sapm session plan

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

Course Objective:The far-reaching developments in the world of finance have redefined the role of the finance manager, placing a premium on well-trained young men and women possessing superior professional skills in financial analysis and management. The finance manager of today is called upon to evolve finance strategies that dovetail with the firm’s competitive business strategies.

Learning Outcomes:On the successful completion of this module the student will be able to: Assess the various financial market instruments and securities Understand the factors effecting equity valuations Analyse the various theories of portfolio management and apply quantitative tools for

optimum results

Course Contents:

Module I: Nature and Scope of Investment Management and Portfolio AnalysisInvestment Management and Security Analysis - Portfolio Management Practices in International markets.Risk and Return - Total Risk - Portfolio Risk - How Diversification Helps? - Market Risk - Combining Risky and Risk less - Securities.

Module II: Fundamental Security AnalysisEconomic Environment Analysis - Industry Analysis - Company Analysis - Growth Stocks.Technical Analysis : Basic Tenets of Technical Analysis - Dow Theory - Behaviour of Stock Prices - Major Trends - Charts and Trend Lines - Resistance and support Lines - Different Patterns.Efficient market theory.

Module IIICapital Asset Pricing Model - Assumptions - the Capital MarketLine - Security Market Line - CAPM with Relaxed Assumptions.Portfolio Evaluation: Portfolio Formula Plans - Risk AdjustedMeasures - Sharpe's Reward-to-Variability - Treynor's VolatilityRatio - Jensen's Differential Return.

Module IV: Equity ValuationFinancial Markets and Instruments, Analysis and Valuation of Equity Investments

Module V: Fixed Income Valuation and AnalysisFinancial Markets and Instruments Analysis of Derivatives and Other Products

Module VI: Portfolio ManagementModern Portfolio Theory, Investment Policy, Asset Allocation, Practical Portfolio Management, Performance Measurement, Management of Investment Institutions

Learning Methods:Tutorials, Interactive sessions, Case studies, Field visits, Management games, Extensive research projects, Seminars, Weekend experience in companies - the course is covered by adopting a combination of lecture methods, class presentation by groups of students, self study sessions. Each student is required to do the back ground reading from the specified chapters of the prescribed book before coming to class. Cases are also to be analyzed, discussed in groups (teams) outside the class as preparatory work.

Examination Scheme:

Components P1 C1 CT1 EEWeightage (%) 10 10 20 60

Text & References:

Text: Fisher, D.E. Security Analysis & Portfolio Management, Prentice Hall, N.D. 2001

References: Gleason, J.T., Risk- The New Management Imperative in Management, Jaici, Kolkata

2001 Reilly, F.K. & Brown, K., Investment Analysis & Portfolio Management, Dryden

Press, 2002 Brealey, R.A. & Myers, S.C., Principles of Corporate Finance, Tata Macgraw Hill,

ND 2002 Luenberger, David G., “Investment Science,” Oxford University Press, 1998. Malkiel, Burton G., “A Random Walk Down Wall Street,” 6e, W.W. Norton and

Company, New York, 1996. Prassanna Chandra Investment Analysis & Portfolio Management Tata Macgraw Hill

2002

NAME OF THE COURSE: SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

COURSE CODE: MIBFN 20402

COURSE OBJECTIVES

The far-reaching developments in the world of finance have redefined the role of the finance manager, placing a premium on well-trained young men and women possessing superior professional skills in financial analysis and management. The finance manager of today is called upon to evolve finance strategies that dovetail with the firm’s competitive business strategies.

LEARNING OUTCOMES

On the successful completion of this module the student will be able to:

Assess the various financial market instruments and securities. Understand the factors effecting equity valuations. Analyse the various theories of portfolio management and apply quantitative tools for

optimum results.

SYLLABUS: As prescribed. Detailed session allocation given below.

BIBLIOGRAPHY: Mentioned against each module/session

COURSE CONTENTS:

Session No. Topic/Faculty References Background Material1 Basics of Security

Analysis and Portfolio Management.

Prasanna Chandra, Investment Analysis and Portfolio Management.

S. Kevin, Security Analysis and Portfolio Management.

William F. Sharpe, Gordon J. Alexander, Jeffery V. Bailey.

SAPM deals with the analysis of individual securities as well as with the theory and practice of optimally combining securities into portfolios. An investor who understands the fundamental principles and analytical aspects of portfolio management has a better chance of success.

2 Nature and Scope of Investment Management and Portfolio Analysis



Investment involves employment of funds with the aim of achieving additional income or growth in values.It is no longer a simple process. It requires scientific knowledge, a systematic approach and also professional expertise. Investment Management combines all these elements to achieve efficiency in investment.

3 Investment Management and Security Analysis


Prasanna Chandra,

Investment Analysis and Portfolio Management.

A generic term that most commonly refers to the buying and selling of investments within a portfolio. Investment management can also include banking and budgeting duties, as well as taxes. But the term most often refers to portfolio management and the trading of securities to achieve a specific investment objective.

