Security Analysis and Portfolio Management

VI SEM BBA

BBA VI
Semester
Security Analysis and Portfolio Management VI SEM BBA

MODULE 1: INTRODUCTION

SYLLABUS CONTENT

Meaning of securities, types of securities like debt, equity and derivatives. Forms of Investment
– Financial and Non Financial forms of Investment, Factors influencing selection of Investments
– Investment Process, Introduction to Risk & Return including problems, Correlation concepts
with problems, Beta concept and problems.

LEARNING OBJECTIVES

 Introducing the Concept of Investment

 To know about the objectives of Investment

 To know about the factors influencing the section of Investment.

 Understanding of Return & Risk(Expected Return, Standard Deviation, Correlation &

Beta)

Meaning of Investment:

Investment or investing is a term with several closely-related meaning in business management,

finance, and economics, related to saving or deferring consumption. Investment is the choice by
the individual to risk his savings with the hope of gain.

Investment is an activity that is undertaken by those who have savings. Savings can be defined as
the excess of income over expenditure.

Investment and Speculation

Investment Speculation
Risk Limited risk High
Return Moderate returns High profits and high gains
Time Long term Short term
Use of funds Own funds through savings Own and borrowed funds
Decisions Safety liquidity, profitability Market behavior information
and stability consideration judgment on movement in the

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Security Analysis and Portfolio Management VI SEM BBA

stock market.

Investment Vs Gambling

Investment can also to be distinguished from gambling. Examples of gambling are horse race,
card games, lotteries, and so on. Gambling involves high risk not only for high returns but also
for the associated excitement. Gambling is unplanned and unscientific, without the knowledge of
the nature of the risk involved. It is surrounded by uncertainty and a gambling decision is taken
on unfounded markettips and rumors. In gambling, artificial and unnecessary risks are created
for increasing the returns.

Investment is an attempt to carefully plan, evaluate, and allocate funds to various investment
outlets that offer safety of principal and expected returns over a long period of time. Hence,
gambling is quite the opposite of investment even though the stock market has been referred to
as a “gambling den”.

Characteristics of investment

The features of economic and financial investments can be summarized as return, risk, safety,
and liquidity.

Return: All investments are characterized by the expectation of a return. In fact, investments are
made with the primary objective of deriving a return. The expectation of a return may be from
income (yield) as well as through capital appreciation. Capital appreciation is the difference
between the sale price and the purchase price of the investment. The dividend or interest from
the investment is the yield. Different types of investments promise different rates of return. The
expectation of return from an investment depends upon the nature of investment, maturity
period, market demand, and so on. The purpose for which the investment is put to use influences,
to a large extent, the expectation of return of the investors. Investment in high growth potential
sectors would certainly increase such expectations.

The longer the maturity period, the longer is the duration for which the investor parts with the
value of the investment. Hence, the investor would expect a higher return from such investments.

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Security Analysis and Portfolio Management VI SEM BBA

Risk: Risk is inherent in any investment. Risk may relate to loss of capital, delay in repayment of
capital, non-payment of interest, or variability of returns. While some investments such as
government securities and bank deposits are almost without risk, others are more risky. The risk
of an investment is determined by the investment’s maturity period repayment capacity, nature of
return commitment,and so on. The longer the maturity period, greater is the risk. When the
expected time in which the investment has to be returned is a long duration, say 10 years, instead
of five years, the uncertainty surrounding the return flow from the investment increases. This
uncertainty leads to a higher risk level for the investment with longer maturity rather than on an
investment with shorter maturity.

Safety: The safety of investment is identified with the certainty of return of capital without loss
of money or time. Safety is another feature that an investor desires from investments. Every
investor expects to get back the initial capital on maturity without loss and without delay.
Investment safety is gauged through the reputation established by the borrower of funds. A
highly reputed and successful corporate entity assures the investors of their initial capital. For
example, investment is considered safe especially when it is made in securities issued by the
government of a developed nation.

