NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES (NMIMS)

GLOBAL ACCESS SCHOOL FOR CONTINUING EDUCATION

(NGA-SCE)

INTERNAL ASSIGNMENT

COURSE: CAPITAL MARKET AND PORTFOLIO MANAGEMENT

APPLICABLE FOR DECEMBER 2022 EXAMINATION
 NMIMS GLOBAL ACCESS SCHOOL FOR CONTINUING EDUCATION (NGA-
SCE)
COURSE: CAPITAL MARKET AND PORTFOLIO MANAGEMENT
INTERNAL ASSIGNMENT APPLICABLE FOR DECEMBER 2022
EXAMINATION

QUES 1.) Assume that you are planning to invest in the capital market. What steps will
you follow to start trading in the capital market.
(10 Marks)
ANSW 1.) Capital market is referred as a place where buyers and sellers involve in the trading
(buying / selling) of financial securities like bonds, stocks, etc. The trading is undertaken by
participants such as individuals and institutions. Capital market trades mostly in long-term
securities. The capital market functions as an important link between savers and investors with
entities that need funds like companies, government, and individuals. Existence of capital market
is essential for an economy to function as it is a market for the trading of long-term investments.
In other words, it is a marketplace for investments that have a lock-in period which is greater
than a year, or their maturity period is at least more than one year.

The capital market involves the sale and purchase of both equity and debt instruments, including
equity shares, debentures, preference shares, secured premium notes, and zero-coupon bonds. It
also caters to all forms of lending and borrowing financial transactions. A capital market helps in
the mobilization of savings for financing long-term investments. It also aids in the trading of
securities. Also, a capital market reduces transaction and information costs by encouraging the
ownership of a broad spectrum of productive financial assets. It facilitates the quick valuation of
shares and debentures.

One of the primary functions of a capital market is that it provides insurance against market
volatility and price risk through derivative trading. One of the best things about capital market is
also that it offers a wide range of investment instruments to investors, thereby fostering the
creation of capital in the economy.

There are various steps to be followed to start trading in the capital market which are
enumerated under various points as follows-
 To buy or sell shares, an investor needs to place an order through a broker
member. The broker enters the price and volume of shares that the investor wishes
to buy or sell.
 Trades are automatically required to be matched at the best bid / offer price
already on the system. Once the orders are matched, a trade notification is sent to
both the buying and selling brokers, while the details of their side of the trade and
the detail of the counterparty that they are required to settle against. The best buy
order matches with the best sell order. An order might match partly with another
 order resulting in multiple trades. In order matching system, the best buy order is
the one with highest price and the best sell order is the one with lowest price.
 Orders can be broken up on the order system at the same or at different prices.
The visibility of order can be withheld so that the order to buy or sell the next
block of shares is not placed live on the system until the existing order has been
matched.
 Orders to buy and sell can be added, modified or removed from the trading
system at any point during market hours. However, once matched, the bargain is
instantly sent for settlement between the brokers on behalf of the investors.
 In India, the trading in the stock market trading takes place through Bombay
Stock Exchange and National Stock Exchange. Both of these stock exchanges
follow same trading mechanisms, trading hours, settlement process etc.
 Trading on these places takes place through using an open electronic limit order
book. This book is used for matching orders with the help of trading computer.
 This electronic system has removed the market makers or specialists from the
stock market and the whole process has become order driven, which implies that
the market order placed by investors can be matched automatically with the best
limit orders. Such a market helps in bringing all the orders placed delete in the
trading system.
 The orders are generally placed by the brokers in the trading system. Most of
these brokers provide online trading facility to retail customers. The institutional
investors can use the Direct Market Access (DMA) option that allows them to
place orders directly in the trading system through the use of trading terminals
provided by brokers.
 Equity trading is also one of the capital market trading option in which the
purchasing and selling of organization stocks takes place. In case of various
companies, the trading takes place through various stock exchanges. On the other
hand the trade their shares in over the counter exchange market in which
securities of those companies are traded that are not listed on the stock exchanges.
 Equity trading is performed by an individual or the organization himself or
through the broker or agents, who buy or sell shares on behalf of the individual or
organization.
 Electronic broking system is a system in which transactions of currencies takes
place by quoting a currency against another currency. The currency which is used
for quoting is called quote currency and the currency against which it is quoted is
called base currency.
QUES 2.) You are given the following information on two stocks BI and B2. The stock
B1 performed well in slowdown as compared to B2. Both the shares are selling at Rs.90
per share. The estimated rupee return of the stock is given as follows:
Economy’s
Behaviour
High Growth Low Growth Stagnation Recession
Probability 0.45 0.25 0.2 0.1
Return on B1 90 98 106 122
Return on B2 120 104 72 48

Calculate the expected return and risk in the following cases: 1. When you invested 5000
in B1 2. When you invested 5000 in B2 Write down your preferences
(10 Marks)
ANSW 2.) The expected return on an investment is the expected value of the probability
distribution of possible returns it can provide to investors. The return on the investment is
an unknown variable that has different values associated with different probabilities.
Expected return is calculated by multiplying potential outcomes by the chances of each
outcome occurring, and then calculating the sum of those results.
Expected return and risk is calculated by the application of following formula as follows-

E(R) = R1P1 + R2P2 + …….+ RnPn

Where R1 = return expectation in given scenario
P1 = Probability of return being achieved in a scenario
n = scenario number

Case 1) When invested 5000 in B1

E(R) = R1P1 + R2P2 + …….+ RnPn
E (R) = (0.45*90) + (0.25*98) + (0.2*106) + (0.1*122)
= 40.5 + 24.5 + 21.2 + 12.2
= 98.4 – Ans.

