Investment Analysis Portfolio MGMT - 04 - 2017 18 PDF

KDF4B
INVESTMENT ANALYSIS
AND PORTFOLIO
THEORY
Unit : 1 to V
UNIT 1 TM
 Nature and Scope of investment management

 Investment management & portfolio management
 factors for investment analysis
 impact of economic analysis- impact of industrial analysis role of capital
markets.
 investment objectives, constraints
 factors- investment process
 Understanding the investment environment
 sources of investment information.
 Multidisciplinary nature of Environmental studies .
KDF4B – Investment Analysis & Portfolio Theory 2

TM
INVESTIGATE, THEN INVEST
Discover
and
exploit
other
investors’
mistakes

TM

TM
Meaning of investment
Investment means is to allocate money in the

expectation of some benefit in the future.
https://www.youtube.com/watch?v=KxOdB6axaW4

TM
Investment Management
“Investment management - is the professional asset

management of various securities (shares, bonds and other
securities) and other assets (eg., Real estate) in order to meet
specified investment goals for the benefit of the investors”.

TM
INVESTMENT OBJECTIVES
1. Return
2. Risk
3. Liquidity
4. Hedge against inflation
5. Safety
6. Tax shelter
7. convenience

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INVESTMENT PROCESS

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INVESTMENT CONSTRAINTS
 Unrealistic Goals
 Vague investment policies
 Naïve extrapolation of past
 Cursory decision making
 Untimely entries & exits
 High costs
 Over & under diversification
 Wrong attitude towards losses & profits

TM
Portfolio Management
“ The art and science of

making decisions about
investment mix and policy,
matching investment to
objectives, asset allocation
for individuals and
institutions and balancing
risk against performance”.

Sources of investment
TM
information
Industry
information
National affairs
Company
information
Sources of Stock
Internation
Investment market
al affairs information information

TM
APPROACHES – DECISION
MAKING

TM

TM
TECHNICAL ANALYSIS
Technical analysis involves a study of market generated data like

prices and volume to determine the future direction of price
movement.

TM

TM
UNIT II - Syllabus
o Approaches to Security analysis
o Security market indicators
o Security price movements
o Fundamental analysis
o Technical analysis
o Dow theory
o Random walk theory
o Efficient market hypothesis-various forms and its
implications to security analysis
o Common stock analysis
o Economic analysis-economic indicators
o Industry analysis .
TM
SECURITY ANALYSIS
Security analysis is a method which helps to

calculate the value of various assets and also find
out the effect of various market fluctuations on the
value of tradable financial instruments (also called
securities).

TM
SECURITY MARKET INDICATORS

Security Market indices provides a summary measure of the behavior
of security prices and the stock market.

TM
OBJECTIVES OF MARKET INDICES
•Reflects market movements accurately.
•Measures portfolio returns vs. market

returns.
•Basis for index based derivatives.

TM
Fundamental Analysis Vs. Technical Analysis
https://www.youtube.com/watch?v=UMSmmIFM5Yg

TM
INDUSTRY ANALYSIS
https://www.youtube.com/watch?v=C8rUL4q8evw

TM
Economic Analysis
The study of forces that

determine the distribution of
scarce resources. Economic analysis
provides insight into how markets
operate, and offers methods for
attempting to predict future market
behavior in response to events, trends,
and cycles. Economic analysis is also
used by governments to determine tax
rates and evaluate the financial
health of the nation or state.

TM
DOW THEORY
https://www.youtube.com/watch?v=iIFRnkabfII

TM
RANDOM WALK THEORY
https://www.youtube.com/watch?v=7OG3AHHx
NCE

TM
EFFICIENT MARKET HYPOTHESIS
”EMH 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.”

TM
EFFICIENT MARKET FORMS

TM
INDUSTRY ANALYSIS

TM
UNIT III - Syllabus
• Company analysis components

• Non financial aspects
• Financial analysis
• Financial statement analysis of prospectus
• Ratio analysis
• Risk return: market risk, interest rate risk,
purchasing power risk, business risk,
financial risk and measurement of risk

TM
STEPS OF FUNDAMENTAL ANALYSIS

 Macroeconomic analysis: evaluates current
economic environment and its effect on
industry and company fundamentals.
 Industry analysis: evaluates outlook for
particular industries.
 Company analysis: evaluates company’s
strengths and weaknesses within industry.

