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DRIVE-SPRING 2014
PROGRAM-MBADS (SEM
3/SEM 5) MBAFLEX/ MBAN2 (SEM 3) PGDFMN (SEM 1)
SUBJECT CODE &
NAME-MF0010 & SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT
BK ID-B1754
CREDIT & MARKS-4
Credits, 60 marks
Q1 Investment
operation is one which upon through analysis promises safety of principal and
an adequate return. Explain the investment process and write down the common
errors in investment management
(Explanation of
investment process, Common errors in investment management) 7, 3
Answer.
Investment
process
It is rare to find investors
investing their entire savings in a single security. Instead, they tend to
invest in a group of securities. Such a group of securities is called a portfolio.
Financial experts stress that in order to minimise risk an investor should hold
a well-balanced investment portfolio. The investment process describes how an
investor should decide the securities to invest in while constructing a
portfolio, how he should spread the investments, and when he
Q2 Financial
markets permit the businesses and governments to raise the funds needed by sale
of securities. The economy requires sound financial markets for its proper
functioning. Explain in detail on financial derivatives and the financial
intermediaries.
(Explanation on
financial derivatives, Explanation of financial intermediaries) 5, 5
Answer.
Financial
derivatives
Derivatives are financial
instruments that have no intrinsic value, but derive their value from something
else. They hedge the risk of owning things that are subject to unexpected price
fluctuations, for example foreign currencies, commodities (like wheat), stocks
and bonds. The term ‘derivative’ indicates that it has no independent value,
i.e. its value is entirely ‘derived’ from the value of the cash asset. For
example, price of a stock option depends on the
Q3 Risk is the
likelihood that your investment will either earn money or lose money. There are
some factors that affect the risk. Explain the factors that affect the risk and
solve the below given problem
Mr. A has purchased
100 shares of Rs.10 each of TVS Motors in 2005 at Rs.78 Per share. The company
has declared a dividend @40% for the year 2006-07. The market price of a share
as on 1-4-2006 was Rs.104 and on 31-3-2007 was Rs.128. Calculate the annual
return on the investment for the year 2006-07.
(Explanation of
factors affecting the risk, Calculation of annual return on investment, Conclusion
and interpretation) 4, 4, 2
Answer.
Factors
affecting the 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
Q4 Elaborate on
Intrinsic value of securities and issues with fundamental analysis.
(Explanation on
intrinsic value of securities, Issues with fundamental analysis, Explanation on
company analysis and its areas of focus) 3, 2, 5
Answer.
Intrinsic value
of securities
The fundamental analyst
determines the intrinsic value of a security and compares it to the current
market price of the security. The comparison reveals whether the company is
overvalued or undervalued. If the company is overvalued it means that it priced
in the market above its fair value. If it is undervalued it means that it is
priced in the market below its fair value. When the share is undervalued it is
bought and held until other investors’ realise its value. This pushes its value
towards its fair share price due to the increasing demand. On the other hand,
when a share is overpriced it may be a signal to sell the shares. This exercise
capitalises on the observed discrepancy in
Q5 Technical
analysis is a method used to evaluate the worth of a security by analyzing
statistics pertaining to its market activity. Explain on Dow theory and its
assumptions. Write complete information on Technical indicators.
(Explanation of Dow
Theory and its assumptions, Explanation of technical indicators) 5, 5
Answer.
Dow Theory and
its assumptions
The Dow Theory was originated by
Charles Dow, the founder of the Dow Jones Company and editor of the Wall Street
Journal. The Dow Theory presumes that the market moves in persistent bull and
bear trends. Dow Theory was originally used for market as a whole, but it is
now used for individual securities as well. Dow Theory recognises that it is
the actions of traders in the marketplace responding to news that cause prices
to change rather
Q6 Modern portfolio
theory helps an investor to identify his optimal portfolio from umpteen number
of security portfolios that can be constructed. Elaborate on Arbitrage Pricing
Theory and principle of Arbitrage theory.
(Explanation of
Arbitrage pricing theory, Principle of Arbitrage theory) 5, 5
Answer.
Arbitrage
pricing theory
Arbitrage Pricing Theory (APT) is
a factor model that was developed by Stephen Ross. It starts with the
assumption that security returns are related to an unknown number of unknown
factors. It does not specify what these factors are. The Arbitrage Pricing
Theory (APT), has been developed by Stephen Ross. It can calculate expected
return without taking recourse to the market portfolio. It is a multifactor
model for determining the required rate of return which means that it takes
into account economy factors as well. APT calculates relations among expected
returns that will rule out arbitrage by investors.
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