Case 2)When invested 5000 in B2

E(R) = R1P1 + R2P2 + …….+ RnPn
E (R) = (0.45*120) + (0.25*104) + (0.2*72) + (0.1*48)
 = 54 + 26 + 14.4 + 4.8
= 99.2– Ans.

QUES 3.) There is an ongoing debate regarding the fundamental analysis and technical
analysis. One school of thought supports fundamental analysis, while the other school
supports that stock market cannot work effectively without technical analysis” these
statements have raised a confusion among the investors.
a. As a security analyst how do you effectively explain the difference between
fundamental and technical analysis to the investors.
(5 Marks)
b. Do you prefer one analysis over the other? Give reasons for your choice.
(5 Marks)

Answ 3.) a. DIIFFERENTIATION BETWEEN FUNDAMENTAL ANALYSIS AND

TECHNICAL ANALYSIS
Fundamental analysis is an analytical and methodical approach to measure the future dividends
and share price. In other words, fundamental analysis can be explained as the detailed study of
the basic factors like economy, industry and the like that affects the performance of organization.
The main task in the fundamental analysis is to explore and interpret the financial statements of
the organization.
By understanding this, the company’s future performance can be judged by fundamental
analysis. whereas technical analysis is used to analyze securities and taking decisions based on
this analysis. One of the major and basic difference between fundamental analysis and technical
analysis is that the former involves the analysis of characteristics of a company for estimating its
value while the latter involve the determination of price movements on the stock in the market.
Fundamental analysis and technical analysis are different investment techniques based on
different underlying premises. Fundamental analysis considers that the stock price of a company
is a reflection of the financial performance of the company. Therefore analysis of the financial
statement is crucial to the fundamental analysis.
Fundamental analysis considers assets, liabilities, revenues, and expenses of a company to
predict stock prices. In addition, fundamental analysis considers the prospect of the company,
general market conditions, and the prospect of the industry to determine the intrinsic value of a
stock. Therefore we can see that fundamental analysis is the analysis of the overall financial
performance of the company to predict stock prices in the future.
On the other hand, technical analysis takes a completely different approach of predicting the
future performance of stocks. This technique takes into account the statistical information of
previous price movements of stock of a company to find a pattern in past price movements and
predict future stock price on the basis of this pattern. Therefore, the entire focus of technical
analysis is on the trend of past stock prices rather than the financial condition of a company.
Fundamental analysis evaluates the securities by measuring the intrinsic value of a stock.
Whereas, technical analysis further analyzes and evaluates the securities by studying the
statistics produced by market activities.
Fundamental analysis takes into account the prospect of the company, general and market
conditions, and the prospect of the industry to determine the intrinsic value of a stock. It takes
into account the statistical information of previous price movements of stocks of a company to
find a pattern in past price movements and predict future stock price.
Fundamental analysis focuses on the analysis of overall financial performance of the company to
predict stock prices in future. On other side, technical analysis focuses on the analysis of trend of
past stock prices rather than the financial conditions of a company.
Fundamental analysis is divided into Economy analysis, Industry analysis, Companies analysis
whereas the technical analysis focuses on stock price and stock volume, price charts and dow
theory.
b. Preference of one analysis over the other analysis
When it comes to preference of one system over the other system or analysis. I would prefer
fundamental analysis over technical analysis where fundamental analysis is the study of various
factors that affect a company’s earnings and dividends. Fundamental analysis studies the
relationship between a company’s share price and various elements of its financial position and
performance.
There are various advantages or, in other words various plus points which can be
analyzed and support the selection of fundamental analysis over technical analysis which
are enumerated under various headings as follows-

I. FORWARD LOOKING

Fundamental analysis is the forward looking technique and even the data is used
by and large historical. The objective of fundamental analysis is to determine a
company’s intrinsic value can be compared to the current value of the company as
measured by the share prices. If the shares are trading at less than the intrinsic
value then the shares may be seen as good value.

II. HELPS UNCOVER COMPANIES

Fundamental analysis can help uncover companies with valuable assets, a strong
balance sheet, stable earnings and staying power. One of the most obvious rewards
of fundamental analysis is development of through understanding of the business.
The basic meaning is that it is a method that is used for measuring the intrinsic
value of a stock or security. It mainly depends on the economic factors affecting
the business and its financials. This process is not only limited to the company’s
financial structure but it goes beyond that. It includes general economic scenario,
the industry’s growth and fall, along with the company’s organizational structure,
 management and financials. The notion behind this is this to analyze the real price
against the prevailing price in the market.

III. IDENTIFICATION OF GOOD STOCKS

The biggest advantage of fundamental analysis is that it helps you in learning

about the various complexities of the stock market and thus helps an investor to
identify goods and stock having good business model and future while avoiding
bad stocks. In simple words just like good soldier knows about the landmines and
avoids putting his foot on the landmines in the same way a good investor through
fundamental analysis can avoid the landmines of stock markets which are nothing
but fundamentally poor stocks.

IV. SOLID BASE FOR INVESTMENT

Stock markets are like a tunnel and if you do not have any knowledge about
fundamental analysis or technical analysis then you can be lost in that tunnel and
fundamental analysis is like a torch that helps you in getting through the tunnel of
the stock market with flying colors. In simple words when you are spoilt for
choice and have plenty of stocks to buy then fundamental analysis can be of great
help in identification of choosing the best stock out of many good stocks.

V. HELPFUL DURING PANIC

In case of panic when everyone around in the same environment is selling stocks
an investor who has done a fundamental analysis of his or her portfolio holdings
will never panic because in case of panic every stock falls whether its good or bad
but in case of fundamentally strong stocks they recover quickly whenever stock
markets recover. In simple words when you have an umbrella with you then you
will not worry about heavy rains as an umbrella will save you from heavy rains in
the same way as fundamental analysis is that umbrella which saves you from bad
weather which keeps happening during the panic in stock markets.