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SEM-3 FINANCE Spring 2017
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
The money market consists of
financial institutions and dealers in money or credit who wish to either borrow
or lend. Participants borrow and lend for short periods, typically up to
thirteen months. Money market trades in short-term financial instruments
commonly called "paper". This contrasts with the capital market for
longer-term funding, which is supplied by bonds and equity.
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 due, or the principal amount,
When
Q3.
Explain the business cycle and leading coincidental & lagging indicators. Analyze
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
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
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
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
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