1

Question Paper
Security Analysis (MB331F) : April 2008
Section A : Basic Concepts (30 Marks)
This section consists oI questions with serial number 1 - 30.
Answer all questions.
Each question carries one mark.
Maximum time Ior answering Section A is 30 Minutes.

1. Which oI the Iollowing is a non-security Iorm oI investment media?
(a) National Savings Scheme
(b) Equity shares
(c) PreIerence shares
(d) Debentures
(e) Gilts.
<ArsWer>
2. In which oI the Iollowing stages oI an industry liIe cycle, the product penetrates the market place and becomes
more commonly used?
(a) Pioneering stage
(b) Expansion stage
(c) Stabilization stage
(d) Declining stage
(e) Maturity stage.
<ArsWer>
3. The Iunction(s) oI secondary market is/are
I. Maintenance oI competitive prices oI securities.
II. Providing liquidity to investors.
III. To bring the savers and users oI Iunds together.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (II) and (III) above.
<ArsWer>
4. Closing prices oI the stock oI First Global Ltd., are given below:
Day Closing Price (Rs.)
1 230.50
2 235.50
3 222.10
4 225.10
5 230.10
The relative strength oI the stock is
(a) 0.9952
(b) 1.0366
(c) 1.0925
(d) 1.1125
(e) 1.1175.
<ArsWer>
5. H-Model is suitable Ior the Iirms which have a
(a) High growth rate in the beginning
(b) Modest growth rate in the beginning
(c) Stable growth rate
(d) Low growth rate in the beginning
(e) Sudden change in the growth rate.
<ArsWer>
. A Iully redeemable non-convertible debenture secured by speciIic movable and immovable assets oI the
company is reIerred as
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2
company is reIerred as
(a) Triple Option Debenture
(b) Auction Rated Debenture
(c) Secured Premium Notes
(d) Floating Rate Bonds
(e) Zero Interest Debentures.
7. As per Strong Form oI EIIicient Market Hypothesis
(a) Stock prices reIlect private inIormation only
(b) Stock prices reIlect public inIormation only
(c) Stock prices reIlect both public and private inIormation
(d) Prices reIlect to inIormation that is available to everybody
(e) In super strong version oI strong Iorm, conIidential inIormation available is highly signiIicant.
<ArsWer>
8. Dow theory
(a) Describes direction oI the market trends
(b) Attempts to Iorecast Iuture movements
(c) Estimates duration oI market trends
(d) Estimates size oI market trends
(e) Uses behavior oI stock market as the basis oI Iorecasting stock prices.
<ArsWer>
9. In which oI the Iollowing contracts, the buyer limits the down risk to the extent oI premium paid?
(a) Futures
(b) Options
(c) Forwards
(d) Swaps
(e) Badla.
<ArsWer>
10. Warrants that are attached to host debentures and can be exercised only iI the host debenture is surrendered are
reIerred to as
(a) Detachable warrants
(b) Puttable warrants
(c) Wedding warrants
(d) Naked warrants
(e) Callable warrants.
<ArsWer>
11. Which oI the Iollowing is/are not a clear bearish signal?
I. Head & Shoulders.
II. Double bottom.
III. Triangle.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (II) and (III) above.
<ArsWer>
12. Mutual Iunds that are engaged in speculative and risky investments like short sales to take advantage oI declining
market are known as
(a) PerIormance Funds
(b) Exchange Rated Funds
(c) Specialized Funds
(d) Growth Funds
(e) Leveraged Funds.
<ArsWer>
13. Which oI the Iollowing is/are diversiIiable risk(s) Ior an investor?
I. Sector risk.
II. Technological risk.
III. Market risk.
IV. Management risk.
(a) Only (II) above
(b) Only (III) above
(c) Both (I) and (II) above
<ArsWer>


