Security Analysis

Amity Campus Uttar Pradesh India 201303

ASSIGNMENTS PROGRAM: BFIA SEMESTER-IV Subject Name Study COUNTRY Roll Number (Reg.No.) Student Name

:SECURITY ANALYSIS :UGANDA : 01152010-20130138 :OKIRIA ALEXANDER MACKEY

INSTRUCTIONS a) Students are required to submit all three assignment sets. ASSIGNMENT Assignment A Assignment B Assignment C

DETAILS Five Subjective Questions Three Subjective Questions + Case Study Objective or one line Questions

MARKS 10 10 10

b) c) d) e)

Total weightage given to these assignments is 30%. OR 30 Marks All assignments are to be completed as typed in word/pdf. All questions are required to be attempted. All the three assignments are to be completed by due dates and need to be submitted for evaluation by Amity University. f) The students have to attached a scan signature in the form.

Signature Date

: :

_________________________________ __21/06/2012_______________________________

( √ ) Tick mark in front of the assignments submitted Assignment √ Assignment ‘B’ √ Assignment ‘C’ ‘A’

√

Security Analysis Assignment A Q . 1 W h a t i s i n v e s t m e n t ? C o m p a r e it w it h s p e c u l a t io n & G a m b l i n g .

I n v e s t me n t i s t h e e m p lo y m e n t o f f u n d s a t t h e p r e s e n t w it h t h e a i m o f a c h i e v i n g , a d d it i o n a l i n c o m e i n t h e fu t u r e . I n v e s t me n t

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c o n s u m p t io n i s s a c r i f i c e d t o g e t a r e t u r n i n t h e f u t u r e . T h e s a c r i f i c e t hat has t o be bo r ne is cert a in but t he ret ur n in t he fut ure ma y be uncert a in.

S p e c u l a t io n o n o t h e r h a n d m e a n s t a k i n g u p t h e b u s i n e s s r i s k i n t h e h o p e o f g e t t i n g s h o r t t e r m g a i n , it e s s e n t i a l l y i n v o l v e s b u y i n g a n d s e l l i n g a c t i v it i e s w it h t h e e x p e c t a t io n o f g e t t i n g p r o f it fr o m t h e p r i c e f l u c t u a t io n s .

Ga mb ling is usua lly a ver y sho rt t erm inve st me nt in a g a me o r c ha nc e. I t s d i f f e r e n t fr o m b o t h i n v e s t m e n t a n d s p e c u l a t io n a s d i s c u s s e d b e l o w ;

T h e m a i n d i f f e r e n c e b e t w e e n s p e c u l a t i n g a n d i n v e s t i n g i s t h e a mo u n t o f o f r i s k u n d e r t a k e n i n t h e t r a d e . T yp i c a l l y , h i g h - r i s k t r a d e s t h a t a r e a l mo s t a k i n t o g a m b l i n g f a l l u n d e r t h e u m b r e l l a o f s p e c u l a t io n , w h e r e a s lo w e r - r i s k i n v e s t me n t s b a s e d o n fu n d a m e n t a l s a n d a n a l y s i s fa ll int o t he cat ego r y o f inve st ing. Inv est o rs see k t o generat e a s a t i s f a c t o r y r e t u r n o n t h e i r c a p it a l b y t a k i n g o n a n a v e r a g e o r b e l o w a vera ge a mo u nt o f r isk. O n t he o t her ha nd, sp ecu lat o rs are se ek ing t o ma ke a bno r ma lly hig h ret urns fro m bet s t hat ca n go o ne w a y o r t he ot her. It sho u ld be no t ed t hat spe cu lat io n is no t exa ct ly lik e ga mb ling b e c a u s e s p e c u l a t o r s d o t r y t o ma k e a n e d u c a t e d d e c i s i o n o n t h e

d ir e c t io n o f t h e t r a d e , b u t t h e r i s k i n h e r e n t i n t h e t r a d e t e n d s t o b e sig nific a nt ly a bo ve a ver age.

A s a n e x a m p l e o f a s p e c u l a t i v e t r a d e , c o n s i d e r a v o la t i l e j u n io r g o l d min ing co mpa n y t hat ha s a n e qua l c ha n ce o ver t he ne ar t er m o f s k y r o c k e t i n g f r o m a n e w g o l d m i n e d i s c o v e r y o r g o i n g b a n k r u p t . W it h n o n e w s f r o m t h e c o mp a n y , i n v e s t o r s w o u ld t e n d t o s h y a w a y f r o m s u c h a r i s k y t r a d e , b u t s o me s p e c u l a t o r s m a y b e l i e v e t h a t t h e j u n io r g o ld m i n i n g c o m p a n y i s g o i n g t o s t r ik e g o l d a n d m a y b u y it s s t o c k o n a h u n c h . T h i s w o u l d b e s p e c u l a t io n .

A s a n e x a m p l e o f i n v e s t i n g , c o n s i d e r a la r g e s t a b l e m u lt i n a t io n a l c o mp a n y . T h e c o m p a n y m a y p a y a c o n s i s t e n t d i v i d e n d t h a t i n c r e a s e s a n n u a l l y , a n d it s b u s i n e s s r i s k i s lo w . A n i n v e s t o r m a y c h o o s e t o i n v e s t i n t h i s c o mp a n y o v e r t h e lo n g - t e r m t o m a k e a s a t i s f a c t o r y r e t u r n o n h i s o r h e r c a p i t a l w h i l e t a k i n g o n r e l a t i v e l y lo w r i s k . A d d it io n a l l y , t h e i n v e s t o r ma y a d d s e v e r a l s i m i l a r c o mp a n i e s a c r o s s d i f f e r e n t i n d u s t r ie s t o h i s o r h e r p o r t fo l io t o d i v e r s i f y a n d f u r t h e r lo w e r t h e i r r i s k .