Liquidity: An investment that is easily saleable or marketable without loss of money and without
loss of time is said to possess the characteristic of liquidity. Some investments such as deposits
in unknown corporate entities, bank deposits, post office deposits, national savings certificate,
and so on are not marketable. There is no well-established trading mechanism that helps the
investors of these instruments to subsequently buy/sell them frequently from a market.
Investment instruments such as preference shares and debentures (listed on a stock exchange) are
marketable. The extent of trading, however, depends on the demand and supply of such
instruments in the market for the investors. Equity shares of companies listed on recognized
stock exchanges are easily marketable.

A well-developed secondary market for securities increases the liquidity of the instruments
traded therein. An investor tends to prefer maximization of expected return, minimization of risk,
safety of funds, and liquidity of investments.

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Security Analysis and Portfolio Management VI SEM BBA

Objectives of Investment

 Income: investments are made with the expectation of earning regular income through
dividend or interest. The investment should be made in such a manner that investors get stable
income. An investment is said to be stable, only when it is able to generate a constant stream of
dividend or interest.
 Capital appreciation: it refers to increase in the value of investment held. The investment
should be made in those avenues that have the feasibility of having capital appreciation. It is
determined by taking into consideration the difference between the value of an investment today
and the value when the investment at the beginning over the value of investment at the beginning
 Minimum Risk: Risk may be understood as the probability that actual returns realized
from an investment may be different from expected return. An investor generally commits his
funds to low risk investments. Each investor tries to maximize his welfare by choosing the
optimum combination of risk and expected return in accordance with his preference and
capacity.
 Hedge against inflation: Cash is idle resource, which does not add up to an investor’s
earnings. It also loses its value to the extent of rise in prices. An inflationary tendency prevailing
in the economy erodes the value of money. Savings are invested to provide a hedge against
inflation.
 Tax advantage: Most of the investors try to reduce their tax liability via tax planning and
management. They seek to invest in those avenues which provide them maximum tax advantage.
Dividends from shares, insurance premium paid on life insurance policies, interest on bank
deposits and others provide tax benefits.

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Security Analysis and Portfolio Management VI SEM BBA

Investment Process

The investment process consists following five –step procedure:

Investment
policy

Performing
security analysis

Asset Allocation
and portfolio
Construction

Portfolio
Revision

. Portfolio
performance
evaluation

a. Investment policy should be set: the investment process start by identifying goals and
creating a new plan and policy. Investment policy involves determining the investment
objectives and amount of one's investable wealth. The plan may consist of many future funding
needs such as retirement, college education, and land purchase. The investment policy qualifies
the investment goal. Making money alone cannot be an appropriate objective. It is appropriate to
state that the objective is to make a lot of money by recognizing the possible losses. A clear
investment policy help to plan, implement and manage portfolio that achieve high return while
controlling risk. Policies assist in strategic assets allocation. Settinga clear investment policy also
involves the identification of potential categories of financial assets for consideration in ultimate
portfolio. The identification of assets depends upon many things such as investment objectives,
investable wealth, tax consideration, retirement, education expenses, mortgage, stocks, bonds,
mutual funds, pensions, social security etc.

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Security Analysis and Portfolio Management VI SEM BBA

b. Performing security analysis: There are thousands of securities to purchase on the financial
markets. So these securities must be analyzed. Analyzing securities is to find out the mis-priced
securities. Performance analysis of security is carried out through.

1) Stock screening by considering earning growth, recent earnings surprises, price /earnings
ratio, dividends, market cap or size, industry, relative strength of each stock.

2) Stock Research: Stock research is carried out after narrow down the list of stock by stock
screening. There is availability of great resources for researching stocks. Company's annual
report and its financial statement are used for financial resources as:

3) Analysis: Many approaches can be used to analyze the securities. These approaches, in broad
sense, can be classified into two types.

i) Technical Analysis: Technical Analysis of security prices involves the study of previous
market price in an attempt to predict the future price movement. Technical analysis ignores the
company underlying the stock and instead tries to predict price changes by studying the market
itself. In technical Analysis past trends in the price is examined and is compared with the recent
emerging trends. The matching of emerging trends or patterns with the past one patterns repeat
themselves. Moving averages, support, and resistance, advance/decline lines, relative, strength,
momentum and volume of trading are examined in the technical Analysis.