3
(c) Both (I) and (II) above
(d) Both (I) and (IV) above
(e) (I), (II) and (IV) above.
14. A bond`s duration equals its maturity under which oI the Iollowing condition(s)?
I. The bond`s coupon rate equals the market interest rate.
II. The bond pays no coupon.
III. The bond is a deep discount bond.
IV. The bond pays a single period cash Ilow.
(a) Only (II) above
(b) Both (II) and (III) above
(c) Both (II) and (IV) above
(d) (I), (II) and (III) above
(e) (II), (III) and (IV) above.
<ArsWer>
15. The standard deviation oI Satyam stock is 25 and its correlation coeIIicient with the market portIolio is 0.6.
The expected return on market is 15 with standard deviation oI 22. II the risk Iree rate is 5, the required
rate oI return on this stock is
(a) 9
(b) 10
(c) 11
(d) 12
(e) 13.
<ArsWer>
1. II a vertical rally or a decline is interrupted by a consolidation pattern similar to a rectangle, such a Iormation is
called
(a) Pennant
(b) Saucer
(c) Flag
(d) Rounding top
(e) Envelopes.
<ArsWer>
17. Superconductors Ltd., is a Iirm that manuIactures electronic equipments, has strong equity base oI Rs.10,000
crore. The debt equity ratio oI the Iirm has been Iound to be 0.15. The total debt oI the Iirm is
(a) Rs. 500 crore
(b) Rs. 600 crore
(c) Rs.1,200 crore
(d) Rs.1,500 crore
(e) Rs.2,000 crore.
<ArsWer>
18. The beta oI stock A is 2.0 and is currently in equilibrium. The required return on the stock is 15 and the
expected return on the market is 10. Suddenly due to economic conditions, the expected return on the market
increases to 15. Other things remaining the same, what would be the new required return on the stock?
(a) 17.5
(b) 20.0
(c) 22.5
(d) 25.0
(e) 30.0.
<ArsWer>
19. Which oI the Iollowing is not a leading economic indicator?
(a) Utilization oI manuIacturing capacity
(b) Residential construction
(c) Corporate proIits
(d) Level oI stock prices
(e) Unemployment.
<ArsWer>
20. A convertible bond with a Iace value oI Rs.1,000 has been issued at Rs.1,350 with a coupon rate oI 12. The
conversion rate is 25 shares per bond. The current market price oI the bond is Rs.1,500 and that oI the stock is
Rs.45. The premium over the conversion value is
(a) 11.11
(b) 22.22
(c) 33.33
(d) 35.35
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1
(d) 35.35
(e) 43.33.
21. II a stock is purchased at Rs.50 and a Rs.55 call is written Ior a premium oI Rs.2, the maximum possible gain per
share is
(a) Rs. 2
(b) Rs. 5
(c) Rs. 7
(d) Rs. 8
(e) Rs.10.
<ArsWer>
22. The Iollowing inIormation pertains to Sonix Ltd.:
ROA 15
Book value Rs.20
Total assets/Net worth 2.00
The EPS oI Sonix Ltd., is
(a) Rs. 6
(b) Rs.10
(c) Rs. 3
(d) Rs.40
(e) Rs. 9.
<ArsWer>
23. Which oI the Iollowing statements is/are false about Iorward contract?
I. It is an over-the-counter product.
II. Unlike Iutures, Iorward contract is standardized in terms oI quality, quantity and terms oI delivery.
III. Unlike Iutures, Iorward contracts are traded in an organized exchange.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (II) and (III) above.
<ArsWer>
24. Which oI the Iollowing statements is/are true regarding the characteristic line?
I. It signiIies the average or normal trade oII between risk and return Ior a group oI securities.
II. The slope oI the characteristic line is the beta oI the stock.
III. The intercept alpha represents the diIIerence between the actual return and the normal return Ior their risk.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) All (I), (II) and (III) above.
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25. Which oI the Iollowing technique is used to identiIy the trend reversal beIore it takes place?
(a) Volume oI the market
(b) Momentum
(c) Simple moving average
(d) Breadth oI the market
(e) Weighted moving average.
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2. Which oI the Iollowing Iactor(s) determine(s) the price oI a callable convertible bond?
I. Call premium on the call issuer`s stock.
II. Call premium on an equivalent nonconvertible bond.
III. Price oI equivalent nonconvertible bond.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
<ArsWer>
27. The stock oI Firodia Chemicals has the Iollowing parameters:
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5
Beta 1.21
Expected return 15
The risk Iree rate oI return is 8 and the market return is 16. The ex-ante alpha () oI Firodia Chemicals is
(a) 4.89
(b) 2.68
(c) 2.68
(d) 4.89
(e) 3.87.
28. Market breadth cannot be analyzed using
(a) Advance-Decline lines
(b) DiIIusion index
(c) Stocks in positive trend
(d) High-low statistics
(e) Rate oI change.
<ArsWer>
29. Which oI the Iollowing statements is/are true?
I. Firms with low proIit margins and high P/S ratio are overvalued.
II. Firms with high proIit margins and low P/S ratio are undervalued.
III. Firms with low proIit margins and low P/S ratio are correctly valued.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (III) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
<ArsWer>
30. Which oI the Iollowing theories states that the shape oI the yield curve is dependent on the supply and demand oI
securities available within each maturity sector?
(a) PreIerred habitat theory
(b) Liquidity premium theory
(c) Pure expectations theory
(d) Relative strength theory
(e) Segmentation market theory.
<ArsWer>

END OF SECTION A



Section B : Problems/Caselet (50 Marks)
This section consists oI questions with serial number 1 5.
Answer all questions.
Marks are indicated against each question.
Detailed workings/explanations should Iorm part oI your answer.
Do not spend more than 110 - 120 minutes on Section B.