Diffe renc e betwe en Ive st ment and ga mb lin g

A g a m b l e i s u s u a l l y a v e r y s h o r t t e r m i n v e s t me n t i n a g a m e o r c h a n c e . G a m b l i n g i s d i f f e r e n t fr o m s p e c u l a t io n a n d i n v e s t m e n t . T h e t i m e h o r i z o n i n v o l v e d i n g a m b l i n g i s s h o r t e r t h a n s p e c u l a t io n a n d i n v e s t me n t . T h e r e s u lt s a r e d e t e r m i n e d b y t h e r o l l o f d i c e o r t h e t u r n of a card. Seco nd ly, peo p le g a mb le a s a wa y t o ent ert a in flo w t he mse lve s, ear ning inco me wo u ld be t he seco nd ary fa ct o r. T h i r d l y , t h e r i s k i n g a m b l i n g i s d i f f e r e n t fr o m t h e r i s k o f t h e

i n v e s t me n t . G a m b l i n g e m p lo y s a r t i f i c i a l r i s k s w h e r e a s c o m m e r c i a l r isk s are pr ese nt in t he inve st me nt act ivit y. There is no r isk a nd ret ur n t r a d e o f f i n t h e g a m b l i n g a n d t h e n e g a t i v e o u t c o me s a r e e x p e c t e d . B u t i n t h e i n v e s t m e n t t h e r e i s a n a n a l y s i s o f r i s k a n d r e t u r n . P o s it i v e ret urns are e xpe ct ed b y t he in ve st o r s. Fina lly, t he fina nc ia l a na lys is d o e s n o t r e d u c e t h e r i s k p r o p o r t io n i n v o l v e d i n t h e g a m b l i n g .

Q.2 De fine r isk & d ist ingu ish bet wee n S yst e mat ic & U nsyst e mat ic r isk

Risk is the degree or probability of a loss

Systematic risk refers to the risk which affects the whole stock market and therefore it cannot be reduced or diversified away. For example any global turmoil will affect the whole stock market and not any single stock, similarly any change in the interest rates affect the whole market though some sectors are more affected then others. This type of risk is called non diversifiable risk because no amount of diversification can reduce this risk whereas Unsystematic risk is the extent of variability in the stock or security’s return on account of factors which are unique to a company. For example it may be possible that management of a company may be poor, or there may be strike of workers which leads to losses. Since these factors affect only one company, this type of risk can be diversified away by investing in more than one company because each company is different and therefore this risk is also called diversifiable risk.

Q.3 What is me a nt by Fu nda me nt a l Ana lys is? E xp la in.

Fundamental analysis is a method used to determine the value of a stock by analyzing the financial data that is 'fundamental' to the company. That means that fundamental analysis takes into consideration only those variables that are directly related to the company itself, such as its earnings, its dividends, and its sales. Fundamental analysis does not look at the overall state of the market nor does it include behavioral variables in its methodology. It focuses exclusively on the company's business in order to determine whether or not the stock should be bought or sold. T h e i n t r i n s i c v a l u e o f a n e q u it y s h a r e d e p e n d s o n a m u lt i t u d e o f fa ct o rs. The e ar ning s o f t he co mpa n y, t he gro wt h rat e a nd t he r isk e x p o s u r e o f t h e c o mp a n y h a v e a d i r e c t b e a r i n g o n t h e p r i c e o f t h e shar e. T he se fact o rs in t ur n re ly o n t he ho st o f o t her fa c t o rs lik e e c o n o m i c e n v i r o n m e n t i n w h i c h t h e y f u n c t io n , t h e i n d u s t r y t h e y b e lo n g t o , a n d f i n a l l y c o m p a n i e s ' o w n p e r fo r m a n c e . T h e f u n d a m e n t a l s c h o o l o f o ught appra ise d t he int r ins ic va lue o f shar es t hro ugh

ECONOMIC ANALYS IS T h e l e v e l o f e c o n o m i c a c t i v it y h a s a n i m p a c t o n i n v e s t m e n t i n m a n y wa ys. I f t he eco no my gro ws r ap id ly, t he ind ust r y c a n a lso be e xp ect ed to sho w rap id gro wt h a nd vic e ver sa. . T h e c o m mo n l y a n a l y s e d m a c r o e c o n o m i c f a c t o r s a r e a s fo l lo w s Gro ss dom estic p ro duct (G DP) It re pr ese nt s t he aggr egat e va lue o f t he go o ds and ser v ice s pro duc ed in t he eco no my. S a v i n g s a n d i n v e s t m e n t I t i s o b v io u s t h a t g r o w t h r e q u i r e s i n v e s t m e n t w hic h

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I n f l a t i o n - A l o n g w it h t h e g r o w t h o f G D P , i f t h e i n f l a t io n r a t e a l s o i n c r e a s e s , t h e n t h e r e a l r a t e o f g r o w t h w o u l d b e v e r y l it t l e . T h e de ma nd in t he co nsu me r pro duct indust r y is sig nific a nt ly a ffe ct ed. Inte re st ra te s - T he int ere st rat e a ffe ct s t he co st o f fina nc ing t o t he f i r m s . A d e c r e a s e i n i n t e r e s t r a t e i m p l i e s lo w e r c o s t o f f i n a n c e fo r f i r m s a n d m o r e p r o f it a b i l it y.