4 Portfolio Management Practices in International markets.


Prasanna Chandra,


International portfolio analysis is basically science and art of making decision about

Investment mix and policy Matching investments to objectives Balancing risk against performance

through investments in a variety of foreign securities so as to minimize the risk component.

5 Risk and Return Prasanna Chandra, Investment Analysis and Portfolio Management.


Return is the primary motivating force that drives investment. It represents the reward for undertaking investment. Measurement of realized returns is necessary to access how well the investment manager has done.One cannot talk about investment return without talking about risk. Risk refers to the possibility that the actual outcome of an investment will differ from its expected outcome.

6 Total Risk - Portfolio Risk



Total Risk = Unique risk + Msrket risk.

The unique risk of a security represents that portion of its total risk which stems from firm-specific factors.

The market risk of a security represents that portion of its risk which is attributable to economy-wide factors.

7 How Diversification Helps?



“Do not put all your eggs in one basket”.

A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the

benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.

8 Market Risk - Combining Risky and Risk less - Securities.


Zvi Bodie, Alex Kane, Alan J Marcus, Pitabas Mohanty: Investments

The day-to-day potential for an investor to experience losses from fluctuations in securities prices. This risk cannot be diversified away. Also referred to as "systematic risk".

9 Fundamental Security Analysis



Fundamental analysis is a logical and systematic approach to estimating the future dividends and share price. It is based on the basic premise that share price is determined by a number of fundamental factors relating to the economy, industry and company.

The economy fundamentals, industry fundamentals and company fundamentals have to be considered while analyzing a security for investment purpose.

10. Economic Environment Analysis - Industry Analysis



The objective of Industry analysis is to assess the prospects of various industrial groupings. Yet careful analysis can suggest which industries have a brighter future than others and which industries are plagued with problems that are likely to persist for a while.It includes: Sensitivity to the business cycle Industry life cycle analysis Study of the structure and characteristics

of an industry Profit potential of industries: Porter

model11 Company Analysis

- Growth Stocks. Prasanna Chandra,



Analyse the financials of a company Identify the qualitative factors that affect

a company’s prospects. Explain the procedure to estimate the

intrinsic value of a share. Understand the tools for judging

undervaluation or over valuation.

12. Technical Analysis : Basic Tenets of Technical Analysis



Technical Analysis involves a study of market generated data like prices and volumes to determine the future direction of price movement. Technical analysis mainly seeks to predict short-term price movements. It focuses mainly on internal market data, particularly price and volume data. Technical analysis appeals mostly to short term traders.

13 Dow Theory Prasanna Chandra, Investment Analysis

Dow believed that the stock market as a whole was a reliable measure of overall

and Portfolio Management.


business conditions within the economy and that by analyzing the overall market, one could accurately gauge those conditions and identify the direction of major market trends and the likely direction of individual stocks.For this reason, all traders using technical analysis should get to know the six basic tenets of Dow theory. The Market Discounts Everything The Three-Trend Market The Three Phases Of Primary Trends Market Indexes Must Confirm Each

Other Volume Must Confirm The Trend Trend Remains In Effect Until Clear

Reversal Occurs14 Behaviour of Stock

Prices - Major Trends



The general direction of a market or of the price of an asset. Trends can vary in length from short, to intermediate, to long term. If you can identify a trend, it can be highly profitable, because you will be able to trade with the trend.

15 Charts and Trend Lines - Resistance and support Lines - Different Patterns.



As a general strategy, it is best to trade with trends, meaning that if the general trend of the market is headed up, you should be very cautious about taking any positions that rely on the trend going in the opposite direction.

A trend can also apply to interest rates, yields, equities and any other market which is characterized by a long-term movement in price or volume.

16. Efficient market theory.



An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.

17. Capital Asset Pricing Model - Assumptions


S. Kevin, Security

CAPM is concerned with two key questions:

What is the relationship between risk and return for an efficient portfolio?

What is the relationship between risk and return for an individual security?

Analysis and Portfolio Management.

18. The Capital MarketLine



A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk-free rate of return and the level of risk (standard deviation) for a particular portfolio.The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the risk-free rate of return. The CML is considered to be superior to the efficient frontier since it takes into account the inclusion of a risk-free asset in the portfolio. The capital asset pricing model (CAPM) demonstrates that the market portfolio is essentially the efficient frontier.

19. Security Market Line



A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky marketable securities.Also referred to as the "characteristic line".The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The x-axis represents the risk (beta), and the y-axis represents the expected return. The market risk premium is determined from the slope of the SML.

20. CAPM with Relaxed Assumptions.



A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.

The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the

market premium (Rm-rf). 21. Portfolio

Evaluation: Portfolio Formula Plans



Zvi Bodie, Alex Kane, Alan J Marcus, Pitabas Mohanty: Investments.

The performance of a portfolio should be evaluated periodically. The key dimensions of portfolio performance evaluation are risk and return and the key issue is whether the portfolio return is commensurate with its risk exposure. Such a review may provide useful feedback to improve the quality of the portfolio management process on a continuing basis.

22. Risk AdjustedMeasures - Sharpe's Reward-to-Variability



Zvi Bodie, Alex Kane, Alan J Marcus, Pitabas Mohanty: Investments.

