II Semester M.F.

A Degree Examination, June/July 2014

(Semester Scheme)
Finance and Accounting
Paper 2.4: Securities Analysis and Portfolio Management
Time: 3 Hours Max. Marks: 80
SECTION A
Answer any ten of the following questions in about 3-4 lines. Each question carries two
marks.
(10x2=20)
1.
a) Define the term security
Evidence to property right, provides a claim over assets.
e.g.: equity stocks, bonds, debentures etc. financial securities are transferable.

b) What are oscillators?

Oscillators indicate the market movement or scrip movement. Oscillators show the share
price movement across a reference point from one extreme to another. The movement
indicates.
a) overbought and oversold conditions of the scrip or market
b) signaling the possible trend reversal.
c) rise or decline in the momentum.

c) Define interest rate risk.

exposure of banks financial conditions to adverse movement in interest rate. Interest rate risk
affects adverse by the price of bonds. As increase of interest rate in the market reduces the
value of bonds/debentures. Interest rate risk is partly covered by immunization.

d) What are defensive shares?

defensive shares of certain sectors are relatively unaffected by market movements in interest
rates prices? E.g.: a) shares of defense oriented companies. Companies supplying product to
defense sector.
b) pharma sector

e) who are liquidity traders?

investment is employment of funds on assets with certain objections. Financial investment
objective is to earn return. Before an investment is made, an analysis of the markets and the
company should be made.
liquidity traders are those who do not study the market before investment. These traders
investment and resale of shares depend upon their fortune. Liquidity traders may sell their
shares to pay their bills. They are exposed to vulnerable situation
 f) what are corner portfolios
entry/exit of security creates a corner portfolio risk/return of portfolios change.

g) what are forward contracts?

forward contracts are derivatives used as hedging investment widely used in import and
export. Business to hedge exchange rate risk.
A forward contract is an agreement between two parties to buy/sell a specified quantity of
an assets whose price is determined on the date of contract for delivery at a specified future
date. Both the parties are obligated to perform the contract.

h) what is capital market line

The cml represent linear relationship between the required rates of return for efficient

i) what is meant by arbitrage

it is the process of buying securities assets in cheaper market and selling is a costly market
resulting in profit.

j) define new issue market. How it is related to secondary market

new issue market is the market where corporates (public for the first time. The investment of
investors will be blocked in new issue (capital) market which is also called primary market.
secondary market provided exit to securities purchased in new issue market. It has two
legs transactions (buying and selling). Secondary market functions through stock exchanges.

k) what are the statistical tools used to measure risk of securities return?
security market uses the following statistical tools, standard deviation, covariance,
correlation coefficient, (r12) coefficient of determination (r2).

l) what are formula plans

A portfolio is a combination of securities. Assets should be blended to achieve high profits.
The formula plan provides the basic rules and regulations for the purchase and sale of
securities. The amount and the portion of securities are fixed. The amount may be fixed
either is a constant and variable ratio.
2) Explain the different wages of raising capital by company
Capital is a long term source. The various types of capital raised by public ltd cos are as
under
a) Initial public offering
b) Private placement
c) Offer for sale
d) Rights issue.

a) Initial public offering

A company which raises capital for the first time is called initial public offering. retail
investors, high network individuals and qualified institutions buyers(QIBs) participate is
I.P.O. This is also called issues through prospectus.

b) Private placement
Under this method the issue is placed with a small number of FIs, corporate bodies and
high net worth individuals. The financial intermediaries purchase the shares and sell them to
investors at a later deal at a suitable (high) price. Most in pvt placement, securities are sold to
financial institutions like UTI, MFS, insurance cos merchant banking subsidiaries of
commercial banks.

c) Offer for sale

The promoter places his shares with an investment banker who offers it to the general
public at a later date. In other words an existing off loads a part of promoters capital to a
wholesaler instead of to general public.

3) Explain investment process?

Investment is employment of funds on assets/securities with certain objectives. The

objectives of (financial) investments in financial assets, is to earn returns and reduce risk.

1) Investment policy

2) Analysis

3) Valuation

4) Portfolio construction

5) Portfolio revision

1) Investment Policy:

Investment policy depends on inverse abel funds available and objectives and knowledge.
 The equation of investment depends upon the funds available. The objectives may
get capital appreciation or regular income. Knowledge about the market is
necessary for a good investment.

Analysis: It is necessary to analyse the securities with reference to the following.

a) Market analysis b) Industry analysis c) Company analysis.

3) Valuation:

Valuation of securities helps the investors to determine the return and risk in
connection with the security valuation is also to find out the future price and intrinsic price of the
securities. There are several models available for valuation of securities.

4) Construction of portfolio:

A portfolio is a combination of securities. The objectives of constructing a

portfolio by investors is to increase the returns and reducing the risk. This is achieved by
diversification and of securities depending upon the above mentioned and analysis the proportion
of securities and the investment on each security will be decided.
4)

Year 200 2003 2004 2005 2006 2007

2

Stock Price (rs.) 130 142 169 154 189 210

% of returns 9.23 19.10 8.90 22.7 11.11

2
Section D

7) Explain the various forms of derivatives and their utility

Derivatives are contracts between two parties whose payoff depends on underlying
assets. Derivatives are used as hedging and speculative purposes. The following are the types of
derivatives

1) Options 2) Forwards 3) Futures

Option contracts

Options are contracts between two parties where one of them will have the right
to buy or sell an underlying asset without any obligation.

Types of options:

1) Call option 2) Put option

Call option gives the buyer or the holder the right to buy an underlying asset at a pre-
determined price called exercise\strike price at a future date without any obligation.

Put option:

The holder or the seller has the right to sell an asset without any obligation. The
price is pre determined for delivery at a future date. The holder of the option is to pay a
cost to the writer which is called premium.

The holder will exercise the option if the option is favourable to him.

1) American option 2) European option

American option

An American option can be excercised by the holder any time (before)/on or

before the due date.

European option

An European option has to be excercised on due date only.

There are two types of options

1. Over the Counter options

2. Exchange traded options

Forward contracts:

Forward contracts are widely used by importers and exporters to hedge exchange
rate risk.

It is an agreement where the buyer agrees to pay cash to the seller at a later date
where the price is pre-determined when the seller delivers the goods. The essential
idea of entering into a forward contract is to peg the price thereby avoid price risk.

Forward contracts are over the counter (one to one) contracts which carries risk of
one of the parties may not honor the obligation.

Futures contract:

It is a standardized contract between two parties where one of the parties commits
to sell and the other to buy a stipulated quantity of commodity, currency, security or
index at an agreed price on a given date in the future.

Futures are traded as exchanges. Commodities are traded on commodity exchanges.

There are 3 parties to a future transaction, buyer, seller, exchange. Both buyer and
seller to deposit a certain amount with clearing house which is called margin.

The price of futures contract are marked to market and profit/loss is calculated on a
daily basis(if prices change).

SWAPS:

SWAPS are contract between two parties who agree to exchange cashflows at
periodic intervals on a notional principle through a swap dealer. Interest rate swaps,
currency swaps and equity swaps are the types of swaps. The objective of swaps is to
reduce the cost of the borrower.