PROGRAM - MBA

SUBJECT CODE & NAME - MF0010 & SECURITY

ANALYSIS AND PORTFOLIO MANAGEMENT
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.
A. Money market- features and composition
The money market facilitates interaction between supply and demand of
short-term funds, with maturity of a year or less. Most money market
transactions are made in marketable securities which are short-term debt
instruments such as T-bills and commercial paper.
Money (currency) is not actually traded in the money markets. The securities
traded in the money market are short-term with high liquidity and low-risk. They are
called money equivalents.
Money market provides investors a place for parking surplus funds for short periods
of time. It also

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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
Probabili
ty

-15
0.05

-10
0.10

5
0.15

10
0.25

15
0.30

20
0.10

30
0.05

You are required to calculate the expected ROR and risk in terms of
standard deviation.
A. Explanation of all the 4 factors that affect risk
The common risk factors are:
Business risk: As a security holder you get dividends, interest or principal
(on maturity in case of securities like bonds) from the firm. But there is a possibility
that the firm may not be able to pay you due to poor financial performance. This
possibility is termed as business risk. The poor financial performance could be
due to economic slowdown, poor demand for the firms goods and services and
large operating expenses. Such a performance affects the equity and the debt
holder. The equity
holder may not get dividends and residual claim on the income and wealth
of the firm. Similarly a debt holder may not get interest and principal
payments.
Inflation risk: It is the possibility that the money you invested will have less
purchasing power when your financial goal is met. This means, the rupee you get
when you sell your asset buys lesser than the

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3. Explain the business cycle and leading coincidental &

lagging indicators. Analyse the issues in fundamental
analysis.
Business cycle and leading coincidental and lagging indicators
All economies experience recurrent periods of expansion and contraction. This
recurring pattern of recession and recovery is called business cycle. The
business cycle consists of expansionary and recessionary periods. When
business activity reaches a high point, it peaks. A low point on the cycle is
called trough. Troughs represent the end of a recession and the beginning of
an expansion. Peaks represent the end of an expansion and the beginning of a
recession.
In the expansion phase, business activity grows, production and demand
increases, and employment expands. Businesses and consumers borrow more
for investment and consumption purposes. As the cycle moves into the peak,
demand for goods overtakes supply and prices rise. This

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4. Explain the implications of Efficient Market Hypothesis

EMH for security analysis and portfolio management.
A. Implications for active and passive investment
Proponents of EMH often advocate passive as opposed to active investment
strategies. Active management is the art of stock-picking and market-timing. The
policy of passive investors is to buy and hold a broad-based market index.

Passive investors spend neither on market research, on frequent purchase nor

on sale of shares.
The efficient market debate plays an important role in the decision between active
and passive investing. Active managers argue that less efficient markets
provide the opportunity for skilful managers to outperform the market.
However, it is important to realise that a majority of active

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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.
Interest rate risk: The cash flows from a bond (coupon payments and
principal repayment) remain fixed though interest rate keeps changing. As a result,
the value of a bond fluctuates. Thus interest rate risk arises because the changes in
the market interest rates affect the value of the bond. The return on a bond comes
from coupons payments, the interest earned from re-investing coupons (interest
on interest), and capital gains. Since coupon payments are fixed, a change in the
interest rates affects interest on interest and capital gains or losses. An increase in
interest rates decreases the price of a bond (capital loss) but increases the
interest received on reinvested coupon payments (interest on interest). A
decrease in interest rates increases the price of a bond (capital gain)

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6. Elucidate the risk and returns of foreign investing.

Analyse international listing.
A. Explanation of all the points in risks and returns from foreign investing
International investing provides superior returns adjusted for risk. Allocating some
portion of one's portfolio to foreign assets provides better risk-cover than a
portfolio of only domestic assets. International equities also offer access to a
broader spectrum of economies and opportunities that can provide for further
diversification benefits. Some of the best performing companies in the world
like General Electric, Exxon Mobil and Microsoft have shares that are listed on
overseas stock markets. If an investor wants to profit from the growth of large
global companies, he would have to invest internationally.
However, there are costs and risks of international investing. In smaller
markets, an investor may have to pay a premium to purchase shares of
popular companies. In some countries, there may

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