B u d g e t - T h e b u d g e t d r a ft p r o v i d e s a n e l a b o r a t e a c c o u n t o f t h e g o v e r n m e n t r e v e n u e s a n d e x p e n d it u r e s . T h e t a x s t r u c t u r e - C o n c e s s io n s a n d i n c e n t i v e s g i v e n t o a c e r t a i n ind u st r y

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balanc e of pa ym ent - T he ba la nc e o f pa yme nt is t he reco rd o f a c o u n t r y ' s m o n e y r e c e i p t s fr o m a n d p a y m e n t s a b r o a d . M o n s o o n a n d a g r i c u l t u r e - Ag r i c u l t u r e i s d i r e c t l y a n d i n d i r e c t l y l i n k e d w it h t h e i n d u s t r ie s . F o r e x a m p l e , S u g a r , C o t t o n , T e x t i l e a n d F o o d p r o c e s s i n g i n d u s t r i e s d e p e n d u p o n a g r i c u lt u r e fo r r a w - m a t e r i a l . I n f r a s t r u c t u r e f a c i l i t i e s - I n f r a s t r u c t u r e f a c i l i t i e s a r e e s s e n t i a l fo r t h e g r o w t h o f i n d u s t r i a l a n d a g r i c u lt u r a l s e c t o r . A w i d e n e t w o r k o f c o m m u n i c a t io n s y s t e m i s a m u s t fo r t h e g r o w t h o f t h e e c o n o m y . R e g u l a r s u p p l y o f p o w e r w it h o u t a n y p o w e r c u t w o u ld b o o s t t h e p r o d u c t io n . D e m o g r a p h i c f a c t o r s - T h e d e mo g r a p h i c d a t a p r o v i d e s d e t a i l s a b o u t t h e p o p u l a t io n b y a g e , o c c u p a t io n , l i t e r a c y a n d g e o g r a p h i c lo c a t io n . T h i s i s n e e d e d t o fo r e c a s t t h e d e m a n d fo r t h e c o n s u m e r g o o d s . T h e p o p u l a t io n b y a g e i n d i c a t e s t h e a v a i l a b i l i t y o f a b l e w o r k fo r c e . Econ omic Forecasting To est imat e t he st o ck pr ic e c ha ng es, a n a na lyst ha s t o ana lyse t he ma cro eco no mic e nviro nme nt a nd t he fact o rs pe cu liar t o t he ind ust r y h e i s c o n c e r n e d w it h . Economic

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i n d i c a t e t h e p r e s e n t s t a t u s , p r o g r e s s o r s lo w d o w n o f t h e e c o n o m y . T h e y a r e c a p i t a l i n v e s t m e n t , b u s i n e s s p r o f i t s , mo n e y s u p p l y , G N P , i n t e r e s t r a t e ; u n e m p lo y m e n t r a t e , e t c . T h e e c o n o m i c i n d i c a t o r s a r e grouped

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INDUSTRY ANALYS IS A n i n d u s t r y i s a g r o u p o f f i r m s t h a t h a v e s i m i l a r t e c h n o lo g i c a l s t r u c t u r e o f p r o d u c t io n a n d p r o d u c e s i m i l a r p r o d u c t s . T h e s e i n d u s t r ie s c a n b e c l a s s i f i e d o n t h e b a s i s o f t h e b u s i n e s s c y c l e i.e. c la ss ified ac co rd ing t o t he ir re act io ns t o t he d iffere nt p hases o f t he bu sine ss c yc le . The y ar e c la ssifie d int o : 1. Gro wth indu st ry - T he gro wt h ind u st r ies ha ve sp ec ia l fe at ures o f h i g h r a t e o f e a r n i n g s a n d g r o w t h i n e x p a n s io n , i n d e p e n d e n t o f t h e b u s i n e s s c y c l e . T h e e x p a n s io n o f t h e i n d u s t r y m a i n l y d e p e n d s o n t h e t e c h n o lo g i c a l c h a n g e . 2 . C y c l i c a l i n d u s t r y - T h e g r o w t h a n d t h e p r o f it a b i l it y o f t h e i n d u s t r y mo v e a lo n g w i t h t h e b u s i n e s s c y c l e . D u r i n g t h e b o o m p e r io d t h e y e n jo y g r o w t h a n d d u r i n g d e p r e s s io n t h e y s u f f e r a s e t b a c k . F o r e x a m p l e , w h it e g o o d s l i k e fr i d g e , w a s h i n g m a c h i n e a n d k it c h e n r a n g e p r o d u c t s . 3 . D e f e n s i v e i n d u s t r y - D e f e n s i v e i n d u s t r y d e f i e s t h e mo v e m e n t o f t h e b u s i n e s s c y c l e . F o r e x a m p l e , fo o d a n d s h e lt e r a r e t h e b a s i c r e q u i r e m e n t s o f h u m a n it y. T h e fo o d i n d u s t r y w it h s t a n d s r e c e s s io n a nd de pre ssio n. 4. Cyc lica l g ro wth i ndu stry - T his is a new t ype o f indu st r y t hat is c yc lic a l

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a u t o mo b i l e i n d u s t r y e x p e r i e n c e s p e r i o d s o f s t a g n a t io n , d e c l i n e b u t t h e y g r o w t r e me n d o u s l y . T h e c h a n g e s i n t e c h n o lo g y a n d i n t r o d u c t io n o f n e w mo d e l s h e l p t h e a u t o mo b i l e i n d u s t r y t o r e s u m e t h e ir g r o w t h p a t h . Indu st ry lif e cy cle - T he indu st r y life c yc le t heo r y is g e ner a ll y at t ribut ed t o Ju liu s Gro de nsk y. T he life c yc le o f t he indu st r y is s e p a r a t e d i n t o fo u r w e l l d e f i n e d s t a g e s s u c h a s :

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p a r t ic u l a r p r o d u c t . I n t h i s s it u a t io n , it i s d i f f i c u lt t o s e l e c t c o mp a n i e s fo r i n v e s t m e n t b e c a u s e t h e s u r v i v a l r a t e i s u n k n o w n . 2. Rapid

