security analysis and portfolio management.pptx
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT
Prema Manoharan
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syllabusUNIT I :Investment - Meaning and process of Investment Management - Speculation -Investment Avenues in India
UNIT II:Risk and Return – Historical and Expected return – Measurement – Risk and its measurement – Systematic and Unsystematic risk – Types – Measurement and significance of Beta.
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SYLLABUS – CONTD…UNIT III Security Valuation – Bond, Equity and preference share
valuation – Yield to maturity- Bond value theorems.
UNIT IVFundamental and Technical Analysis – Economy,
Industry and Company analysis – Tools for technical analysis.
UNIT VPortfolio Selection, performance evaluation and
portfolio revision- Formula plans. – Capital Asset Pricing Model (CAPM)
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securities ?security analysis?portfolio?port folio management?
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Security A security or financial instrument is a
tradable asset of any kind
Financial instruments are tradable assets such as cash, ownership interest in any asset, contractual rights to receive cash etc
Assets are financial resources – for investment purposes classified as real assets and financial assets
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Portfolio ManagementPortfolio - collection of loose sheets in a file
In finance – it means collection of assets held by an institution of by an individual
Basket of stocks
Portfolio management is the art and science of making decisions about the mix of investments
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What is investment?Monetary commitment
Sacrifice of present consumption for a return in future
Investment is the employment of funds on assets with the aim of earning income or capital appreciation.
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investmentaccording to the economical view - Net
addition made to the nation’s capital stock
according to financial view - Allocation of money to assets that are expected to yield gain in future
Both views are related since individual’s savings are invested in the capital market to be used in economic investment
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exercise
Return on investment and capital gain - differentiate
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exerciseDifferentiate securities and investment
Differentiate securities and portfolio
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speculationTaking up high risk for return in the short span of timeExercise ------------- : Buying a stock for its dividend ----------------: Buying a stock for its anticipated
price rise in near future What are the differences between
investment and speculation?What are the differences between gambling
and speculation?
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What is investment management?the professional asset management of securities
and assets such as real estate to meet specified investment objectives of the investors.
Investors may be1. institutions (insurance companies, pension funds, corporations, charities, educational establishments etc.) 2. private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or exchange-traded funds).
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exerciseIs there any difference between these terms?
Investment managementAsset managementPortfolio managementWealth managementMoney managementFund Management
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Investment process -meaning Steps of activities leading to the purchase of securities
the established operating method according to which fund managers make decisions about which investments to buy and sell.
Investment processes include risk management procedures and may also involve regular meetings of committees that approve each investment.
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Process of investment management - 5 steps
1. Framing of investment policy 2. Investment analysis 3. Valuation of securities4. Portfolio construction5. Portfolio evaluation
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Flow chart for investment process
Investment policy
Investible fund
Investment objectives
knowledge
analysis
Market
industry
company
valuation
Intrinsic value
Futuristic value
Portfolio constructio
n
diversification
Selection and
allocation
Portfolio evaluation
appraisal
revision
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investment policyIn the economic point of view: Government regulation that encourages or discourages foreign investment in India
In individual Point of view: An investment policy outlines and prescribes
a prudent and acceptable individualized investment philosophy
sets out the investment management procedures and long-term goals for the investor.
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3 constituents of investment policyInvestible funds – available through savings
or from borrowings?Investment objectives – need for regular
income? Risk perception? Required rate of return?
Knowledge - about the investment alternatives and market in which investments are made
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Investment objectivesGrowth and income accompanied by a conservative level of risk
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Other objectivesMajor objective:Increasing the rate of return and reducing the riskOther objectives:1. Safety of the funds invested – within the
legal and regulatory frame work2. Liquidity – marketability of the investment3. Hedge against inflation – rate of return
should be higher than the rate of inflation
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Investors’ goals and philosophy for investment is based on-Current liquid and net worth -Risk aversion -Investing time horizon -Income levels -Expense levels -Restrictions on security selection
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Need for investment policy to identify need to take risk based on
financial objectives and income stability.To establish guidelines for investmentTo create reasonable expectationsTo create the framework for a well-diversified
asset mix to generate acceptable long-term returns at a level of
risk suitable to the InvestorTo describe an appropriate risk posture for the
Investor’s PortfolioTo specify the target asset allocation policy;To diversify assets
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Security analysisMarket study – finding the economic scenario
– GDP – inflation rate – monetary policy – capital market’s trend (bull or bear)
stock price fluctuation in the secondary market – is it upward or downwards?Industry analysis – economic significance and
growth potential of the industryCompany analysis - to find the earnings,
profitability, operating efficiency, management, capital structure, functioning
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valuation1. Intrinsic value – actual value of the company with reference to fundamental analysis with out reference to the market value
This value may or may not be the same as the current market value. 2. Future value is the value of an asset at a specific date
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Portfolio construction
Diversification - reducing risk by investing in a variety of assets1. Selection - Determining the Appropriate Asset Allocation Ascertaining individual financial situation and investment goals is the first task in constructing a portfolio. Age, attitude etc also play role
A second factor to take into account is personality and risk tolerance.2: allocation - Achieving the Portfolio Designed in Step 1
to divide your capital between the appropriate asset classes (Equities & bonds) as already determined.
further break down the different asset classes into subclasses, which also have different risks and potential returns.
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Portfolio evaluationAppraisal – measuring the risk and return of the
portfolio assets and comparing with the market To assess the portfolio's actual asset allocation,
quantitatively categorize the investments and determine their values' proportion to the whole.
Revision -analyze and rebalance the portfolio periodically because there are factors such as market movements, current financial situation, future needs and risk tolerance are likely to change over time.
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Exercise:1. What is Risk return trade-off ?2. Conservative Vs. Aggressive Investors
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Some terms related to diversification of assets in portfolio Stock Picking - Choose stocks that satisfy the level of risk you want to carry in the equity portion of your
portfolio - sector, market cap and stock type are factors to consider. Analyze the companies using stock screeners to shortlist potential picks, than carry out more in-depth analyses
on each potential purchase to determine its opportunities and risks going forward. This is the most work-intensive means of adding securities to your portfolio, and requires you to regularly monitor price changes in your holdings and stay current on company and industry news.
Bond Picking - When choosing bonds, there are several factors to consider including the coupon, maturity, the bond type and rating, as well as the general interest rate environment.
Mutual Funds - Mutual funds are available for a wide range of asset classes and allow you to hold stocks and bonds that are professionally researched and picked by fund managers. Of course, fund managers charge a fee for their services, which will detract from your returns.Index funds present another choice; they tend to have lower fees because they mirror an established index and are thus passively managed.
Exchange-Traded Funds (ETFs) - If you prefer not to invest with mutual funds, ETFs can be a viable alternative. You can basically think of ETFs as mutual funds that trade like stocks. ETFs are similar to mutual funds in that they represent a large basket of stocks - usually grouped by sector, capitalization, country and the like - except that they are not actively managed, but instead track a chosen index or other basket of stocks. Because they are passively managed, ETFs offer cost savings over mutual funds while providing diversification. ETFs also cover a wide range of asset classes and can be a useful tool for rounding out your portfolio.