TM
INDUSTRY ANALYSIS
CLASSIFYING INDUSTRIES
1. Cyclical industry - performance is positively
related to economic activity
2. Defensive industry - performance is insensitive
to economic activity
3. Growth industry - characterized by rapid growth
in sales, independent of the business cycle

TM

TM
COMPANY ANALYSIS
ASPECTS
• Marketing
• Accounting Policies
• Profitability
• Dividend Policy
• Capital Structure
• Operating Efficiency
• Management
• Financial analysis

TM

TM
FINANCIAL RATIOS
https://www.youtube.com/watch?v=TZZFBkbC2l
A

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OTHER RATIOS
♦ Earnings per share (EPS): (Net income after taxes –

preferred dividends)/ number of shares
♦ Price-earnings (P/E): Price per share/expected EPS
♦ Dividend yield: Indicated annual dividend/price per share
♦ Dividend payout: Dividends per share/EPS
♦ Cash flow per share: (After-tax profits + depreciation and
other noncash expenses)/number of shares
♦ Book value per share: Net worth attributable to common
shareholders/number of shares

TM
DEFINING RETURN
Income received on an investment plus any
change in market price, usually expressed as a
percent of the beginning market price of the
investment.
R =Dt + (Pt - Pt-1 )

Pt-1

TM
https://www.youtube.com/watch?v=xAWxKk9tUME

TM
CO VARIANCE
s jk = s j s k r jk
sj is the standard deviation of the jth asset in the
portfolio,
sk is the standard deviation of the kth asset in the

portfolio,
rjk is the correlation coefficient between the jth and kth
assets in the portfolio.

TM
COEFFICIENT CORRELATION
A standardized statistical measure of the linear relationship

between two variables.
Its range is from -1.0 (perfect negative correlation), through 0 (no

correlation), to +1.0 (perfect positive correlation).

TM
MEANING OF
RISK
Risk is an uncertain event or

condition that if it occurs, has
an effect on atleast one
objective.

TM

TM
Total risk = systematic risk+ unsystematic risk

UNIT IV - Syllabus
TM
o Portfolio management theory and management

o Objectives, traditional and modern portfolio theory
o Diversification : Markowitz approach
o Portfolio management process: Planning, analysis, selection,
evaluation, revision
o Various steps in development of portfolio

TM
PORTFOLIO MANAGEMENT
“Portfolio management is the process of selecting a bunch of

securities that will provide the investing organization a maximum
yield for a given level of risk or alternatively ensures minimum
risk for a given level of return.”

TM
OBJECTIVES OF PORTFOLIO MANAGEMENT

• BASIC OBJECTIVES
- Maximize yield
- Minimize risk.
• OTHER OBJECTIVES
- regular income or stable income.
- appreciation of capital
- marketability and liquidity
- safety of investment
- minimizing tax liability.

TM
PORTFOLIO MANAGEMENT PROCESS
https://www.youtube.com/watch?v=kq9T3yWuqR4

TM
VARIOUS STEPS TO DEVELOP PORTFOLIO

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STEPS IN TRADITIONAL APPROACH

TM
MODERN APPROACH
 Emphasizes statistical measures to develop

a portfolio plan
 Focus is on:
Expected returns
Standard deviation of returns
Correlation between returns
 Combines securities that have negative (or

low-positive) correlations between each
other s rates of return

TM
EFFICIENT PORTFOLIO THEORY
https://www.youtube.com/watch?v=s0oEJkdigjw

TM
KEY ASPECTS OF EFFICIENT

FRONTIER
• The leftmost boundary of the feasible set of
portfolios that include all efficient portfolios: those
providing the best attainable tradeoff between risk
and return
• Portfolios that fall to the right of the efficient frontier

are not desirable because their risk return tradeoffs
are inferior
• Portfolios that fall to the left of the efficient frontier

are not available for investments

TM

TM
MARKOWITZ APPROACH

TM

TM
UNIT V - Syllabus
 CAPM
 Beta
 Security Market Line
 Arbitrage Pricing Theory
 Derivative
 Forward Contract
 Options
 Types of traders
 Institutional Investors

TM
CAPITAL ASSET PRICING MODEL

CAPM is a model that describes the relationship
between risk and expected (required) return; in
this model, a security’s expected (required)
return is the risk-free rate plus a premium based
on the systematic risk of the security.

TM
https://www.youtube.com/watch?v=gzxKd2S2M
dU

TM
CAPM ASSUMPTIONS
1. Capital markets are efficient.
2. Homogeneous investor expectations over a

given period.
3.Risk-free asset return is certain (use short- to

intermediate-term Treasuries as a proxy).
4.Market portfolio contains only systematic risk

(use S&P 500 Index or similar as a proxy).

TM
WHAT IS BETA?
• An index of systematic risk.

• It measures the sensitivity of a stock’s returns
to changes in returns on the market portfolio.
• The beta for a portfolio is simply a weighted
average of the individual stock betas in the
portfolio.

