0; 6 + (18-6)0 = 6%
Q. 3. What do you mean by listing of shares?
Discuss in brief the SEBI requirement for listing of shares.
Answer: Listing means the admission of securities
of a company to trading on a stock exchange. Listing is not compulsory under
the Companies Act. It becomes necessary when a public limited company desires
to issue shares or debentures to the public. When securities are listed in a
stock exchange, the company has to comply with the requirements of the
exchange.
The company has to follow specified conditions
before Shares listing in stock exchange:
Q. 4. „Investors‟ are utility maximizers”, do you
agree? Explain with the help of suitable example
Answer: Investors are
risk averse utility maximizers because they will always look for opportunities
and make the most out of them and at the same time are reluctant to venture
into projects that are associated with risk of financial loss or projects that
have little economic viability. Investors acquire factors of production such as
labor, capital, and land and ensure that they are maximally used. For example,
if an real estate investor
Q. 5. Risk free return is at 5% and
expected return of market portfolio is 16%. Find out the expected returns of
the securities with a beta of (a) 1.25 (b) .8 and (c) 1?
Answer: (a) The expected returns of the securities with a beta of 1.25:
E(R) = 5% + 1.25(16%-5%) = 5% + 1.25 * 11% = 5%
+ 13.75% = 18.75%
The expected returns of the securities with a
beta of 1.25 is 18.75 %
Q. 6. Current dividend per share is
Rs 5, growth expected during the next three years is 15 % p.a., thereafter, for
three years, the dividend are expected to grow at the rate of 10% per annum and
then the dividends are likely to grow at a constant rate of 7 % p.a., If an
investor expects a return of 20% p.a., find out what is the value of these
shares for this investor.
Answer:
Stage one dividends grew by 15% or 0.15
Year......Workings ............................. Expected
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