1. Given below is the distribution oI conditional returns and explicit probability
distribution oI stocks oI Excel Ltd., and Delux Ltd.:
Conditional Returns
Probability
Excel Ltd. Delux Ltd.
10 60 5
20 50 15
40 40 25
20 30 35
10 20 50
You are required to:
a. Calculate the expected returns, standard deviations oI returns Ior both the
stocks and correlation co-eIIicient between the stocks.
(
6 marks)
<ArsWer>
b. Determine the expected rate oI return oI a zero-risk portIolio consisting oI
the above stocks.
(
5 marks)

the above stocks.

2. Rajesh wants to invest in a bond that matures aIter six years Irom now. The Iace
value oI the bond is Rs.1,000 and it carries a coupon rate oI 10.75. The bond is
currently trading at Rs.950.
You are required to calculate:
a. The duration oI the bond.
(
7 marks)
<ArsWer>

b. The price oI the bond iI interest rate increases by 0.50.
(
2 marks)

3. The data given below relates to stock prices oI Satyam Computers Ltd., Ior the Iirst
thirteen trading sessions in the month oI February, 2007 and February, 2008 respectively:
Days Closing price (2007) Closing price (2008)
1 372.45 612.55
2 373.90 630.30
3 390.65 636.40
4 387.65 642.45
5 393.10 636.25
6 391.65 630.55
7 399.80 651.10
8 405.15 648.55
9 403.20 652.05
10 404.30 654.15
11 412.35 646.25
12 411.35 630.15
13 430.75 625.75
You are required to check whether these stock prices are independent or not using
auto-correlation test. (
12 marks)
<ArsWer>

Caselet
Read the caselet carefully and answer the following questions:


4. Real estate sector is booming and it is a Iact that the securities market along with
Sebi and Government oI India has decided to tap its latent potential. Discuss the
major drivers oI real estate boom in India.
(
9 marks)
<ArsWer>
5. The beginning oI REMFs will not only lead to enhancement oI investment options,
but will also boost the starving housing sector. Discuss how REMFs can be
beneIicial to the capital market.
(
9 marks)
<ArsWer>

Real estate can be deIined as land including the air above it, the ground below it
and any building or structure made on it. It includes residential houses, commercial
oIIices, and trading spaces like shopping malls, hotels, etc. It involves purchase,
sale and development oI land, buildings and structures. The players in this market
are landlords, developers, builders, tenants, and buyers to mention a Iew. At
present, India is one oI the Iastest growing economies. The major Iactor behind this
is the boom in the real estate sector caused by IT and related businesses and also
the signiIicant changes related to real estate businesses. This sector is now
considered as the next economic growth engine. According to the tenth Five-Year
Plan, by 2007 there would be a shortage oI housing units running to the extent oI
22.7 million, which would Iorce the government to increase spending in this sector.
Also, liberalizing the Foreign Direct Investment (FDI) is expected to increase the
inIlow oI money into this sector. In the year 2005, the real estate segment was on a
turnaround. A number oI changes like urban land ceiling law reIorms, stamp duty
cuts and access to Iinance pushed real estate market to a record high level. This had
improved the scale oI investment in real estate segment. As per the report oI The
Federation oI Indian Chambers oI Commerce and Industry (FICCI), this is the
second largest employer segment in India aIter the agriculture sector.
Real Estate Mutual Funds (REMFs) are all ready to roll into the Indian capital
market. As the name itselI is quite selI-explanatory, REMFs are mutual Iunds that
invest investors` money in the real estate. Market regulator Sebi has deIined REMF
as a scheme oI mutual Iunds, which has investment objective to invest directly or
indirectly in the real estate property.