TM
SECURITY MARKET LINE

https://www.youtube.com/watch?v=GaNZlW97s
y8

TM
ARBITRAGE PRICING THEORY- ABT
https://www.youtube.com/watch?v=153grGc_5c
Q

TM

TM
MEANING OF DERIVATIVE
A derivative can be define

as a financial instrument
whose value depends on
(or derives from) the values
of other, more basic,
underlying variables.

TM
FORWARD CONTRACT
Forward contract is relatively a simple derivative.
It is an agreement to buy or sell an asset at a
certain future time for a certain price.
https://www.youtube.com/watch?v=H9UEZdAnn
t8

TM
OPTIONS
Options are traded both on exchanges and in

the over-the-counter market
https://www.youtube.com/watch?v=Ac8pN9YW
wXU

TM
TYPES OF TRADERS
Three main types of traders can be identified:
 Hedgers are in the position where they

face risk associated with the price of an
asset. They use derivatives to reduce or
eliminate this risk.
 Speculators wish to bet on future
movements in the price of an asset. They
use derivatives to get extra leverage.
 Arbitrageurs are in business to take
advantage of a discrepancy between prices
in two different markets.

TM
INSTITUTIONAL INVESTORS
An institutional investor is an
entity which pools money to
purchase securities, real property,
and other investment assets or
originate loans. Institutional
investors include banks, insurance
companies, pensions, hedge
funds, REITs, investment
advisors, endowments, and mutual
funds.

TM
THANK YOU

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KDF4B

 Nature and Scope of investment management

KDF4B – Investment Analysis & Portfolio Theory 2

INVESTIGATE, THEN INVEST

KDF4B – Investment Analysis & Portfolio Theory 3

KDF4B – Investment Analysis & Portfolio Theory 4

Investment means is to allocate money in the

KDF4B – Investment Analysis & Portfolio Theory 5

“Investment management - is the professional asset

KDF4B – Investment Analysis & Portfolio Theory 6

4. Hedge against inflation

KDF4B – Investment Analysis & Portfolio Theory 7

KDF4B – Investment Analysis & Portfolio Theory 8

 Vague investment policies

 Naïve extrapolation of past

 Cursory decision making

 Untimely entries & exits

 Over & under diversification

 Wrong attitude towards losses & profits

KDF4B – Investment Analysis & Portfolio Theory 9

“ The art and science of

KDF4B – Investment Analysis & Portfolio Theory 10

KDF4B – Investment Analysis & Portfolio Theory 11

KDF4B – Investment Analysis & Portfolio Theory 12

KDF4B – Investment Analysis & Portfolio Theory 13

Technical analysis involves a study of market generated data like

KDF4B – Investment Analysis & Portfolio Theory 14

KDF4B – Investment Analysis & Portfolio Theory 15

Security analysis is a method which helps to

KDF4B – Investment Analysis & Portfolio Theory 17

SECURITY MARKET INDICATORS

KDF4B – Investment Analysis & Portfolio Theory 18

OBJECTIVES OF MARKET INDICES

•Reflects market movements accurately.

•Measures portfolio returns vs. market

•Basis for index based derivatives.

KDF4B – Investment Analysis & Portfolio Theory 19

Fundamental Analysis Vs. Technical Analysis

KDF4B – Investment Analysis & Portfolio Theory 20

KDF4B – Investment Analysis & Portfolio Theory 21

The study of forces that

KDF4B – Investment Analysis & Portfolio Theory 22

KDF4B – Investment Analysis & Portfolio Theory 23

RANDOM WALK THEORY

KDF4B – Investment Analysis & Portfolio Theory 24

EFFICIENT MARKET HYPOTHESIS

”EMH an investment theory that states it is impossible to

KDF4B – Investment Analysis & Portfolio Theory 25

EFFICIENT MARKET FORMS

KDF4B – Investment Analysis & Portfolio Theory 26

KDF4B – Investment Analysis & Portfolio Theory 27

UNIT III - Syllabus

• Company analysis components

KDF4B – Investment Analysis & Portfolio Theory 28

STEPS OF FUNDAMENTAL ANALYSIS

KDF4B – Investment Analysis & Portfolio Theory 29

KDF4B – Investment Analysis & Portfolio Theory 30

KDF4B – Investment Analysis & Portfolio Theory 31

KDF4B – Investment Analysis & Portfolio Theory 32

KDF4B – Investment Analysis & Portfolio Theory 33

KDF4B – Investment Analysis & Portfolio Theory 34

♦ Earnings per share (EPS): (Net income after taxes –

KDF4B – Investment Analysis & Portfolio Theory 35