ii) Fundamental Analysis: Fundamental analysis tries to identify the real or true value of
financial assets. The real value of any kind of financial assets is the present value of the future
cash flow given by the assets or expected by the holder. Fundamental analysis evaluates a stock
by examining the company, especially its operations and its financial conditions. In fundamental
analysis several valuation methods, factoring in P/E ratio, dividend yields, book value,
price/sales ratio, return on equity etc. are looked. The fundamental analyst attempts to forecast
the timing and size of the cash flows and then converts them into their equivalent present value
by using appropriate discount rate.

c. Asset Allocation and portfolio Construction: Assets allocation is based on investment goals,
Investor experience, and risk tolerance. Assets allocation is putting savings into investments, as
opposed to letting it sit in bank. Dividing your money across different assets classes (stocks,

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Security Analysis and Portfolio Management VI SEM BBA

bonds, money, market etc.) is the first step when making investments and is arguably the most
important decision. A well-constructed portfolio help investors archive at desired investment
goals. The portfolio construction should ensure the optimum use of people, money, and other
resources. Assets allocation and portfolio construction is of two types- active and passive. Active
assets allocation and portfolio construction is based on market views.

d. Portfolio Revision: Portfolio revision is the repetition of previous three steps of investment
process. Over the period of time, the objectives of investor at may change and the current
portfolio may no longer be optimal. Portfolio revision is the evaluation of outcome with the help
of performance measures. Thus it can be said that portfolio revision is the art of optimizing
assets and raising the worth of a portfolio. A timely revision of portfolio helps in obtaining
maximum profit because:

- The investor can sell some unattractive securities and introduce attractive ones to form a new
optimal portfolio.

- Some securities that are initially unattractive may turn out to be attractive later and Vice Versa.

e. Portfolio performance evaluation: The last step in investment process is portfolio

performance evaluation. This step gives the answer of the question. “How the portfolio
performed?" the performance of portfolio should be evaluated in term of return earned and the
risk experienced by the investor. For evaluation of portfolio performance, appropriate measures
of return and risk is needed. Evaluation must be carried out by relevant standards.

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Security Analysis and Portfolio Management VI SEM BBA

RETURNS:

Returns refer to income or revenue generated on employment of fund.

The returns are divided into

1. Revenue Returns.
2. Capital Returns.
3. Total Returns / Maximum / Holding Returns.
4. Real Rate of Returns.

1. Revenue Returns: It refers to dividend or interest received by the investor.

The Revenue Returns are calculated

RR = (Dividend / Price of Share) *100

2. Capital Returns: It refers to the returns generated out of the sales of securities.

The Capital Returns are calculated

CR = (End Price of Share – Beginning Price / Beginning Price) *100

3. Total Returns / Maximum / Holding Returns: It refers to the total returns that is generated during the
period of time, which includes Capital & Revenue Returns.

TR/MR/HR = (P1-P0) + Dividend / Po) *100

P1 – refers to end price.

P0 – refers to beginning price.

4. Real Rate of Returns: It refers to the rate of return which is calculated based on the inflation rate.

Real Rate of Returns are calculated:

RR = {1+r/1+IR} – 1

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Security Analysis and Portfolio Management VI SEM BBA

r = refers to returns.

IR = Inflation rate.

PRACTICAL PROBLEMS:

1. If an investor makes an investment of Rs 60,000 on 1st Jan 2015 when the price of the share of Cipla
was Rs 505 and as on 31st Dec 2015 the price of the same security is Rs 678. What is the capital gain
yield of the investor?

2. There are two securities Sun Pharma and Lupin with the following price at the beginning and the end
of the year. Calculate the capital gain yield of both the securities and also suggest which security is
better to invest.

