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MF0010-Security Analysis and Portfolio Management

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Master of Business Administration - MBA Semester 3
MF0010-Security Analysis and Portfolio Management-4 Credits
(Book ID: B1754)
Assignment (60 Marks)
Note: Answer all questions must be written within 300 to 400 words each. Each Question carries 10
marks 6 X 10=60
Q1. Financial markets bring the providers and users in direct contact without any intermediary. Financial
markets permits the businesses and governments to raise the funds needed by sale of securities.
Describe the money market/capital market – features and its composition.
Answer. Money Market – Features and Composition
The money market exists as a result of the interaction between the suppliers and demanders of short-term
funds (those having a maturity of a year or less). Most money market transactions are made in marketable
securities which are short-term debt instruments such as T-bills and commercial paper. Money (currency)
is not actually traded in the money markets. These crudities traded in the money market are short-term
with high liquidity and low-risk; therefore they are close to being money. Money market provides investors
a place for parking surplus funds for short periods of time.
Q2. Risk is the likelihood that your investment will either earn money or lose money. Explain the factors
that affect risk. Mr. Rahul invests in equity shares of Wipro. Its anticipated returns and associated
probabilities are given below:
You are required to calculate the expected ROR and risk in terms of standard deviation.
(Explanation of all the 4 factors that affect risk, Calculation of expected ROR and risk in terms of
standard deviation)
Answer. Factors that affect risk
Business risk: This is the possibility that the company holding your money will not pay the interest or
dividend due, or the principal amount, when your bond matures. This may be caused by a variety of
factors like heightened competition, emergence of new technologies, development of substitute products,
shifts in consumer preference, inadequate supply of essential inputs, changes in governmental policies and
so on. The poor business performance definitely affects the interest of equity shareholders, who have a
residual claim on the income and wealth of the firm.
Q3. Explain the business cycle and leading coincidental & lagging indicators. Analyse the issues in
fundamental analysis.
Answer. Business cycle and leading coincidental and lagging indicators
All economies experience recurrent periods of expansion and contraction. This recurring pattern of
recession and recovery is called the business cycle. The business cycle consists of expansionary and
recessionary periods. When business activity reaches a high point, it peaks; a low point on the cycle is a
trough. Troughs represent the end of a recession and the beginning of an expansion. Peaks represent the
end of an expansion and the beginning of a recession. In the expansion phase, business activity is growing,
production and demand are increasing, and employment is expanding. Businesses and consumers
normally borrow more money for investment and
Q4. Discuss the implications of EMH for security analysis and portfolio management.
Answer. Implications for active and passive investment
Proponents of the efficient market hypothesis often advocate passive as opposed to active investment
strategies. Active management is the art of stock-picking and market-timing. The policy of passive
investors is to buy and hold a broad-based market index. Passive investors spend neither on market
research nor on frequent purchase and sale of shares. However, passive strategies may be tailored to meet
individual investor requirements. The efficient market debate plays an important role in the decision
between active and passive investing.
Q5. Explain about the interest rate risk and the two components in it. An investor is considering the
purchase of a share of XYZ Ltd. If his required rate of return is 10%, the year-end expected dividend is Rs.
5 and year-end price is expected to be Rs. 24, Compute the value of the share.
Answer. Interest Rate Risk: With the passage of time, interest rate changes in the market. The cash flows
from a bond (coupon payments and principal repayment) however, remain fixed. As a result, the value of a
bond fluctuates. Thus interest rate risk arises because the changes in the market interest rates affect the
value of the bond. The return on a bond comes from coupons payments, the interest earned from reinvesting coupons (interest on interest), and capital gains. Since coupon payments are fixed, a change in
the interest rates affects interest on interest and capital gains or losses. An increase in interest rates
decreases the price of a bond (capital loss) but increases the interest received on reinvested coupon
payments (interest on interest).
Q6. Elucidate the risk and returns of foreign investing. Analyze international listing.
Answer. Risks and Returns from Foreign Investing
International investing provides superior returns adjusted for risk. Allocating some portion of one's
portfolio to foreign assets provides better risk adjusted reruns than a portfolio of domestic assets alone.
International equities also offer access to a broader spectrum of economies and opportunities that can
provide for further diversification benefits. Some of the best performing companies in the world like
General Electric, Exxon Mobil and Microsoft have shares that are listed on overseas stock markets. If an
investor wants to profit from the growth
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