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s u r v i v i n g f i r m s f r o m t h e p io n e e r i n g s t a g e . T h e c o mp a n i e s t h a t h a v e w it h s t o o d t h e c o m p e t it io n g r o w s t r o n g l y i n m a r k e t s h a r e a n d f i n a n c i a l p e r fo r m a n c e . T h e t e c h n o lo g y o f t h e p r o d u c t io n w o u l d h a v e i m p r o v e d r e s u l t i n g i n lo w c o s t o f p r o d u c t io n a n d g o o d q u a l it y p r o d u c t s . T h e c o mp a n i e s h a v e s t a b l e g r o w t h r a t e i n t h i s s t a g e a n d t h e y d e c l a r e d iv ide nd t o t he shar e ho lder s. It is ad visa b le t o inve st in t he share s o f t he se co mpa n ie s. 3 . M a t u r i t y a n d s t a b i l i s a t i o n s t a g e - I n t h e s t a b i l i s a t io n s t a g e , t h e g r o w t h r a t e t e n d s t o mo d e r a t e a n d t h e r a t e o f g r o w t h w o u l d b e mo r e o r l e s s e q u a l t o t h e i n d u s t r ia l g r o w t h r a t e o r t h e g r o s s d o m e s t i c p r o d u c t gro wt h rat e. S ympt o ms o f o bso le sce nc e ma y ap pe ar in t he t ec hno lo g y. T o k e e p g o i n g , t e c h n o lo g i c a l i n n o v a t io n s i n t h e p r o d u c t io n p r o c e s s a n d p r o d u c t s s h o u l d b e i n t r o d u c e d . T h e i n v e s t o r s h a v e t o c lo s e l y mo n it o r t h e c h a n g e s t h a t t a k e p l a c e i n t h e m a t u r it y s t a g e o f t h e i n d u s t r y. D e c l i n i n g s t a g e - I n t h i s s t a g e , d e m a n d fo r t h e p a r t i c u l a r p r o d u c t a n d t h e e a r n i n g s o f t h e c o mp a n i e s i n i n d u s t r y d e c l i n e . N o w - a - d a y s v e r y f e w c o n s u m e r s d e m a n d b l a c k a n d w h it e T . V . I n n o v a t io n o f n e w p r o d u c t a nd c ha nge s in co nsu mer pre fer e nc e s lea d t o t his st age. T he spe c ific f e a t u r e o f t h e d e c l i n i n g s t a g e i s t h a t i n t h e b o o m p e r io d , t h e g r o w t h o f t h e i n d u s t r y w o u l d b e lo w a n d d e c l i n e a t a h i g h e r r a t e d u r i n g t h e c e s s i o n . I t is b e t t e r t o a v o i d i n v e s t i n g i n t h e s h a r e s o f t h e lo w g r o w t h i n d u s t r y e v e n i n t h e b o o m p e r io d . I n v e s t m e n t i n t h e s h a r e s o f t h e s e t yp e s o f c o mp a n i e s l e a d s t o e r o s i o n o f c a p i t a l . F a c t o r s t o b e c o n s i d e r e d - A p a r t fr o m i n d u s t r y l i f e c y c l e a n a l y s i s , t h e

i n v e s t o r h a s t o a n a l y s e s o m e f a c t o r s t o o . T h e y a r e a s l i s t e d b e lo w

1. Growth of the in dustry 2. Cost structure and profitability 3.

Nature of the produ ct

4. Nature of the competition 5. Government policy 6. Research and development Pollution standards 7. SWOT analysis

COMPANY ANALYSIS I n t h e c o mp a n y a n a l y s i s t h e i n v e s t o r a s s i m i l a t e s t h e s e v e r a l b it s o f i n f o r m a t io n r e l a t e d t o t h e c o m p a n y a n d e v a l u a t e s t h e p r e s e n t a n d f u t u r e v a l u e s o f t h e s t o c k . T h e r i s k a n d r e t u r n a s s o c i a t e d w it h t h e p u r c h a s e o f t h e s t o c k is a n a l y s e d t o t ak e b e t t e r i n v e s t m e n t d e c i s io n s .

T h e c o m p e t it i v e n e s s o f t h e c o m p a n y c a n b e s t u d i e d w it h t h e h e l p o f

The m arket sha re - T he ma rket sha re o f t he a nnu a l sa le s he lp s t o det er mine

a

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r e lat ive

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p o s it i o n

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i n d u s t r y. I f t h e m a r k e t s h a r e i s h i g h , t h e c o mp a n y w o u l d b e a b l e t o m e e t t h e c o m p e t it io n s u c c e s s f u l l y . G r o w t h o f s a l e s - T h e c o m p a n y m a y b e a l e a d i n g c o m p a n y, b u t i f t h e g r o w t h i n s a l e s i s c o m p a r a t i v e l y l o w e r t h a n a n o t h e r c o m p a n y , it i n d i c a t e s t h e p o s s i b i l it y o f t h e c o m p a n y lo s i n g t h e l e a d e r s h i p . T h e r a p i d g r o w t h i n s a l e s w o u l d k e e p t h e s h a r e h o l d e r i n a b e t t e r p o s it io n t h a n o n e w it h t h e s t a g n a n t g r o w t h r a t e . Stabilit y of sal es - I f a fir m has st a ble sa le s re ve nu e, o t her t hing s be ing

re ma in ing

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ear nings.

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v a r i a t io n i n s a l e s l e a d s t o v a r i a t io n s i n c a p a c it y u t i l i s a t io n , f i n a n c i a l

p la nning a nd d iv id e nd. Sales

foreca st

-

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co mp a ny

may

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a

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c o m m a n d i n g m o r e s a l e s b o t h i n mo n e t a r y t e r m s a n d p h y s i c a l t e r m s b u t t h e i n v e s t o r s h o u l d h a v e a n i d e a w h e t h e r it w i l l c o n t i n u e i n f u t u r e o r n o t . F o r t h i s p u r p o s e , fo r e c a s t o f s a l e s h a s t o b e d o n e . H e c a n f o r e c a s t t he sa le s in d iffer e nt wa ys. 1 . T h e i n v e s t o r c a n f it a t r e n d l i n e d it h e r l i n e a r o r n o n l i n e a r w h i c h e v e r i s s u it a b l e . 2 . H i s t o r ic a l p e r c e n t a g e o f c o m p a n y s a l e s t o t h e i n d u s t r y s a l e s c a n b e a na lyse d. E ve n s imp le le ast squar e t ec hn iqu e co u ld be u se d t o f ind o ut t h e f u n c t io n C = f ( I ) i. e . C - C o mp a n y s a l e s ; I - I n d u s t r y s a l e s . 3.

