SECURITY ANALYSIS AND INVESTMENT MANAGEMENT
UNIT 1
INVESTMENT: MEANING, NATURE, SCOPE
Investment or investing means that an asset is bought, or that money is put into a
bank to get a future interest from it.
TYPES OF INVESTMENTS
1.Growth investments
These are more suitable for long term investors that are willing and able to withstand
market ups and downs.
2.Shares
Shares are considered a growth investment as they can help grow the value of your
original investment over the medium to long term.
3.Property
Property is also considered as a growth investment because the price of houses and
other properties can rise substantially over a medium to long term period
NATURE AND SCOPE OF INVESTMENT
Investment is the application of money for earning more money. Investment also
means savings or savings made through delayed consumption. According to
economics, investment is the utilization of resources in order to increase income or
production output in the future.
INVESTMENT DECISION PROCESS
Stages of the Investment Process
The investment process is summarised in 5 key stages:
1. Establishing portfolio objectives;
2. Developing the strategic and tactical asset allocation;
3. Manager research, selection and configuration;
4. Portfolio implementation; and
5. Ongoing monitoring and due diligence.
INVESTMENT ALTERNATIVES
Direct equity (Stocks)
Equity mutual fund.
Debt mutual fund.
Public provident fund.
Fixed Deposit.
Real Estate.
Gold.
INVESTMENT RISK: INTEREST RISK, INFLATION RISK,
DEFAULT RISK ETC.
Defined as the probability or likelihood of occurrence of losses relative to the
expected return on any particular investment .
TYPES OF RISK
1. Credit Risk (also known as Default Risk)
Credit risk is just the risk that the person you have given credit to, i.e. the company or
individual, will be unable to pay you interest, or pay back your principal, on its debt
obligations.
2. Interest Rate Risk
A golden rule in debt investing is this: Interest Rates go up, prices of bonds go down and vice
versa.
3. Inflationary Risk
Inflationary risk, or simply, inflation risk, is when the real return on your investment is
reduced due to inflation eroding the purchasing power of your funds by the time they mature.
MEASUREMENT OF SYSTEMATIC AND UNSYSTEMATIC
RISK
BASIS FOR
SYSTEMATIC RISK UNSYSTEMATIC RISK
COMPARISON
Meaning Systematic risk refers to the Unsystematic risk refers to the
hazard which is associated risk associated with a
with the market or market particular security, company
segment as a whole. or industry.
Nature Uncontrollable Controllable
Factors External factors Internal factors
Affects Large number of securities in Only particular company.
the market.
Types Interest risk, market risk and Business risk and financial
purchasing power risk. risk
Protection Asset allocation Portfolio diversification
VALUATION OF SECURITIES
1.DEBENTURES/BONDS
When a bond or debenture is irredeemable, its present value can be determined by simply
discounting the stream of interest payments for the infinite period by an appropriate
capitalization rate or discount rate.
2.PREFERENCE SHARES
The valuation of preference shares is a very straightforward exercise. Usually
preference shares pay a constant dividend. This dividend is the percentage of the
face value of the share.
2.EQUITY SHARES
This measure of a company's value is calculated by multiplying the current stock
price by the total number of outstanding shares.
DURATION OF BONDS
The formula for the duration is a measure of a bond’s sensitivity to changes in the
interest rate, and it is calculated by dividing the sum product of discounted future
cash inflow of the bond and a corresponding number of years by a sum of
the discounted future cash inflow.
TERM STRUCTURE OF INTEREST RATES
Essentially, term structure of interest rates is the relationship between interest rates
or bond yields and different terms or maturities. The term structure of interest rates is
known as a yield curve, and it plays a crucial role in identifying the current state of an
economy.
YIELD TO MATURITY
Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held
until it matures.
Yield to Maturity = [Annual Interest + {(FV-Price)/Maturity}] / [(FV+Price)/2]
UNIT 2
TECHNIQUES OF RISK MEASUREMENT AND THEIR
APPLICATIONS
Standard Deviation
Standard deviation measures the dispersion of data from its expected value. The
standard deviation is used in making an investment decision to measure the amount
of historical volatility associated with an investment relative to its annual rate of
return.