Securities Sun Pharma Lupin

Year 2017 Rs 435 Rs 720
Year 2018 Rs 670 Rs 980
Annual Income (Dividend) Rs 2.00 Rs 5.00

3. Calculate the current yield of the securities Tata Steel & Tata Motors.

Securities Tata Steel Tata Motors

Year 2017 Rs 493 Rs 164
Year 2018 Rs 755 Rs 443
% of Dividend 100% 0%

Face Value of Equity Share Rs 10.00 Rs 2.00

4. An investor wants to know which of the following securities would have yield good rate of return. The
details are as follows:

Securities Eicher Motors Ashok Leyland SML Isuzu Ltd MRF

25th November 2008 Rs 280 Rs 6.90 Rs 214 Rs 1,985
17th September 2018 Rs 29,663 Rs 127.40 Rs 793 Rs 70,244

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Security Analysis and Portfolio Management VI SEM BBA

Dividend for the year

1100% 243% 15% 600%
2018 (%)
Face Value of Equity Rs 10.00 Rs 1.00 Rs 10.00 Rs 10.00
Compute rate of return.

5. Which of the following securities have high current yield?

Securities Rain Industries J K Tyres Bharat Forge Ltd.

Year 2017 Rs 142 Rs 87 Rs 542
Year 2018 Rs 475 Rs 193 Rs 797
Dividend for the
100% 75% 225%
year 2018 (%)
Face Value Rs 2.00 Rs 2.00 Rs 2.00

6. An investor wants to know which of the following securities will yield good rate of return when
invested for one time horizon of 1 year. The details are as follows:

Jindal Stainless Steel Authority of

Securities JSW Steel Ltd
Steel (Hisar )Ltd India Ltd(SAIL)
Year 2017 Rs 84 Rs 238 Rs 61
Year 2018 Rs 250 Rs 427 Rs 100
Dividend for the
0% 320% 0%
year 2018 (%)
Face Value Rs 2.00 Rs 1.00 Rs 10.00

Compute rate of return.

7. From the following calculate the Average Rate Return of State Bank of India for Year 2018

Stock Price
Month State Bank of
India (Rs.)
18-Jan 310
18-Feb 316.05

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Security Analysis and Portfolio Management VI SEM BBA

18-Mar 266.8
18-Apr 251
18-May 246.4
18-Jun 269.5
18-Jul 259.9
18-Aug 295
18-Sep 312
18-Oct 265.5
18-Nov 282.5

8. From the following calculate the Average Rate Return of TCS & INFOSYS for Year 2018. Suggest which
company is better.

TCS INFOSYS
Month Stock Price Stock Price
(Rs.) (Rs.)
18-Jan 2,689.80 1,040.00
18-Feb 3,120.00 1,150.00
18-
3,041.00 1,173.45
Mar
18-Apr 2,845.00 1,135.50
18-
3,533.00 1,200.00
May
18-Jun 1,758.00 1,231.90
18-Jul 1,829.95 1,313.90
18-
1,951.00 1,365.85
Aug
18-Sep 2,080.05 1,458.00
18-Oct 2,186.00 1500.45
18-
1,940.10 1550.00
Nov

9. From the following calculate the Average Rate Return & Real Rate of Return, MAHINDRA &
MAHINDRA LTD & TVS Motor for Year 2018. Suggest which company is better. The average inflation rate
for the year 2018 is 3.31%.

M&M Stock TVS MOTOR

Month
Price (Rs.) (Rs.)

18-Jan 752 764

18-Feb 765 697

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Security Analysis and Portfolio Management VI SEM BBA

18-Mar 730 681

18-Apr 743.25 622.3
18-May 880 675
18-Jun 924 591
18-Jul 908.5 570
18-Aug 936 518
18-Sep 976.6 580
18-Oct 863.7 560
18-Nov 769 543.9

10. From the following calculate the Average Rate Return & Real Rate of Return of Page Industries Ltd
for the year 2018. The average inflation rate for the year 2018 is 3.31%. The Investor has purchased in
the year 2010 (invested) 1,000 shares at Rs.13,760 per share.

Page Industries
Month
Stock Price (Rs.)