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v a r i a b l e s l i k e g r o s s d o m e s t i c p r o d u c t c a p it a i n c o m e a n d p o p u l a t io n gro wt h. 4 . T h e d i f f e r e n t c o mp o n e n t s o f d e m a n d fo r t h e c o m p a n y ' s p r o d u c t h a v e to be a na lysed be ca use t he d e ma nd ' ma y ar ise fro m d iffere nt so urce s. F o r s o me p r o d u c t t h e d e m a n d m a y b e fr o m t h e c o n s u m e r s a s w e l l a s , fro m t he indu st r ies. Fo r 167 e x a m p l e , s t e e l a n d p e t r o le u m p r o d u c t s a r e d e m a n d e d b y c o n s u m e r s a n d i n d u s t r ie s . 5 . T h e d e m a n d fo r t h e s u b s t it u t e s a n d c o mp e t it o r s ' p r o d u c t a l s o s h o u l d be a na lysed u sing lea st squ are~ t ec hn ique s.

Q . 4 W h a t i s D u r a t io n ? E x p l a i n it s i m p o r t a n c e i n v a l u a t io n o f b o n d s .

D ur a t i o n , i s d e f i n e d a s t h e w e i g h t e d a v e r a g e o f t i m e p e r io d s t o m a t u r it y , w e i g h t s b e i n g

pre se nt

v a l u e s o f t h e c a s h f lo w i n e a c h t i m e

p e r io d . Duration measures the time structure of a bond and the bond's interest rate risk. The time

structure of investment in bonds is expressed in two ways. The common way to state is how many years he has to wait until the bond matures and the principal money is paid back. This is known as asset time to maturity or its years to maturity. The other way is to measure the average time until all interest coupons and the principal is recovered. The concept of du ration is important because it provides more meaningful measure o f the length of a bond, helpful in evolving immunization strategies for portfolio management and measures the sensitivity of the bond price to changes in the interest rate.

T h e fo r m u l a fo r d u r a t io n i s D=

C1

+

C2

(1 +r)

(1+r)2

P0

P0

+

C1

*T

(1+r) P0

D = Du ration C = Cash Flow r = Current yield to maturity T = Number o f Ye a r s PY (C) = Present , value of the Ca s h f low P0 = Sum o f t h e p resent values o f c ash f low

Q.5 Exp la in E ffic ie nt mar ket H ypo t he sis?

Efficient Market Hypothesis (EMH), states that the market prices of assets reflect all available information about the assets. The appropriate definition of all available‘ varies and gives rise to alternative testable implications of the EMH. The information set over which markets are said to be efficient can be one of three possibilities, each giving rise to a broader (i.e. stronger) version of the EMH which encompasses more information relevant to asset prices/returns: 1. The Weak EMH This states that all information contained in historical prices and firm characteristics (such as size, book value etc.) is incorporated in the actual (current) price. All historical information is thus reflected in the observed market price. Notice that no claim is made about the inclusion of any other type of information, nor about the speed with which information is incorporated in asset prices.

2. The Semi-Strong EMH This includes the history of past prices as well as all publicly available information about assets‘ returns, i.e. all disclosures, announcements and reports which are available to all market participants. All such information is reflected in the current price. 3. The Strong EMH In addition to the the above, the strong form of the EMH also includes all privately available information on the assets, i.e. information proprietary to particular analysts and managers. The most common such information is private forecasts of asset returns. Since each information set is a proper subset of the next one, the strong EMH clearly implies the semi-strong EMH, and in turn the semi-strong form implies the weak form, but not vice versa.

Assignment B Q.1 E nu me rat e t he impo rt a nc e o f t ec hn ica l a na lys is in inve st me nt a na lys is .

•

T e c h n i c a l a n a l y s i s d o e s n o t c o n c e r n i t s e l f w it h a c o mp a n y ' s b a s i c s o r fu n d a m e n t a l s . R a t h e r , t e c h n i c a l a n a l y s i s i n v o l v e s t h e s t u d y o f a st o ck's t rad ing pat t erns t hro ug h t he use o f c hart s, t rend line s, suppo rt and r esist a nc e le ve ls, a nd ma n y o t her mat he mat ic a l a na lys is t o o ls , i n o r d e r t o p r e d ic t fu t u r e mo v e m e n t s i n a s t o c k 's p r i c e , a n d t o h e l p i d e n t i f y t r a d i n g o p p o r t u n it i e s .

•

T h e b a s i c fo u n d a t io n s o r p r e m i s e s o f t e c h n i c a l a n a l y s i s a r e t h a t a s t o c k ' s c u r r e n t p r i c e d i s c o u n t s a l l i n f o r m a t io n a v a i l a b l e i n t h e m a r k e t , t h a t p r i c e mo v e m e n t s a r e n o t r a n d o m, a n d t h a t p a t t e r n s i n p r i c e mo v e m e n t s , i n v e r y m a n y c a s e s , t e n d t o r e p e a t t h e m s e l v e s o r t r e n d i n s o me d i r e c t io n .

Q.2 What is YT M ? E xp la in.

YTM (Yield To Maturity) is the rate of return, which an investor can expect to earn if the bond

is held till maturity. The concept of yield-to-maturity (YTM) is one of the widely used tools in bond investment management. Its calculated basing on some assumptions;

1. There should not be any default. Coupon and principal amount should be paid as per schedule. 2. The investor has to hold the bond till maturity. 3. All the coupon payments should be reinvested immediately at the same interest rate as the same yield to maturity of the bond.

Q . 3 E x p l a i n a n y E q u it y V a l u a t io n mo d e l w it h a n i l l u s t r a t io n .

THE THREE PHASE MODEL Here , three phases of dividend growth pattern is assumed, Dividends are assume d to grow at a const ant rate ‗ g ‘ for a period of ‗ A ‘ years . After the phase ‗ A ‘ the growth rate of dividend declines for A + 1 years throughout the phase B and the decline in the dividend rate would be linear . Afterwards , there would be perpetual growth rate ‗ g ‘ . Some times t he ‗ ga ‘ would be less than ‗ gb ‘ and in the second phase there would be linear growth r ate . The perpetual growth rate is known as the firms long run normal growth rate . The following figure illustrates the three stage growth rates .