Z
The REMFs can invest in real estate properties within India, mortgage backed by
securities, equity shares/bonds/debentures oI listed/unlisted companies, which deal
in real estate and also undertake property development in other securities. As per
Sebi, the REMFs should invest at least 35 oI it in property and 40 oI it can be
invested in shares and securities oI realty companies. These Iunds own properties,
commercial spaces and earn income in the way oI rent and also in the Iorm oI
capital appreciation. They acquire, develop and sell the property, and the beneIits
are shared with the investors, just like in any other mutual Iund scheme. Real estate
sector is booming and it is a Iact that the securities market along with Sebi and
Government oI India has decided to tap its latent potential. There is also a huge
demand witnessed on the residential side especially Irom the high end and middle
class segments. The residential market in major cities continues to witness strong
demand Irom investors and end users especially in the southern part oI the nation.
Mumbai alone would need anywhere between 180,000 and 200,000 additional
residential units in the next ten years. India is expected to see an annual shortIall oI
20 million housing units till 2011. Lower interest rates, easy availability oI housing
Iinance, escalating salaries and job prospects have been lending buoyancy to the
residential sector. With more malls coming up in India, plenty oI home Iinancing
options and the changing proIile oI home buyers have made the real estate as a
good option Ior investment.
The beginning oI REMFs will not only lead to enhancement oI investment options,
but will also boost the starving housing sector. There are a number oI mutual Iund
schemes that oIIer a chance to invest in a particular sector, but the emergence oI
REMFs will give the small investors a chance to invest in real estate and earn the
potential returns Irom the real estate market. The setting up oI REMFs can also
provide some support to the cash-starved housing sector.
However, analysts caution about the risks in the investment. They warn that real
estate markets may not be as transparent; and that Indian real estate capital market
is not as mature and sophisticated when compared to global markets like the US.
Tax policy is one oI the concerns Ior the investors in Indian real estate markets.
The stamp duty varies Irom State to State and also the registration charges are
subjected to changes in government policies. However, considering the viable
opportunities, real estate is an opportunity Ior an investment. Though the real estate
Iunds are now catering to high net worth investors, the retail investors can go Ior
the Iund options as and when the opportunity arises.
END OF
CASELET


END OF SECTION B

8

Section C : Applied Theory (20 Marks)

This section consists oI questions with serial number 6 - 7.
Answer all questions.
Marks are indicated against each question.
Do not spend more than 25 - 30 minutes on Section C.


6. Technical analysts always conIirm whether the A-D lines have made the Iinal
advance by waiting Ior a downside trendline penetration or a moving average
crossover. Breadth oI the market is popularly studied using A-D lines. Other
techniques are also used along with the A-D lines to measure breadth oI the
market. Describe brieIly the popular methods oI measuring the breadth oI the
market. ( 10 marks)
<ArsWer>
7. Many industry analysts believe that industries evolve through Iour stages oI
complete liIe cycle. InIact, the concept oI an industry liIe cycle can be applied
to industries or product line within industries. Describe brieIly the Iour stages
oI industry liIe cycle. ( 10 marks)
<ArsWer>

END OF SECTION C

END OF QUESTION PAPER


9
Suggested Answers
Security Analysis (MB331F) : April 2008
Section A : Basic Concepts
Answer Reason

1. A Non security Iorms oI Iinancial investment media are broadly classiIied into:
1. National savings schemes.
2. Post oIIice savings schemes.
3. Deposits with commercial banks.
4. Corporate Iixed deposits.
5. Unit Schemes oI UTI
TOP
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2. B During the expansion or consolidation stage, the industry will grow Iaster then the rest
oI the economy as the products penetrate and are used more Irequently. Hence, (b) is
the answer.
TOP
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3. D The Iunction oI the primary market is to bring savers and users together resulting in
the transIer oI Iunds Irom one to another.
The Iunctions oI the secondary markets are :
That the investor should be able to dispose his stock at most competitive
price. The most competitive price in case oI selling is highest price, while
buying it is lowest price;
They should provide liquidity to investors without any loss. That is, an
investor should be able to convert stock into cash at a short notice;
That resulting transaction costs are minimum Ior the investor.
TOP
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4. B
Relative strength oI the stock
Average oI upclosing prices
Average oI downclosing prices