18-Jan 25,488.00
18-Feb 21,749.95
18-Mar 21,850.00
18-Apr 22,501.00
18-May 24,244.00
18-Jun 25,201.00
18-Jul 27,750.00
18-Aug 29,228.95
18-Sep 34,600.00
18-Oct 32,567.20
18-Nov 29,385.55

11. From the following information calculate return and real rate of return and suggest which company
is better. The inflation rate during the year 2015 was 7.35%

% of Dividend
Company Face Value Beginning Price (Rs.) End Price (Rs.)
Declared

TCS Rs 1 4350% 2,200 2,400

ITC Rs 1 850% 280 320
COAL INDIA Rs10 274% 280 310
SBI Rs 1 260% 176 320

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Security Analysis and Portfolio Management VI SEM BBA

CORPORATION
Rs 2 0% 38 42
BANK

RISK:

Company analysis involves not only an estimation of future returns, but also an assessment of the
variability in returns called risk.

Problems:

1. From the following calculate the average return, variance & standard deviation (Risk).

Month CRISIL (Rs.)

18-Jun 1,719.10
18-Jul 1,800.95
18-Aug 1,770.15
18-Sep 1,825.00
18-Oct 1,727.60
18-Nov 1,449.00

2. From the following calculate average returns and standard deviation (Risk) of Puravankara Ltd &
DLF Ltd.

Puravankara Ltd DLF Ltd

YEAR
(Rs.) (Rs.)
2010 92 361.15
2011 112 294.85
2012 57 183.9
2013 101.8 233.5
2014 81 167.4
2015 83.85 137.3
2016 63.7 116
2017 45.55 115.5
2018 167.65 260

3. Calculate the average returns and standard deviation (Risk) of FDC LTD.

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Security Analysis and Portfolio Management VI SEM BBA

YEAR FDC LTD (RETURN) %

2009 30.22
2010 -89.83
2011 -71.75
2012 24.21
2013 -12.88
2014 -35.90
2015 -23.24
2016 -42.84
2017 3.64
2018 -15.01

4. Calculate the average returns and standard deviation (Risk) of PIRAMAL ENTERPRISES LTD &
DR.REDDY'S LABORATORIES LTD.

DR.REDDY'S
PIRAMAL ENTERPRISES
YEAR LABORATORIES
LTD.(RETURN) %
LTD.(RETURN) %
2009 -32.41 -35.40
2010 55.83 140.00
2011 25.40 46.14
2012 -18.98 -5.75
2013 38.42 16.54
2014 5.32 38.48
2015 50.09 28.02
2016 20.89 -3.85
2017 61.91 -1.48
2018 76.16 -21.43

5. From the following calculate the expected return, variance & standard deviation.

ALBERT DAVID LTD. Probability /

YEAR
Return (%) Weights
2020 -6.67 0.1
2021 120.24 0.1
2022 233.73 0.5
2023 160.82 0.2
2024 172.27 0.1

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Security Analysis and Portfolio Management VI SEM BBA

6. From the following calculate the expected return, standard deviation (risk) of Nath Bio Genes
(India) Ltd.

Nath Bio Genes (India) Ltd Probability /

YEAR
Expected Return (%) Weights
2019 148.40 0.25
2020 -37.16 0.20
2021 92.38 0.30
2022 212.55 0.25

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Security Analysis and Portfolio Management VI SEM BBA

CORRELATION:

Correlation coefficient measures the degree to which two variables move together. Its value ranges
between -1 and 1. -1 indicates perfectly negative relationship, 1 shows a perfectly positive relationship
and zero means there is no relationship between the variables.

Correlation coefficient refers to the relationship between two variables where one is considered as
dependent variable and other as an independent variable.
Correlation coefficient is a very important number in finance because it helps tell whether there is a
relationship between say population growth and GDP growth, crude oil price and stock price of oil and
gas companies, a mutual fund and the broad market index, etc.
Two variables might have a very high correlation, but it might not necessarily mean that one causes the
other.
The most common measure of correlation is called the Pearson correlation which can be calculated
using the following formula:

Problems:

1. From the following calculate correlation between syndicate bank stock price and NSE index
which is given for 6 days. Stock price as on 30th Nov. 2017 was Rs. 62.50 and NSE index 8,180.