T h r e e P h a s e M o d e l o f S t o c k R e t u rn a n d V a l u a t i o n n P0 =

∑ t =1

n

D 0 (1 + g a ) t + ( 1 + r) t

∑ t =1+

Dt-1(1+gb) + ( 1 + r) t

DB(1+gn) r- g n ( 1 + r) B

D0 = The next year dividend ga = the period ‗ A ‘ growth r ate gb = The period ‗ B ‘growth rate gn = The growth rate in the third phase DB = The dividend at the beginning o f the third p h a s e

Case study: Read the caselet carefully and answer the questions:

A mutual fund (MF) is a trust that pools money from a cross-section of investors by issuing units, constructs a diversified portfolio of stocks, bonds and other investment instruments, and invests the same in the capital and other markets.

The Indian MF industry has grown in terms of Assets Under Management (AUM), number of Asset Management Companies (AMCs), types of investors, number and variety of schemes and the number of distributors participating in the industry. As on February 2008, the industry comprised 32 AMCs, 1644 schemes and crossed 36 million folios. The MF industry is growing at an average rate of 16-17% because of the entry of commercial banks and the private players coupled with the rapid growth of the Indian capital market. Even then India ranks 25 in the AUM of the global MF industry. The MF industry in India is rapidly growing in tune with the growth of the Indian economy, although it faces a lot of challenges such as lack of awareness towards the industry, risk return trade-off etc. The more significant reason for this stupendous growth has been the regulatory changes introduced by the SEBI, in the past two years. In January 2008, the SEBI asked MF companies not to charge any load from small investors who approached them directly for buying units, instead of going through brokers. This move has helped cut costs for investors and made fund operations more transparent. The Indian MF industry is mostly concentrated among High Net Worth Individuals (HNWIs). Irrespective of the many players, the MFs today didn’t gather a large investor base. The urban investors are playing a major role in the industry, but should be diversified into rural and suburban areas, where there is a vast potential market. The industry is also competing with insurance companies that have launched a range of products with. High costs, low awareness and low penetration remain the biggest bugbears in the MF industry a similar structure, for the same set of investors. The MFs are now conducting investor awareness programs at various centres across the country. Investors’ relations centres are spread over the country to redress the investors' grievances. Despite all the facts investors make common mistakes while investing because they react based on intuition and hunches etc. Being conscious of what happened to a fund’s returns in the past, investors should be very careful in predicting the likely range of the fund’s returns in the future. The greater is the range, the more risky are the fund’s prospects. It is difficult to predict the behavior of investors as they belong to different cultures, lifestyles, educational levels, social status, income groups and religions. Besides all the consistency, the performance of MFs has been a major factor that has attracted many investors. The Indian MF industry has been reformed by making its operations much more

transparent than ever before. In a nutshell, it can be said that the future performance of the MFs will be better than in the past.

QUESTIONS:

Q1 Though MF industry in India is rapidly growing in tune with the growth of the Indian economy, it comes across various challenges. Discuss the various challenges faced by the MF industry.

Various challenges faced by MF Industry in India 

lack of investor awareness towards the industry



Risk return trade-off



The Indian MF industry is mostly concentrated among High Net Worth Individuals (HNWIs). Irrespective of the many players, the MFs today didn’t gather a large investor base. .



The industry is also competing with insurance companies that have launched a range of products



low awareness and low penetration remain the biggest bugbears in the MF industry a similar structure, for the same set of investors.

Q2 ‘Despite all the facts investors make common mistakes while investing because they react based on intuition and hunches etc.’ According to the caselet discuss, what are the common mistakes investors make while investing in mutual funds.

Common mistakes investors make while investing in mutual funds 1. Failing to sit tight not less than 10 to 15 years 2. Worrying about a fund’s management fee, its turnover rate, or the dividends it pays

3. Being affected by news on the market when you’re said to be investing in the future 4. Selling out during bad markets 5. Being impatient and losing confidence too soon

Assign men t C Q . 1 D u r a t io n i s t h e m e a s u r e o f (a) T ime st ruct ure o f t he bo nd (b) I nt ere st rat e risk (c) T ime st ruct ure & mar ket r isk ( d ) T i m e s t ru c t u r e & t h e i n t e r e s t r a t e ri s k

Q . 2 T h e s t a t i s t ic a l t o o l u s e d t o me a s u r e a c o mp a n y ’ s r i s k i s (a) Mean (b) Mo de ( c ) V a ri a n c e (d) Co -var ia nc e

Q.3 Int ere st rat e risk o ccur s w he n (a) T he mark et pr ic e o f bo nd mo ve s inver se ly t o t he pre va ilin g mar ket int ere st rat e ( b ) T h e v a ri a b i l i t y i n y i e l d i s d u e t o t h e m a r k e t i n t e r e s t ra t e flu ctuation s ( c ) T h e r e i s v a r i a b i l it y i n t h e c o u p o n i n t e r e s t r a t e s (d) All

Q.4 U nco nt ro lla b le r isk o f a co mpa n y is (a) La bo ur pro ble m (b) I ncr ea se in lo a n ser vic e c harg e (c) Cut in su bsid y (d) Technological ob solescen ce

Q . 5 C o n c e p t u a l f r a m e w o r k o f v a l u a t io n t h r o u g h P / E r a t io a r i s e s fro m ( a ) M u lt i p l e y e a r h o l d i n g mo d e l

(b) Constant g rowth model ( c ) T w o s t a g e g r o w t h mo d e l ( d ) T h r e e s t a g e g r o w t h mo d e l