235.50 225.10 230.10
3
222.10
+ +


230.23
222.10
1.0366
TOP
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5. A H-Model is best suited to those Iirms which have a high growth rate in the beginning
and gradual decline in growth rate over a time period.
TOP
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6. B A Iully redeemable non-convertible debenture secured by speciIic movable and
immovable assets oI the company is known as auction rated debenture.
TOP
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7. C According to strong Iorm , prices oI securities Iully reIlect all available inIormation
both public and private. That iI this Iorm is true, prices reIlect the inIormation that is
available to only selected groups-like management, Iinanciers and stock exchange
oIIicials. The super strong Iorm is more extreme and states that conIidential
inIormation available only to selected groups oI people mentioned is also oI no use in
obtaining abnormal returns.
TOP
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8. A Dow theory only describes the direction oI market trends and does not attempt to
Iorecast Iuture movements or estimate either the duration or the size oI such market
trends. The theory uses the behaviour oI the stock market as barometer oI business
conditions, rather than as the basis Ior Iorecasting stock prices themselves.
TOP
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9. B
In options, the buyer limits the down risk to the extent oI premium paid
TOP
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10. C Warrants that are attached to host debentures and can be exercised only iI the host
debenture is surrendered are reIereed to as wedding warrants.
TOP
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11. E Head and Shoulders and Double Top are technical indicators which indicates bearish
market. Hence (I) is not correct. Double bottom indicates a bull market and triangles
TOP
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10
market. Hence (I) is not correct. Double bottom indicates a bull market and triangles
are commonly used to identiIy reversals and consolidation but are not very reliable
Iormation. ThereIore, (II) and (III) are not clear bearish signal and (e) is the answer.
~
12. E Mutual Iunds that are engaged in speculative and risky investments like short sales to
take advantage oI declining market are known as Leveraged Funds.
TOP
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13. E Sector risk, the risk oI a sector not doing well, can be diversiIied by investing in
diIIerent sectors. The changes in technology may aIIect the perIormance oI an
industry. However, the eIIects oI technological changes diIIer Irom industry to industry
and hence the technological risk can be diversiIied by investing in diIIerent industries
which are aIIected diIIerently by technological changes. Management risk, the risk oI
management being poor, can be diversiIied by investing in diIIerent securities, because
the poor management oI one company in a portIolio can be oIIset with the good
management oI another company in the portIolio. Hence, I, II and IV are considered as
diversiIiable risks.
Certain Iactors aIIect the entire market in a certain direction and such risk cannot be
diversiIied completely. The risk that cannot be diversiIied or reduced is reIerred to as
market risk. Hence, III is not diversiIiable.
TOP
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14. E Deep discount bond, zero coupon bond and a bond which pays a single cash Ilow will
have duration equal to its maturity. This is because only one payment is made at the
time oI maturity and no cash Ilow will be available in intermediate periods.
TOP
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15. D
2
2
( )
var iance
var iance ( )
0.6 0.25
0.68 0.7
0.22 ( )
( )
0.05 0.7 0.1 0.05 0.07 0.12 12
= +
=
=
=

= = = =
= +
= + = + = =

R R R R
CovR R
R
CovR R
R
R R R R
orR

TOP
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16. C
II a verical rally or a decline is interrupted by a consolidation pattern similar to a
rectangle, such a Iormation is called a Ilag.
Hence, option (c) is the correct answer.
TOP
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17. D
Debt
0.15
Equity
0.15 10000 .1500
=
= = Debt Rs Crore

TOP
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18. D 15 R
I
2 (10 R
I
)
i.e., R
I
20 15 5
Revised R 5 2 (15 5) 25
TOP
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19. E The lead indicator approach is an important Iorecasting method to Iorecast the general
economic conditions by identiIying economic indicators that turn ahead oI the change
in general level oI economic activity. Some oI the leading economic indicators are the
utilization oI manuIacturing capacity, residential construction, corporate proIits, and
the general level oI stock prices.
All the Iirst Iour alternatives are the leading economic indicators, while the last
alternative is a lagging economic indicator.
ThereIore answer is (e).
TOP
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20. C
Premium over conversion value
Bond price - Conversion value
Conversion value

Conversion value Current market price oI the stock x Conversion rate
45 x 25
TOP
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11
Rs.1,125
Premium over conversion value
1,500 - 1,125
0.3333
1,125
=
33.33
Hence (c) is the answer.
21. C The maximum possible gain per share when spot price exceeds strike price oI Rs.55 is
(55502) Rs.7.
TOP
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22. A EPS ROE Book value
Where ROE ROA Asset to equity ratio
EPS 0.15 2 20 Rs.6
Hence option (a) is the answer.
TOP
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23.
E Forwards are over-the-counter products i.e; they are not traded in organised location
called as exchange. Futures are standardized contracts in terms oI quality, quantity and
terms oI delivery. Forward contracts are not standardized and terms are structured to
meet the needs oI both the contracting parties. A separate clearinghouse clears Iutures
contracts whereas in Iorward contracts such Iacility is not available.
TOP
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24.
B Characteristic Line is the line oI best Iit between the actual observation oI security
returns and market returns whereas security market line represents the average oI
normal trade oII between risk and return group oI securities. Hence, statement I is not
true. A characteristic line is represented by the equation r
it
a
i

i
r
mt
, where r
it
is the
return on the security, r
mt
is the return oI the market index,
i
is the slope oI the
characteristic line. Hence, statement II is true. In the above equation, a
i
is the intercept
term which represents the average return on the security when the market index return
is zero. Hence, statement III is not true. Hence the answer is (b).
TOP
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25.
B
Momentum is used to identiIy the trend reversal beIore it takes place.
ThereIore, Option (b) is the correct answer.
TOP
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26. E Call premium on the call issuer`s stock ,call premium on an equivalent nonconvertible
bond and price oI equivalent nonconvertible bond all combinedly determine the value
oI a callable convertible bond.
TOP
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27. B Using CAPM,
R (R)
i
R
I

