Security Analysis and
Portfolio Management
Prof. Akhil Shetty
Introduction
► Security analysis refers to the method of analyzing the value of securities like
shares and other instruments as well as to understand the respective
characteristics of securities
► There are three methods to analyze the value of securities – Fundamental,
Technical and Behavioral analysis
► Selection process requires that you estimate and evaluate the expected risk return
trade-offs for the different investments available
► Portfolio management includes understanding client’s need, Asset Allocation,
Selection of Securities, portfolio construction, evaluation and monitoring of the
performance of the portfolio and Rebalancing
► Harry Markowitz’s classic article in 1952 on “Portfolio Selection” provided the
foundation for what is now known as Modern Portfolio Theory (MPT)
► The theory concluded that investors should not only hold portfolios but should also
focus on how individual securities in the portfolios are related to one another
Asset Classes
Asset class
Derivative
Securities Commodities Real Estate
Contract
--Fixed Income --Forward --Physical Commodities --Physical Property
--Preference Share --Futures --Derivative contracts
--Common Share --Options
--Pooled Investment --Swaps
Vehicle
Characteristics of Investment
► Return
► The principal component of return is the periodic income on the investment, either
in the form of interest or dividends
► The second component is the change in the price of the asset— commonly called the
capital gain or loss
► Historical rate of Return is calculated using Arithmetic Mean or Geometric Mean
► Expected Rate of Return = (Expected Selling Price – Purchase Price + Periodic
Income)/Purchase Price
► Risk
► Risk is generally associated with the possibility that realized returns of securities will
be less than the returns that were expected
► Total Risk can calculated using variance and standard deviation
► Safety
► Liquidity
Factors Affecting Risk
► Systematic risk (External Factors)
► Market Risks
► Interest-rate risk
► Purchasing-power risk
► Political Risks
► Exchange rate risk
► Unsystematic risk (Internal Factors)
► Business risk
► Financial Risk
► Default or insolvency risk
► Liquidity Risks
► Management Risks
Basic Features of Fixed Income Securities
► Issuer
► Supranational Organisation
► Sovereign (National) Government
► Non Sovereign (Local) Government
► Quasi – Government Entities
► Corporate
► Special Legal Entities
► Credit Rating
► Maturity
► Par Value
► Coupon Rate & Frequency
► Currency Denomination
► Source of Repayment
► Collaterals
► Legal & Tax Consideration
Fixed Income Securities
► Money Market Instrument
► Treasury Bill (T-Bill)
► Commercial Paper
► Certificate of Deposit
► Repurchase agreements (repos)
► Capital Market Instrument
► G sec Bond
► Secured Bond
► Unsecured Bond
► Debentures
► Zero – Coupon Bond
► Convertible / Callable / Puttable Bond
► Mortgage Backed Securities & Asset Based Securities
► Fixed Deposits
Equity Securities
► Primary Markets
► Initial Public Offering (IPO) & Follow-on Public Offer (FPO)
► Book Building Process (Issuer directly sell securities to investors to raise funds)
► Underwriting vs Best effort Offering
► Private Placements
► Secondary Markets
► Listed in Stock Exchange (NSE, BSE)
► Investors buy and sell public securities in Stock Exchange
► Investment Avenues in Equity
► Common Shares (Ordinary Shares)
► Investor has an interest on company’s operating performance, has voting rights, last claim on company’s asset
during liquidation
► Preference Shares
► Irredeemable / Redeemable, Cumulative / Non – Cumulative, Callable, Putable, Convertible or combination
► Warrants
► Rights offering
► Dividend Reinvestment Plans
Pooled Investment Vehicle
► Mutual Fund
► Open Ended vs Closed Ended
► Actively Managed vs Passively Managed
► Exchange Traded Fund (ETF)
► Open- ended funds that investors can trade among themselves in secondary markets
(Shares are listed in exchange)
► Passive investment which track Index or Gold or Sector or Currency or Bond or Global
Index
► Alternate Investment Fund (AIF)
► Hedge Funds
► Venture capital funds (Including Angel Funds)
► Private Equity Funds
► SME Funds
► Infrastructure funds
Contracts
► Forward Contracts
► It is an agreement to trade the underlying asset in the future at a price agreed
upon today
► It is OTC product which can be customized as per the counterparty
► Counter Party Risk & Liquidity Risk are two major issue an investor has to look for
► Futures Contracts
► It is a standardized forward contract for which a clearinghouse guarantees the
performance of all traders
► To protect against defaults, futures clearinghouses require that all participants
post with the clearinghouse an amount of money known as initial margin when
they enter a contract
► Participants whose margins drop below the required maintenance margin must
replenish their accounts
Contracts
► Swap Contracts
► It is an agreement to exchange payments of periodic cash flows that depend on future
asset prices or interest rates
► It is OTC product like Interest Rate Swap, Currency Swap, Commodity Swap which can
be customized as per the counterparty
► Two major issue Counter Party Risk & Liquidity Risk
► Option Contracts
► An option contract allows the holder (the purchaser) of the option to buy or sell,
depending on the type of option, an underlying instrument at a specified price at or
before a specified date in the future
► An option to buy is a Call Option, and an option to sell is a Put Option
► Premium need to be paid by Buyer of Options to the Seller (Option Writer)
Real Assets
► Commodities
► Commodities include precious metals, energy products, industrial metals, agricultural
products, and carbon credits
► Returns on commodity investments are primarily based on changes in price rather than on
income from interest, dividends, or rent
► Investors can have exposure in Commodities through Physical commodity, Forwards,
Future, Options, Swaps, Exchange Traded Products and Specific Commodity Sectors Funds
► Low correlation with other traditional investment like Equity & Fixed Income
► Real Estate
► Real estate investing is typically thought of as either direct or indirect ownership (shares in
REIT or REOC) in real estate property, such as land, Residential and Commercial Property
► Return on real estate are primarily based on Rental Income and change in property price
► Low correlation with other traditional investment like Equity & Fixed Income
FINANCIAL INTERMEDIARIES
► Brokers, Exchanges, and Alternative Trading Systems
► Dealers
► Securitizers
► Financial Institutions and Other Financial Corporations
► Insurance Companies
► Arbitrageurs
► Settlement and Custodial Services