Q.6 An inve st o r purc ha ses a st o ck in t he st o ck market . H is ho ld in g p e r io d r e t u r n d e p e n d s o n t h e (a) Purc ha se pr ic e o f t he st o ck (b) Se lling pr ic e o f t he st o ck (c) D iv id e nd pa id t o t he st o ck (d) All the above

Q.7 Int er Co nne ct ed St o ck exc ha ng e is to int er link (a) The BSE, NSE & OT CEI (b) All t he st o ck e xc ha nge s ( c ) F i f t e e n re g i o n a l s t o c k e x c h a n g e s ( d ) F o u r t e e n r e g io n a l s t o c k e x c h a n g e s

Q . 8 O v e r t h e C o u n t e r E x c h a n g e o f I n d i a w a s s t a r t e d a ft e r t h e r o l e mo d e l o f ( a ) N AS AQ (b) JAS AQ (c) NASDAQ & JASDAQ (d) NSE

Q . 9 C u s t o m e r ’ s p r o t e c t io n f u n d i s s e t u p ( a ) T o p r o t e c t t h e i n v e s t o r s a g a i n s t p r i c e f l u c t u a t io n s ( b ) T o p r o t e c t t h e b r o k e r i n c a s e o f n o n p a y m e n t o f mo n e y b y in ve st o rs ( c ) T o p r o v i d e i n s u ra n c e t o i n v e s t o r s i n c a s e o f d e f a u l t b y t h e memb ers (d) To prot ect t he me mbe r & t he in ve st o r

Q . 1 0 T h e o ld e s t s t o c k e x c h a n g e i n I n d i a i s (a) BSE (b) NSE (c) N ift y (b) ISE

Q . 1 1 T h e a c c o u n t i n g p e r io d c y c l e o f N S E is (a) Wednesday to next Tuesday ( b ) T u e s d a y t o n e x t We d n e s d a y (c) Mo nd a y t o ne xt Fr id a y (d) Wed nesda y t o ne xt Wed nesda y

Q . 1 2 M a r k e t a b i l it y r i s k o f b o n d i s (a) The ma rket r isk w h ic h a ffe ct s a ll t he bo nd s ( b ) V a ri a t i o n i n r e t u rn c a u s e d b y d i f f i c u l t y i n s e l l i n g b o n d s (c) The fa ilure t o pa y t he agr eed va lue o f t he bo nd by t he issuer (d) Both a & b

Q . 1 3 D e f a u lt r i s k i s lo w e r i n (a) Treasur y b ills ( b ) G o v e rn m e n t b o n d s (c) ICICI Bo nd s (d) IDBI bo nd s

Q.14 The va lu e o f bo nd dep e nd s o n (a) The co upo n rat e ( b ) Y e a r s t o ma t u r it y ( c ) E x p e c t e d y i e l d t o ma t u r it y (d) All the above

Q . 1 5 T h e b o n d y i e l d r e m a i n s c o n s t a n t o v e r it s l i f e a n d t h e d i s c o u n t o r pre miu m a mo u nt w ill de crea se ( a ) At a d e c r e a s i n g r a t e a s it s l i f e g e t s s h o r t e r ( b ) At a d e c r e a s i n g r a t e a s it s l i f e g e t s lo n g e r ( c ) A t a n i n c r e a s i n g ra t e a s i t s l i f e g e t s s h o rt e r ( d ) At a n i n c r e a s i n g r a t e a s it s l i f e g e t s lo n g e r

Q.16 Inve st me nt is t he ( a ) N e t a d d it io n s m a d e t o t h e n a t io n a l c a p it a l s t o c k s ( b ) P e r s o n ’ s c o m m it m e n t t o b u y a f l a t o r a h o u s e ( c ) E m p l o y m e n t o f f u n d s o n a s s e t s t o e a rn r e t u rn s ( d ) E mp l o y m e n t o f f u n d s o n g o o d s a n d s e r v i c e s t h a t a r e u s e d i n p r o d u c t io n p r o c e s s

Q.17 Spe cu lat o r is a p erso n ( a ) W h o e v a l u a t e s t h e p e r fo r m a n c e o f t h e c o mp a n y (b) Who use s his o w n fu nd s o nly ( c ) W h o i s w i l l i n g t o t a k e h i g h ri s k f o r h i g h r e t u rn ( d ) W h o c o n s i d e r s h e r e s a y s & m a r k e t b e h a v io u r s

Q . 1 8 T o fr a m e t h e i n v e s t m e n t p o l i c y t h e i n v e s t o r s h o u l d h a v e ( a ) K n o w l e d g e a b o u t t h e c o mp a n y a n d t h e b r o k e r s (b) Inve stib le fund s ( c ) K n o w l e d g e a b o u t i n v e s t m e n t a lt e r n a t i v e s ( d ) K n o w l e d g e a b o u t t h e m a r k e t w it h f u n d s

Q . 1 9 T h e m a i n o b j e c t i v e o f a r a t io n a l i n v e s t o r i s ( a ) M a x i m i s i n g r e t u rn s & m i n i m i z i n g ri s k (b) M in imis ing r et urn & ma x imiz ing r isk (c) sho rt t er m ga ins (d) sa fet y o f t he pr inc ip a l

Q . 2 0 C l e a r i n g & s e t t le m e n t o p e r a t io n s o f t h e N S E i s c a r r i e d o u t b y ( a ) N a t io n a l S e c u r it y D e p o s it o r y L t d ( b ) N a t i o n a l S e c u ri t y C l e a r i n g C o - o p e ra t i o n (c) St at e Bank o f I nd ia ( d ) B y t h e e x c h a n g e it s e l f

Q . 2 1 I n t h e s t o c k m a r k e t p s y c h o lo g y ( a ) I n v e s t o r s fo r g e t t h e p a s t ( b ) H i s t o r y r e p e a t s it s e l f ( c ) M o r e fa i t h i n f u t u r e p r e d i c t io n (d) Both a &b

