BPK6C SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT. Unit : I to V. BPK6C - Security analysis and portfolio management

Transcription

1 BPK6C SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Unit : I to V BPK6C - Security analysis and portfolio management

2 UNIT 1 SYLLABUS 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 BPK6C - Security analysis and portfolio management 2

3 Nature and Scope of investment management BPK6C - Security analysis and portfolio management 3

4 Investment management & portfolio management Portfolio management is 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. BPK6C - Security analysis and portfolio management 4

5 Factors for investment analysis BPK6C - Security analysis and portfolio management 5

6 APPROACHES DECISION MAKING BPK6C - Security analysis and portfolio management 6

7 INVESTIGATE, THEN INVEST Discover and exploit other investors mistakes BPK6C - Security analysis and portfolio management 7

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9 Meaning of investment Investment means is to allocate money in the expectation of some benefit in the future. BPK6C - Security analysis and portfolio management 9

10 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. BPK6C - Security analysis and portfolio management 10

11 INVESTMENT OBJECTIVES 1. Return 2. Risk 3. Liquidity 4. Hedge against inflation 5. Safety 6. Tax shelter 7. convenience BPK6C - Security analysis and portfolio management 11

12 INVESTMENT PROCESS BPK6C - Security analysis and portfolio management 12

13 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 BPK6C - Security analysis and portfolio management 13

14 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. BPK6C - Security analysis and portfolio management 14

15 UNIT II - Syllabus Understanding the investment environment sources of investment information. 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. BPK6C - Security analysis and portfolio management 15

16 Sources of investment information National affairs Industry information Company information Internation al affairs Sources of Investment information Stock market information BPK6C - Security analysis and portfolio management 16

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18 TECHNICAL ANALYSIS Technical analysis involves a study of market generated data like prices and volume to determine the future direction of price movement. BPK6C - Security analysis and portfolio management 18

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20 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). BPK6C - Security analysis and portfolio management 20

21 SECURITY MARKET INDICATORS Security Market indices provides a summary measure of the behavior of security prices and the stock market. BPK6C - Security analysis and portfolio management 21

22 OBJECTIVES OF MARKET INDICES Reflects market movements accurately. Measures portfolio returns vs. market returns. Basis for index based derivatives. BPK6C - Security analysis and portfolio management 22

23 Fundamental Analysis Vs. Technical Analysis BPK6C - Security analysis and portfolio management 23

24 INDUSTRY ANALYSIS BPK6C - Security analysis and portfolio management 24

25 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. BPK6C - Security analysis and portfolio management 25

26 DOW THEORY BPK6C - Security analysis and portfolio management 26

27 RANDOM WALK THEORY NCE BPK6C - Security analysis and portfolio management 27

28 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. BPK6C - Security analysis and portfolio management 28

29 EFFICIENT MARKET FORMS BPK6C - Security analysis and portfolio management 29

30 INDUSTRY ANALYSIS BPK6C - Security analysis and portfolio management 30

31 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 BPK6C - Security analysis and portfolio management 31

32 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. BPK6C - Security analysis and portfolio management 32

33 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 BPK6C - Security analysis and portfolio management 33

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35 COMPANY ANALYSIS ASPECTS Marketing Accounting Policies Profitability Dividend Policy Capital Structure Operating Efficiency Management Financial analysis BPK6C - Security analysis and portfolio management 35

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37 FINANCIAL RATIOS BPK6C - Security analysis and portfolio management 37

38 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 BPK6C - Security analysis and portfolio management 38

39 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 =D t + (P t - P t-1 ) P t-1 BPK6C - Security analysis and portfolio management 39

40 RISK AND RETURN BPK6C - Security analysis and portfolio management 40

41 MEANING OF RISK Risk is an uncertain event or condition that if it occurs, has an effect on atleast one objective. BPK6C - Security analysis and portfolio management 41

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43 Total risk = systematic risk+ unsystematic risk BPK6C - Security analysis and portfolio management 43

44 UNIT IV - Syllabus 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 BPK6C - Security analysis and portfolio management 44

45 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. BPK6C - Security analysis and portfolio management 45

46 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. BPK6C - Security analysis and portfolio management 46

47 PORTFOLIO MANAGEMENT PROCESS R4 BPK6C - Security analysis and portfolio management 47

48 VARIOUS STEPS TO DEVELOP PORTFOLIO BPK6C - Security analysis and portfolio management 48

49 STEPS IN TRADITIONAL APPROACH BPK6C - Security analysis and portfolio management 49

50 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 BPK6C - Security analysis and portfolio management 50

51 EFFICIENT PORTFOLIO THEORY BPK6C - Security analysis and portfolio management 51

52 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 BPK6C - Security analysis and portfolio management 52

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54 MARKOWITZ APPROACH BPK6C - Security analysis and portfolio management 54

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56 UNIT V - Syllabus CAPM Beta Security Market Line Arbitrage Pricing Theory Derivative Forward Contract Options Types of traders Institutional Investors BPK6C - Security analysis and portfolio management 56

57 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. BPK6C - Security analysis and portfolio management 57

58 CAPITAL ASSET PRICING MODEL du BPK6C - Security analysis and portfolio management 58

59 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 (use S&P 500 Index or similar as a proxy). risk BPK6C - Security analysis and portfolio management 59

60 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. BPK6C - Security analysis and portfolio management 60

61 SECURITY MARKET LINE y8 BPK6C - Security analysis and portfolio management 61

62 ARBITRAGE PRICING THEORY- ABT Q BPK6C - Security analysis and portfolio management 62

63 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. BPK6C - Security analysis and portfolio management 63

64 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. t8 BPK6C - Security analysis and portfolio management 64

65 OPTIONS Options are traded both on exchanges and in the over-the-counter market wxu BPK6C - Security analysis and portfolio management 65

66 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. BPK6C - Security analysis and portfolio management 66

67 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. BPK6C - Security analysis and portfolio management 67