i
(R
m
R
I
)
R (R
i
) 8 1.21 (16 8) 17.68
E(R
i
) R(R
i
) 15 17.68 2.68
TOP
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28. E Apart Irom Advance-Decline lines, breadth oI the market can be analyzed using:
i. Stocks in positive trend
ii. DiIIusion index
iii. High-low statistics
iv. Percentage oI stocks over a moving average.
Hence (e) is the answer.
TOP
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29. E
Firms with low porIit amrgins and high P/S ratios are overvalued and those with high
porIit margin and low P/S ratio are undervalued. Fims with low proIit amrgin and low
P/S ratio are correctly priced. Hence, all the statements mentioned above are true.
Hence, option (e) is the correct answer.
TOP
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30. E The segmentation market theory states that the shape oI the yield curve is dependent
on the supply and demand oI the securities available within each segment.
TOP
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12

Section B : Problems/Caselet
1. a. Exce| Ltd.
R
(S)
P
i
R
S
P
i
(R
S
E
(S)
) Pi|(R
S
E(E
S
)|
2

60 0.10 6 20 40
50 0.20 10 10 20
40 0.40 16 0 0
30 0.20 6 10 20
20 0.10 2 20 40
P|R3 = 10
P|[(R3 - E(E3)|
2
= 120
E(3) = 10
3 =
120
= 10.95.
0e|ux Ltd.
R
(DE)
P
i
R
(DE)
P
i
(R
DE
E
(DE)
) P
i
(R
DE
E
DE
)
2

5 0.10 0.50 20.5 42.025
15 0.20 3.0 10.5 22.050
25 0.40 10.0 0.50 0.100
35 0.20 7.0 9.5 18.05
50 0.10 5.0 24.5 60.025
P| R(0E) = 25.5
P| (R0E - E0E)
2
=112.25
E(0e) = 2.5
0E =
142.25

= 11.93
Covariance between two stocks
P
i
(R
S
E
S
) (R
DE
E
DE
)
Pi (R
S
E
S
) x (R
DE

E
DE
)
0.10 20 20.5 41
0.20 10 10.5 21
0.40 0 0.50 0
0.20 10 9.5 19.0
0.10 20 24.5 49
P| (R3 - E3) x (R0E - E0E)
C0v(3 &0E) = - 130
Corre|al|or coell|c|erl =
COV
SDE
DE S


=
130
10.95 11.93

= - 1
3|rce lre corre|al|or oelWeer lWo sloc|s |s -1. A zero r|s| porllo||o car oe corslrucled us|rg lrese
sloc|s.
ll w1 ard w2 |s proporl|or ol |rveslrerl |r Exce| ard 0e|ux sloc|s. Tre porllo||o r|s| W||| oe
o.
2
p

=
2 1 2 1 12
2
2
2
2
2
1
2
1
W W 2 W W + +

2
p

=
2 1 2 1
2
2
2
2
2
1
2
1
W W ) 1 ( 2 W W + +

p

= (w1 1 - w2 2)
2

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p

= w1 1 - w2 2
0 = w1 1 - w2 2
w1 1 = w2 2 (|)
Aga|r w1 w2 = 1
or w2 = 1 - w1 (||)
Pull|rg lre va|ue ol w2 |r equal|or (|)
w1 1 = (1 - w1)2
w13 = (1 - w1)0E
10.95 w1 = (1 - w1) 11.93
(10.95 11.93) w1 = 11.93
w1 =
11.93
(10.95 11.93) +
= 52.11
w2 = 1 - 0.5211= 0.1Z8 = 1Z.8
Expecled relurr ol r|s| lree porllo||o
= 0.5211 10 0.1Z8 25.5
= 33.0.
2. a. YTM oI the bond
950 107.5 PVIFA
(k, 6)
1000 PVIF
(k, 6)

at k 12
R.H.S. 948.6
at k 10.75
R.H.S. 1,000
YTM 10.75 12.5
1000 950
1000 948.6

11.97
Current yield
107.5
950
11.32
Duration
c
d
r
r
(PVIFA
(k, n)
) (1 k)
c
d
r
1 n
r

(11.97, 6)
0.1132 0.1132
PVIFA (1.1197) 1 6
0.1197 0.1197

+



0.9457 4.115 1.1197 0.3258
4.683 years.
b. change in price MD y

4.683
0.50
1.1197

2.091
New price 950 (1 0.02091)
Rs.930.14.
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3.
Days Price changes
X Y X
2
Y
2
XY
1 1.4500 17.7500 2.1025 315.0625 25.7375
2 16.7500 6.1000 280.5625 37.2100 102.1750
3 -3.0000 6.0500 9.0000 36.6025 -18.1500
4 5.4500 -6.2000 29.7025 38.4400 -33.7900
5 -1.4500 -5.7000 2.1025 32.4900 8.2650
6 8.1500 20.5500 66.4225 422.3025 167.4825
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6 8.1500 20.5500 66.4225 422.3025 167.4825
7 5.3500 -2.5500 28.6225 6.5025 -13.6425
8 -1.9500 3.5000 3.8025 12.2500 -6.8250
9 1.1000 2.1000 1.2100 4.4100 2.3100

