MF0010 & SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

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ASSIGNMENT

DRIVE	WINTER  2016
PROGRAM	MBADS – (SEM 3/SEM 5) / MBAN2 / MBAFLEX – (SEM 3) / PGDFMN – (SEM 1)
SUBJECT CODE & NAME	MF0010 & SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT
SEMESTER	3
BK ID	B 1754
CREDITS	4
MARKS	60

Note: Answer all questions. Kindly note that answers for 10 marks questions should be approximately of 400 words. Each question is followed by evaluation scheme.

Q.1 Financial markets bring the providers and users in direct contact without any intermediary. Financial markets permits the businesses and governments to raise the funds needed by sale of securities. Describe the money market/capital market – features and its composition.

Ans : Money market- features and composition : As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter and is wholesale. Various instruments exist, such as Treasury bills, commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed securities.It provides liquidity funding for the global financial system. Money

Q.2 Risk is the likelihood that your investment will either earn money or lose money. Explain the factors that affect risk. Mr. Rahul invests in equity shares of Wipro. Its anticipated returns and associated probabilities are given below:

Return               -15          -10         5            10          15          20          30

Probability         0.05       0.10       0.15       0.25       0.30       0.10       0.05

You are required to calculate the expected ROR and risk in terms of standard deviation.

Ans : Risk is the potential of losing something of value, weighed against the potential to gain something of value. Values (such as physical health, social status, emotional well being or financial wealth) can be gained or lost when taking risk resulting from a given action, activity and/or inaction, foreseen or unforeseen. Risk can also be defined as the intentional interaction with uncertainty. Risk perception is the subjective judgment people make about the severity of a risk, and may vary person to person. Any human endeavor carries some risk, but some are much riskier than others.

Factors that affect risk :

1. The actual investment you're considering:

Different investments carry different levels of risk. All investments involve a degree of risk and returns can never be guaranteed so it is important to choose investments that suit your circumstances. Below is a table that illustrates a range of investment types and their associated risks

2. Your risk

Q.3 Explain the business cycle and leading coincidental & lagging indicators. Analyse the issues in fundamental analysis.

Ans : Explanation of business cycle: The fluctuations in economic activity that an economy experiences over a period of time. A business cycle is basically defined in terms of periods of expansion or recession. During expansions, the economy is growing in real terms (i.e. excluding inflation), as evidenced by increases in indicators like employment, industrial production, sales and personal incomes. During recessions, the economy is contracting, as measured by decreases in the above indicators. Expansion is measured from the

Leading indicators are indicators that usually change before the economy as a whole changes. They are therefore useful as

Q.4 Discuss the implications of EMH for security analysis and portfolio management.

Ans : In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.

There are three major versions of the hypothesis: "weak", "semi-strong", and "strong".

EMH and Technical Analysis:

Technical analysis bases decisions on past results. EMH, however, believes past results cannot be used to outperform the market. As

Q.5 Explain about the interest rate risk and the two components in it.

An investor is considering the purchase of a share of XYZ Ltd. If his required rate of return is 10%, the year-end expected dividend is Rs. 5 and year-end price is expected to be Rs. 24, Compute the value of the share.

Ans : Introduction of interest rate risk : The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. Such changes usually affect securities inversely and can be reduced by diversifying (investing in fixed-income securities with different durations) or hedging (e.g. through an interest rate swap).

Ans : Formula to calculate the present value of the share :

P0  = D1/(1+Ke) + P1/(1+K e)

Where P0 = Current market price of the share

Q.6 Elucidate the risk and returns of foreign investing. Analyse international listing.

Ans : Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.

Explanation of all the points in risks and returns  from foreign investing :

nvesting internationally has often been the

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