Date NSE Index Stock Price (Rs.)

1/12/2017 8192.9 66.5
2/12/2017 8086.8 66.1
5/12/2017 8128.75 66.4
6/12/2017 8143.15 66.6
7/12/2017 8102.05 66.1

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Security Analysis and Portfolio Management VI SEM BBA

8/12/2017 8246.85 66.5

2. Calculate the correlation between BSE Index and Bata India Ltd.

Bata India
Month BSE Index
Ltd (Rs.)
18-Jan 35,965.02 706
18-Feb 34,184.04 732
18-Mar 32,968.68 730
18-Apr 35,160.36 802
18-May 35,322.38 778
18-Jun 35,423.48 859
18-Jul 37,606.58 908
18-Aug 38,645.07 1082
18-Sep 36,227.14 972
18-Oct 34,442.05 976
18-Nov 36,194.30 1040

3. Calculate the correlation between the NSE Index and BSE Index.

Date NSE Index BSE Index

22-Nov 10,527 34,981

26-Nov 10,629 35,354

27-Nov 10,686 35,513
28-Nov 10,729 35,717
29-Nov 10,859 36,170
30-Nov 10,877 36,194
3-Dec 10,884 36,241

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Security Analysis and Portfolio Management VI SEM BBA

4. Calculate the correlation between the NSE Index and Yes Bank Stock Price & Comment.

Yes Bank
NSE
Date Stock Price
Index
(Rs.)

22-Nov 10,527 196

26-Nov 10,629 188
27-Nov 10,686 183
28-Nov 10,729 162
29-Nov 10,859 160
30-Nov 10,877 170
3-Dec 10,884 178

BETA (β)

Beta is a measure of a stock’s systematic risk. It is estimated by comparing the sensitivity of a stock’s
return to the broad market return. The broad market has a beta of 1 and a stock’s beta of less than 1
means that it has lower systematic risk than the market and vice versa.

The market beta i.e. the average beta of all the investments that are out there is 1 and an individual
investment’s systematic risk is measured relative to the overall market risk. A beta of more than 1
means that the investment has higher exposure to systematic risk than the market. In general, a beta
less than 1 means that the investment is less exposed to the systematic risk factors.

It is calculated with help of the following:

N ∑XY – (∑X) ( ∑Y)

β = -------------------------
N ∑X2 – (∑X)2

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Security Analysis and Portfolio Management VI SEM BBA

1. From the following data calculate Beta.

MARUTI
BSE
Date SUZUKI INDIA
Index
LTD.
3/12/2018 7,759.80 36,241.00
4/12/2018 7,724.75 36,134.31
5/12/2018 7,559.55 35,884.41
6/12/2018 7,209.70 35,312.13
7/12/2018 7,314.10 35,673.25
10/12/2018 7,350.10 34,959.72

2. From the following data calculate Beta.

TATA CONSULTANCY
Year BSE Index
SERVICES LTD. (Rs.)
2008 9647 478
2009 17465 750
2010 20509 1165
2011 15455 1161
2012 19427 1259
2013 21171 2171
2014 27499 2555
2015 26118 2433
2016 26626 2362
2017 34057 2700
2018 35673 1975

3. From the following data calculate Beta.

L&T FINANCE
BSE
Year HOLDINGS
Index
LTD.
2011 15454.92 42.95
2012 19426.71 89
2013 21170.68 74.7
2014 27499.42 67.7
2015 26117.54 66.4
2016 26626.46 87.45

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Security Analysis and Portfolio Management VI SEM BBA

2017 34056.83 173.8

2018 35673.25 133.8

4. From the following data calculate Beta.

VST Industries Ltd

Year BSE Index
(Rs.)
1991 1909 190
1992 2615 302.5
1993 3346 455
1994 3927 335
1995 3110 172
1996 3085 112.5
1997 3659 87
1998 3055 141
1999 5006 61
2000 3972 105
2001 3262 155

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