Days Price changes
X Y X
2
Y
2
XY
10 8.0500 -7.9000 64.8025 62.4100 -63.5950
11 -1.0000 -16.1000 1.0000 259.2100 16.1000
12 19.4000 -4.4000 376.3600 19.3600 -85.3600
Total 58.3000 13.2000 865.6900 1246.2500 100.7075
Mean 4.8583 1.1000

= 4.8583 Y = 1.1

2
X 865.6900 X 58.3000 = =


2
Y 1246.2500 Y 13.2000 = =

XY 100.7075
r
2

2
2 2
a Y b XY n (Y)
Y n(Y)
a Y bX
+

=

b
2 2
XY n XY
X n(X)




2
100.7075 12(4.8583) (1.1)
865.69 12(4.8583)

0.0628
a 1.1 (0.0628) (4.8583) 0.7945
r
2

2
2
0.7945 13.2 (0.0628) (100.7075) 12 (1.1)
1246.25 12 (1.1)
+



2.29
1231.73

0.0019
Hence, there is a small degree oI correlation between the returns oI two periods and thereIore we
can conclude that index moved in a random manner.
4. The major drivers oI real estate boom in India may be attributed to a number oI Iactors like:
Strong economic growth backed by IT, IT-enabled services and Knowledge Process
Outsourcing (KPO), creating increased demand Ior more space.
Shortage oI quality real estate.
Expansion oI retail sector due to consumerism, changing liIestyles, and better income level.
High rate oI return in real estate.
With increase in IT and IT-enabled services and low operating cost being the driver, they
are moving towards Tier-II and Tier-III cities as the space is available at cheaper rates as
compared to Tier-I cities and also the growth in Tier-I cities has already reached a
saturation point.
Good amount oI disposable income with the investors.
Favorable government policy as Iar as real estate sector is concerned like liberalizing the
FDI norms in this sector.
Gradual improvement in inIrastructure.
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5. The REMFs are introduced Ioreseeing the number oI advantages such as, the REMF would
result in an increased Ilow oI Iunds towards housing sector and provide more liquidity in the
mutual Iunds industry. They would bring proIessionalism in the mutual Iund industry thereby
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hiring legal proIessionals who will evaluate and give judgments on legal matters pertaining to
property, thereby reducing risk chances as Iar as deIective titles are concerned. Facilities
management will come into picture as proIessionals are employed to provide services to keep the
property in good shape. Added to this, the retail investors will be beneIited in the terms that they
can invest small amount in real estate, which is not possible otherwise. Further, REMF would
preserve the value oI portIolio Irom the eIIects oI inIlation, and Iinally, these Iunds would
generate competitive rate oI returns as compared to investment in other securities and stability to
some extent as compared to investment in other securities.