Sharpe ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The Sharpe ratio formula is:

23. Treynor's VolatilityRatio



A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless investment per each unit of market risk. The Treynor ratio is calculated as:(Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Beta of the Portfolio.

In other words, the Treynor ratio is a risk-adjusted measure of return based on systematic risk. It is similar to the Sharpe ratio, with the difference being that the Treynor ratio uses beta as the measurement of volatility. Also known as the "reward-to-volatility ratio".

24. Jensen's Differential

Prasanna Chandra, Investment Analysis

A risk-adjusted performance measure that represents the average return on a

Return. and Portfolio Management.


portfolio over and above that predicted by the capital asset pricing model (CAPM), given the portfolio's beta and the average market return. This is the portfolio's alpha. In fact, the concept is sometimes referred to as "Jensen's alpha."

25. Equity Valuation Prasanna Chandra, Investment Analysis and Portfolio Management.



Calculate the intrinsic value of a stock using the zero growth model, the constant growth model, the two stage growth model, and the H model.

Analyse the determinants of the P/E ratio.

Evaluate the proper rules of thumb to establish benchmark P/E Ratio.

Describe the active and passive strategies used in managing an equity portfolio.

26. Financial Markets and Instruments




Equity analysts employ two kinds of analysis viz., fundamental analysis and technical analysis.

Techniques of fundamental equity valuation fall into three broad categories: balance sheet valuation, discounted cash flow techniques and relative valuation techniques.

27. Analysis and Valuation of Equity Investments




Three measures derived from balance sheet are book value, liquidation value and replacement cost. Dividend Discount Model Gordon Model

28. Analysis and

Valuation of Equity Investments




Two Stage Growth Model H Model Free Cash Flow Model.

29. Fixed Income Valuation and Analysis




It covers fixed income securities or . Estimate the price of a bond. Calculate the various measures of bond

yield. Show how bond prices vary in response

to interest rate changes. Identify the risk in bonds

30. Financial Markets and Instruments




Fixed Income instruments include bonds, debentures etc. Type of bonds, their valuation and analysis. Calculation of duration of bond.

31. Analysis of Derivatives and Other Products




Financial derivatives have evolved as a mechanism for reducing or hedging the risk involved in financial investments. Futures and options are the most common derivative instruments. Each derivative instrument has an underlying asset such as a security, a foreign currency etc whose price fluctuations can be hedged by trading in derivatives market.

32. Analysis of Derivatives and

Prasanna Chandra, Investment Analysis

An investor buying or selling a financial asset can reduce the risk involved by

Other Products and Portfolio Management.



simultaneously trading in derivative instruments. Investment in securities can be profitably combined with derivatives trading to achieve the objectives of maximizing returns and minimizing risk.

33. Portfolio Management




The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against. performance.

Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk.

34. Modern Portfolio Theory




A theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.

Also called "portfolio theory" or "portfolio management theory."

According to the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering the maximum possible expected return for a given level of risk. This theory was pioneered by Harry Markowitz in his paper "Portfolio Selection," published in 1952 by the Journal of Finance.

There are four basic steps involved in portfolio construction:-Security valuation-Asset allocation-Portfolio optimization-Performance measurement

35. Investment Policy Prasanna Chandra, Investment Analysis and Portfolio Management.

S. Kevin, Security Analysis and Portfolio

Investment policy provides the general investment goals and objectives of a client and describes the strategies that the manager should employ to meet these objectives. Specific information on matters such as asset allocation, risk tolerance, and liquidity requirements would also be included.

Management.


For example, an individual may have an Investment Policy stating that by the time he or she is 60 years old his or her job will become optional, and his or her investments will annually return $65,000 in today's dollars given a certain rate of inflation.

36. Asset Allocation Prasanna Chandra, Investment Analysis and Portfolio Management.



An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon. The three main asset classes - equities, fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time.

37. Practical Portfolio Management




Active vs Passive Portfolio Management. Specification of Investment Objectives

and Constraints. Choice of Asset Mix. Formulation of Portfolio Strategy. Selection of Securities. Portfolio Execution. Portfolio Revision. Performance Evaluation.

38. Performance Measurement




The performance of a portfolio should be evaluated periodically. The key dimensions of portfolio performance evaluation are risk and return and the key issue is whether the portfolio return is commensurate with its risk exposure. Such a review may provide useful feedback to improve the quality of the portfolio management process on a continuing basis.

39. Management of Investment Institutions




An establishment that focuses on dealing with financial transactions, such as investments, loans and deposits. Conventionally, financial institutions are composed of organizations such as banks, trust companies, insurance companies and investment dealers. Almost everyone has deal with a financial institution on a regular basis. Everything from depositing money to taking out loans and exchange currencies must be done through financial

institutions.Since all people depend on the services provided by financial institutions, it is imperative that they are highly regulated.

40. Stock Simulation Practical Stock market game that simulates trading stocks and options.

sapm session plan

Documents

trained young men

fixed income valuation

apply quantitative tools

capital market line

stage growth model

portfolio formula plans

evolve finance strategies

portfolio management practices