Sharpe Ratio
The Sharpe ratio measures performance as adjusted by the associated risks. This is
done by removing the rate of return on a risk-free investment
Beta
Beta is another common measure of risk. Beta measures the amount of systematic
risk an individual security or an industrial sector has relative to the whole stock
market.
Value at Risk
It is a statistical measure used to assess the level of risk associated with a portfolio
or company. It measures the maximum potential loss with a degree of confidence for
a specified period
CONCEPT OF BETA, CLASSIFICATION OF BETA- GARED AND
UNGEARED BETA
Beta is a concept that measures the expected move in a stock relative to movements
in the overall market.
CLASSIFICATION OF BETA
The asset beta (unlevered beta) is the beta of a company on the assumption that the
company uses only equity financing.
In contrast, the equity beta (levered beta, project beta) takes into account different
levels of the company's debt. What is the beta of a project?
Project's beta is a measure of systematic or market risk present in a particular
project. It is used to adjust for differences between project's risk and firm's average
risk
The beta of a portfolio is the weighted sum of the individual asset betas, According to
the proportions of the investments in the portfolio.
INTERPRETTION OF BETA
SECURITIES MARKET LINE
The security market line (SML) is a line drawn on a chart that serves as a graphical
representation of the capital asset pricing model (CAPM)—which shows different
levels of systematic, or market risk, of various marketable securities, plotted against
the expected return of the entire market at any given time.
CAPITAL MARKET LINE
Represents portfolios that optimally combine risk and return. It is a theoretical
concept that represents all the portfolios that optimally combine the risk-free rate of
return and the market portfolio of risky assets.
PRACTICAL PORTION OF UNIT 1 AND UNIT 2
BASIC FUNCTIONS
1. SUM-(=SUM)
2. PRODUCT-(=PRODUCT)
3. AVERAGE-(=AVERAGE)
4. SUBSTITUTE- (=SUBSTITUTE {TEXT, OLD TEXT, NEW TEXT{)
INTERES RATES ON INVESTMENT
CALCULATING RETURN AND UNSYSTEMATIC RISK
EXPECTED RETURN=SUBMISSION OF xi*pi (X*P)
WEIGHTED RETURN-SUBMISSION OF wi*pi (W*X)
HOLDING PERIOD RETURN/YIELD=YIELD + PRICE CHANGE
[ (P1-PO)+INCOME/PO]
UNSYSTEMATIC RISK
STANDARD DEVIATION
σ=√Ʃpi (Xi- X̄)2
pi: Probability for ith returns
Xi: Return i-1……n
X̄: Expected Return/ Average Return
STANDARD DEVIATION
σ=√Ʃ(Xi- X̄)2/N
σ=√Ʃ(Xi- X̄)2/N-1
pi: Probability for ith returns
Xi: Return i-1……n
X̄: Expected Return/ Average Return
VARIANCE
σ2=Ʃpi (Xi- X̄)2
SYSTEMATIC RISK
CALCULATION OF BETA
Cov (Rm,Rs)= Ʃ (Rm- Rm¯) (Rs-Rs¯ )/ N-1
Var (Rm) = Ʃ (Rm- Rm¯)²/N-1
RM=INDEX PRESENT-INDEX INITIAL/INDEX INITIAL
RS=SHARE PRICE PRESENT- SHARE PRICE INITIAL/ SHARE PRICE INITIAL
RM BAR=SUBMISSION OF RM/N-1
RS BAR= SUBMISSION OF RS/N-1
WEIGHTED BETA=SUBMISSION OF W*BETA [WEIGHT*BETA]
LEVERED/UNLEVERED/PROJECT BETA
PORTFOLIO BETA
βp = (wA × βA + wB × βB + ... + wN × Βn)
βp is the portfolio beta coefficient
wA is the weight of the first investment
βA is the beta coefficient of first investment;
wB is the weight of the second investment
βB is the beta coefficient of second investment
wn is the weight of the nth investment,
βn is the beta coefficient of nth investment