Section C: Applied Theory
6. Breadth oI the market is popularly studied using A-D lines. Other techniques are also used
along with the A-D lines by technical analysts. The Iour popular methods are
i. Stocks in positive trends
ii. Percentage oI stocks over a moving average
iii. DiIIusion indexes
iv. High-Low statistics
i. Stocks in Positive Trends
A stock which rallies aIter a decline to reach a new high is said to be in an uptrend; a
stock that reacts to reach a new low is said to be in a downtrend. The percentage oI
stock in an uptrend to the total stock traded is computed and plotted on a graph. A
rising market is expected to have an increasing percentage oI uptrend stock.
Reversal is signaled when stock in positive trend begin to diminish.
ii. Percentage of Stock Over a Moving Average
A speciIic moving average Ior a number oI stocks is Iirst computed, and the
percentage oI the number that is above the average is ascertained. The percentage oI
stocks over a moving average increases in a bull market, and generally moves along
with the positive trend index computed in (i) above. When the percentage oI stocks
over a moving average reaches an extreme oI 90-100 percent or 10-15 percent, it
indicates that a substantial proportion oI the prevailing move has taken place and
that reversal is imminent. When the percentage index reverses direction, the reversal
in market trend is almost immediate.
iii. Diffusion Index
A diIIusion index momentum index is computed by calculating the rate at which a
certain group oI stocks change price over a given period oI time. It is generally
calculated on either a wide number oI stocks, or a number oI industry indexes. Also
called the momemtum index, a rise in the index signals the onset oI a bull market
and vice versa.
iv. High-Low Statistics
Technical analysts also study the high-low statistics to conIirm market trends. A
rising market should be accompanied by a healthy number oI net new highs. A graph
oI a net new highs can be plotted to be read along with a market index. II net new
highs trace a series oI declining peaks while the index continues to rise, a reversal is
imminent. Similarly, a graph oI net new lows can be expected to signal the end oI a
bear market, when it does not conIirm the new trough reached by the market index.
This is because, a declining number oI stocks reaching new lows implies that larger
number oI stocks are resisting the downtrend in the market index, and thus signiIies
the end oI a bear market.
Breadth oI the market, thus, is an important indicator oI the depth oI the prevailing
trend, and is oI immense utility to the analyst in identiIying trend reversals.
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7.
Many observers believe that industries evolve through Iour stages the pioneering stage, the
expansion stage, the stabilization stage and the declining stage. There is an obvious parallel in
this idea to human development. The concept oI an industry liIe cycle could apply to industries
or product lines within industries. The industry liIe cycle concept is depicted in Iigure 6.2 and
each stage is discussed in the Iollowing section.
Pioneering Stage
In this stage, rapid growth in demand occurs. Although a number oI companies within a
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growing industry will Iail at this stage because they will not survive the competitive pressures,
most experience rapid growth in sales and earnings, possibly at an increasing rate. The
opportunities available may attract a number oI companies, as well as venture capital.
Considerable jockeying Ior position occurs as the companies battle each other Ior survival,
with the weaker Iirms Iailing and dropping out. Investor risk in an unproven company is high,
but so are expected returns iI the company succeeds. At the pioneering stage oI an industry it
can be diIIicult Ior security analysts to identiIy the likely survivors, just when the ability to
identiIy the Iuture strong perIormers is most valuable. By the time it becomes apparent who the
real winners are, their prices may have been bid up considerably beyond what they were in the
earlier stages oI development.
Expansion Stage
In this second stage oI an industry`s liIe cycle the survivors Irom the pioneering stage are
identiIiable. They continue to grow and prosper, but the rate oI growth is more moderate than
beIore. At the expansion stage oI the cycle, industries are improving their product and perhaps
lowering their prices. They are more stable and solid, and at this stage they oIten attract
considerable investment Iunds. Investors are more willing to invest in these industries now that
their potential has been demonstrated and the risk oI Iailure has decreased.
'Financial policies become Iirmly established at this stage. The capital base is widened and
strengthened dividends oIten become payable, Iurther enhancing the attractiveness oI these
companies to a number oI investors.
Stabilization Stage
Finally, industries evolve into the stabilization stage (sometimes reIerred to as the maturity
stage), at which the growth begins to moderate. Sales may still be increasing, but at a much
slower rate than beIore. Products become more standardized and less innovative, the market
place is Iull oI competitors, and costs are stable rather than decreasing through eIIiciency
moves and so on. Industries at this stage continue to move along, but without signiIicant
growth.
Stagnation may occur Ior considerable periods oI time, or intermittently.
This three-part classiIication oI industry evolvement is helpIul to investors in assessing the
growth potential oI diIIerent companies in an industry. Based on the stage oI the industry, they
can better assess the potential oI companies within that industry. However, there are limitations
to this type oI analysis. First, it is only a generalization, and investors must be careIul not to
attempt to categorize every industry, or all companies within a particular industry, into neat
categories that may not apply. Second, even the general Iramework may not apply to some
industries that are not categorized by many small companies struggling Ior survival. Finally,
the bottom line in security analysis is stock prices, a Iunction oI the expected stream oI the
beneIits and risk involved. The industrial liIe cycle tends to Iocus on sales and share oI the
market and investment in the industry. Although all oI these Iactors are important to investor,
they are not the Iinal items oI interest. Given these qualiIications to industry liIe cycle analysis,
what are the implications to investors?
The pioneering stage may oIIer the highest potential returns, but also oIIers the greatest risk.
Several companies in a particular industry will Iail, or do poorly. Such risk may be appropriate
Ior some investors, but many will wish to avoid the risk inherent in this stage.
The maturity stage is to be avoided by investors interested primarily in capital gains.
Companies at this stage may have relatively high dividend pay-outs because their growth
prospects are Iewer. These companies oIten oIIer stability in earnings and dividend growth.
Declining Stage
In this stage oI the industrial liIe cycle decline is indicated on either a relative or absolute
basis. Clearly, investors should seek to spot industries in this stage and avoid them.
It is the second stage i.e. expansion, that is probably oI most interest to investors. Industries
that have survived the pioneering stage oIten oIIer good opportunities as the demand Ior their
products and services is growing more rapidly than the economy as a whole. Growth is rapid,
but orderly, an appealing characteristic to investors
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