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SEM-3 FINANCE SUMMER 2014
MF0010 & SECURITY ANALYSIS AND
PORTFOLIO MANAGEMENT
Q1.
Financial markets bring the providers and users in direct contact without any
intermediary. Financial markets permits the businesses and governments to raise
the funds needed by sale of securities. Describe the money market/capital
market – features and its composition.
(Money
market- features and composition-5 marks, Capital market-features and
composition-5 marks) 10 marks
Answer:
Money
Market – Features and Composition
The money
market exists as a result of the interaction between the suppliers and
demanders of short-term funds (those having a maturity of a year or less). Most
money market transactions are made in marketable securities which are
short-term debt instruments such as T-bills and commercial paper. Money
(currency) is not actually traded in the money markets. These crudities traded
in the money market are short-term with high liquidity and
Q2.
Risk is the likelihood that your investment will either earn money or lose
money. Explain the factors that affect risk. Mr. Rahul invests in equity shares
of Wipro. Its anticipated returns and associated probabilities are given below:
Return
|
-15
|
-10
|
5
|
10
|
15
|
20
|
30
|
Probability
|
0.05
|
0.10
|
0.15
|
0.25
|
0.30
|
0.10
|
0.05
|
You
are required to calculate the expected ROR and risk in terms of standard
deviation.
(Explanation
of all the 4 factors that affect risk-4 marks, Calculation of expected ROR and
risk in terms of standard deviation-6 marks) 10 marks
Answer:
Factors
that affect risk
Some common
risk factors are:
Business
risk: This is the possibility that the company
holding your money will not pay the interest or dividend
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Q3.
Explain the business cycle and leading coincidental & lagging indicators.
Analyse the issues in fundamental analysis
(Explanation
of business cycle-leading coincidental and lagging indicators-6 marks, Analysis
and explanation of the issues in fundamental analysis all the four points-4
marks)10 marks
Answer:
Business
cycle and leading coincidental and lagging indicators
All
economies experience recurrent periods of expansion and contraction. This
recurring pattern of recession and recovery is called the business cycle. The
business cycle consists of expansionary and recessionary periods. When business
activity reaches a high point, it peaks; a low point on the cycle is a trough.
Troughs represent the
Q4. Discuss the
implications of EMH for security analysis and portfolio management.
(Implications for active
and passive investment-5 marks, Implications for investors and companies-5
marks)10 marks
Answer:
Implications
for active and passive investment
Proponents
of the efficient market hypothesis often advocate passive as opposed to active
investment strategies. Active management is the art of stock-picking and
market-timing. The policy of passive investors is to buy and hold a broad-based
market index. Passive investors spend neither on market research nor on
frequent purchase and sale of shares. However, passive strategies may be
tailored to meet individual investor requirements. The
Q5. Explain about the
interest rate risk and the two components in it.
An
investor is considering the purchase of a share of XYZ Ltd. If his required
rate of return is 10%, the year-end expected dividend is Rs. 5 and year-end
price is expected to be Rs. 24, Compute the value of the share.
(Introduction of interest
rate risk-2 marks, Explanation of two components of interest rate risk-4 marks,
Calculation of value of the share-4 marks) 10 marks
Answer:
Interest
Rate Risk: With the passage of time, interest rate
changes in the market. The cash flows from a bond (coupon payments and principal
repayment) however, remain fixed. As a result, the value of a bond fluctuates.
Thus interest rate risk arises because the changes in the market interest rates
affect the value of the bond. The return on a bond comes from coupons payments,
the interest earned from re-investing coupons (interest on
Q6. Elucidate the risk
and returns of foreign investing. Analyze international listing.
(Explanation of all the
points in risks and returns from foreign investing-7 marks, Introduction of
international listing-3 marks)10 marks
Answer:
Risks and
Returns from Foreign Investing
International
investing provides superior returns adjusted for risk. Allocating some portion
of one's portfolio to foreign assets provides better risk adjusted reruns than
a portfolio of domestic assets alone. International equities also offer access
to a broader spectrum of economies and opportunities that can provide for
further diversification benefits. Some of the best performing companies in the
world like General Electric, Exxon
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