MBA & MBA – Banking and Finance(Term-IV)

Course : Security Analysis and Portfolio Management

Unit I : Introduction to Security analysisLesson No. 1.1- Investment

WHAT IS INVESTMENT? Investment is a commitment of

funds made in the expectation of some positive rate of return.

Investment is the sacrifice of certain present value for uncertain future reward.

INVESTMENT ATTRIBUTES Rate of return Risk Marketability & Liquidity Tax shelter Safety Hedge against Inflation Convenience

WHAT IS SPECULATION? Assuming business risk in the hope

of earning a short-term gain. Involves buying and selling of

securities with a view to earn profits due to price fluctuations.

INVESTMENT VS. SPECULATIONPoints of Difference

Investment Speculation

Planning Horizon

Longer Planning Horizon Short Planning Horizon

Basis for Decisions

Scientific Analysis of Intrinsic worth of the security

Inside information, hearsays, Market Psychology

Funds Use of own funds Use of Borrowed funds

Risk Moderate Risk High Risk

Return Expectation

Modest rate of Return High rate of return

Motive Reasonable return on a consistent basis

One time , large return rather quickly

INVESTMENT VS. GAMBLINGPoints of Difference

Investment Gambling

Planning Horizon

Longer Planning Horizon Short Planning Horizon

Basis for Decisions

Scientific Analysis of Intrinsic worth of the security

Based on tips and rumors

Nature Planned activity Unplanned activity

Risk Commercial Risk Artificial Risk

Return Expectation

Risk-return trade-off determines return

Negative returns are expected

Motive Safety of principal and stability of returns

Entertainment while earning

THE INVESTMENT PROCESSIt consists of the following steps: Security Analysis Portfolio Management

SECURITY ANALYSIS Security Analysis defined:

The entire process of estimating return and risk for individual securities is known as Security Analysis.

Approaches to Security Analysis:1. Traditional Security Analysis : Analysts have

attempted to identify undervalued securities to buy, and overvalued securities to sell.

2. Modern Security Analysis : Strongly influenced by Efficient Market Hypothesis. It questions the validity of Traditional Security Analysis.

PORTFOLIO MANAGEMENT Portfolio: It is a combination of

Securities with their own risk and return characteristics.

Portfolio Management : It is the dynamic function of analyzing, selecting, evaluating and revising the portfolio in terms of stated investor objectives.

APPROACHES TO PORTFOLIO MANAGEMENT Traditional Portfolio Management:

Selection of those securities that best fit the personal needs and desires of the investor. It may yield less than optimum results.

Modern Portfolio Management: Scientific approach based on estimates of risk and return of the portfolio. Analysis of securities on the basis of attitudes of investors towards risk-return trade-off.

INVESTMENT CATEGORIES

Real Assets: Tangible, material things like, automobiles. Real assets are heterogeneous, thus less liquid.

Financial Assets: Paper claims, that represent an indirect claim on the real assets of an entity. Eg: debt or equity instruments. Financial assets offer the benefit of liquidity to the investor.