SECURITY ANALYSIS
AND
PORTFOLIO MANAGMENT
HARISHA.B.V
AIP(FINANCE & CONTROL)
IIM BANGALORE
MODULE 1
INVESTMENT
Income can be what is spent for current
consumption or saved for the future
consumption.
Investment is a sacrifice of current money or
other resources for future benefits.
Investment is a commitment of
funds(resources) made in the expectation of
some positive rate of return.
1-2
• Investment is a commitment of money
for a time period in order to derive future
payment that will Compensate the
investor for
1. The time the funds are committed
2. The expected rate of inflation
3. The uncertainty of the future payments
1-3
In the finance sense, investment is the
commitment of a person’s funds to derive future
income in the form of interest, dividend,
premiums, pension benefits or appreciation in the
value of their capital .
In the economic sense investment means the
net additions to the economy’s capital stock which
consists of goods and services that are used in
the production of other goods and
services( formation of new and productive capital)
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Essential nature of investment
Reduced current consumption
Planned later consumption
By saving money (instead of spending it ),
individuals tradeoff present consumption for a
larger future consumption.
1-5
Characteristics of Investment
Return
Risk
Liquidity ( Marketability )
Tax benefits
Convenience.
Safety.
1-6
Return
Holding period return (HPR)
HPR = ENDING VALUE OF INVESMENT
BEGINNING VALUE OF
INVESMENT
HPY=HPR-1
HOLDING PERIOD RETURN.xls
1-7
Objectives of investment
Maximization of return.
Minimization of risk.
Hedge against inflation.
1-8
Investments v/s Speculation
Particulars Investments Speculation
Time horizon At least 1 year For few days or
months
Risk Moderate High risk
Return Modest rate of High rate of
expectation return return(Capital
gains)
Analysis Fundamental Technical,
charts
leverage Own funds Borrowed funds
1-9
Category of Investors
Individual Investors
Institutional Investors
1. Bank trust departments
2. Pension funds
3. Mutual funds
4. Insurance companies
1-10
FINANCIAL MARKETS
A place for creation of financial assets.
FUNCTIONS OF FINANCIAL MARKETS
Facilitate price discovery
Provide liquidity to financial assets
Reduce the cost of transacting
1. search costs
2. information costs
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Classification of financial markets
1. Nature of claim
Debt market
Equity market
2. Maturity of claim
Money market
Capital market
3. Seasoning of claim
Primary market
Secondary market
4. Timing of delivery
Cash or spot market
Forward or futures market
5. Organizational structure
Exchange traded market
Over-the-counter market
1-12
Approaches to investment decision making
Fundamental approach
Psychological approach
Academic approach
Eclectic approach
1-13
Fundamental approach
There is an intrinsic value of a security.
Intrinsic value depends on company,
industry, and economy.
Market price varies from time to time
Undervalued securities- Buy
Overvalued securities - sell
1-14
Psychological approach
Stock prices are guided by emotion
rather than reason.
Since psychic values appear to be more
important than intrinsic value it is
profitable to analyze how investors tend
to behave.
1-15
Academic approach
Stock prices reflects intrinsic value fairly
well. Market price = intrinsic value.
Stock price is having a random
behaviour
Past behaviour cannot be used to
predict future price behaviour.
1-16
Eclectic approach
Fundamental analysis is helpful in establishing
basic standards and benchmarks.
Technical analysis helps to know the
prevailing mood of investors.
The market is neither well ordered as
academic approach not as speculative as the
psychological indicates
It is characterized by some inefficiencies and
imperfections.
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Security Analysis and Portfolio Management
Security analysis
It is the analysis or study of risk and return
trade off of a security after taking into
consideration the objective of the investor.
Portfolio management
It is the analysis or study of risk and return
trade off of group of investments after taking
into consideration the objective of the investor
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Portfolio Management Process
Security analysis(valuation)
Specification of investment objectives and constraints
through Fundamental analysis Technical analysis,
(Efficient Market Hypothesis).
Portfolio analysis
Choice of asset mix
Formulation of portfolio strategy
Portfolio selection
Active investment strategy
Passive investment strategy
EMH
1-19
Portfolio execution
Portfolio revision
Portfolio evaluation(performance
evaluation)
1-20
Investment Avenues
Financial assets
Financial assets are paper/electronic
claims on some issuer (govt/ company)
Real assets
it is represented by tangible assets like
residential house , agricultural farm,
gold etc.
1-21
Financial assets(direct investing)
Non marketable financial assets
Savings deposits
Certificate of deposits
Post office time deposits
Bank deposits
Monthly income scheme of post office
Kisan vikas patra
National saving certificate
Company deposits
Employee provident fund scheme
Public provident fund
Money market
Treasury bills
Certificates of deposits
Commercial paper
Repos
1-22
Capital market
•Fixed income securities
Treasuries
Agencies
Municipals
corporates
•Equities
Preference shares
Equity shares
1-23
Derivatives market
Futures
options
1-24
Financial assets (indirect investing)
Investment companies(mutual funds)
Unit investment trust
Open end
Closed end.
1-25
Real assets
Residential house
Commercial property
Agricultural land
Suburban land
Precious objects
Gold and silver
Precious stones
Art objects
Paintings
Antiques
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