Q . 2 2 G r o s s d o m e s t i c p r o d u c t i s a l o g ic a l f a c t o r t o a n a l y s e t h e e c o n o m y i n p i c k i n g u p a s t o c k b e c a u s e it i n d i c a t e s ( a ) I n f l a t io n o r d e f l a t io n (b) T he mar ket va lu e o f asset s (c) The st at us o f t he e co no my (d) The condition of the stock market

Q . 2 3 O n e o f t h e fo l l o w i n g f a c t o r s le a d s t h e a c t i v it y o f t h e s t o c k mar ket (a) Money supply ( b ) P e r c a p it a i n c o m e ( c ) U n e m p lo y m e n t r a t e ( d ) M a n u f a c t u ri n g & t ra d e

Q.24 T he fa ll in int ere st rat e is co nd uc ive t o t he st o ck market because ( a ) M o n e y m a y f lo w fr o m t h e b o n d m a r k e t t o s t o c k m a r k e t (b) Co rpo rat e ca n bo rro w at easy t er ms

( c ) B r o k e r s c a n d o b u s i n e s s a t b o r r o w e d fu n d s (d) Both b & c

Q.25 The gro wt h in bo o k va lu e per sha re sho ws t he (a) R ise in t he share pr ic e ( b ) I n c r e a s e i n t h e p h y s i c a l a s s e t s o f t h e fo r m (c) Increa se in t he net wo rt h ( d ) G ro w t h i n re s e r v e s

Q . 2 6 T h e p r i c e e a r n i n g s r a t io o f a s t o c k r e f l e c t s (a) The g rowth o f the co mpa ny ( b ) T h e m a r k e t mo o d fo r t h e c o mp a n y ’ s s t o c k (c) The ear ning s ret a ined a nd inve st ed in t he co mpa n y ( d ) T h e d i v i d e n d p a i d o u t fo r t h e c o mp a n y ’ s s t o c k Q.27 NB FC ’s o ffe rs hig her int ere st rate bec au se o f ( a ) t h e b e s t ma n a g e m e n t f u n d s ( b ) t h e c o mp e t it io n a mo n g s t N B F C s ( c ) t h e ri s k i n v o l v e d ( d ) t h e c r e d it r a t i n g

Q.28 Ope n e nd ed sc he me s are ( a ) o p e n fo r a p a r t ic u l a r p e r i o d ( b ) h a v e f i x e d p e r i o d o f m a t u r it y (c) list ed in t he st o ck exc ha nge s (d) open on a continuou s basis

Q.29 Int er va l fu nd is (a) Ind e x fu nd (b) o pe n fu nd ( c ) a c lo s e d e n d f u n d (d) a combin ation o f c lo se & open en d fund

Q.30 Inde x sc he me s (a) Ret ur ns e qua l t o inde x r et urns ( b ) re f l e c t t h e m a r k e t (c) are inco me sc he me s (d) are t ax sa ving sc he me s

Q.31 St o ck exc ha ng e ( a ) h e l p s i n t h e f i x a t io n o f s t o c k p r i c e s (b) e nsur e sa fe & fa ir de a ling ( c ) i n d u c e s g o o d p e r fo r m a n c e b y t h e c o m p a n y (d) All the above

Q.32 ______ ____ wa s t he gr a nd fat her o f t ec hn ic a l a na lys is. A)

H a r r y M a r k o w it z

B)

W illia m S harp e

C)

Charles Dow

D)

Be nja min Gr a ha m

E)

no ne o f t he a bo ve

Q.33 The go a l o f t he Do w t heo r y is t o A)

id e nt ify hea d a nd sho u lder p at t erns.

B)

id e nt ify br eak aw a y po int s.

C)

id e nt ify r esist a nc e le ve ls.

D)

i d e n t i f y s u p p o r t le v e l s .

E)

i d e n t i f y l o n g - t e r m t re n d s .

Q.34 Tec hn ic a l ind ic at o rs he lp ( a ) T o f i n d o u t t h e p r e s e n t s t a t e o f t h e s t o c k ma r k e t (b)To est imat e t he gro wt h o f st o ck market ( c ) T o i n d i c a t e t h e e c o n o m i c a c t i v it y

(d)To sho w the di rectio n of th e overa ll ma rket

Q.35 The mark et va lu e o f t he scr ip is det er mined b y (a) The d iv id e nd d ec lar ed by t he co mp a ny (b) T he pr ese nt st at us o f t he st o ck market ( c ) T h e n u m b e r o f f lo a t i n g s h a r e s (d) The inte raction o f d emand & sup ply

Q . 3 6 T h e n e g o t ia b l e f i n a n c i a l i n v e s t m e n t is d i f f e r e n t fr o m t h e n o n nego t ia ble fina nc ia l inve st me nt in t er ms o f ( a ) M a t u r it y p e r i o d (b) I nt ere st rat e (c) Transfer a bilit y (d) Fac e va lue

Q . 3 7 I n v e s t m e n t ma d e o n a h o u s e p r o p e r t y i s a ( a ) F i n a n c i a l i n v e s t me n t (b) Econo mi c invest ment (c) No n- ne go t ia ble fina nc ia l in ve st me nt (d) No n- fina nc ia l inve st me nt

Q . 3 8 W h i c h o n e o f t h e fo l lo w i n g i s n o t a mo n e y m a r k e t s e c u r it y ? (a) Treasur y b ills ( b ) N a t i o n a l s a v i n g s c e rt i f i c a t e

( c ) C e r t i f i c a t e o f d e p o s it (d) Co mmer c ia l p aper

Q.39Co mmerc ia l p aper s are ( a ) U n s e c u r e d p ro m i s s o r y n o t e s (b) sec ured pro misso r y no t es (c) So ld at a pre miu m ( d ) i s s u e d fo r a p e r io d o f 1 - 2 y e a r s

Q . 4 0 T h i s p a r t ic u l a r s c h e m e h e l p s i n d e f e r r i n g t h e t a x p a y m e n t (a) Pu blic pro vide nt fu nd (b) National savings scheme ( c ) N a t io n a l s a v i n g s c e r t i f i c a t e (d) Life insura nc e sc he me