Sapm Mba
Sapm Mba
Sapm Mba
SECURITY ANALYSIS
INDTRODUCTION
»OVERVIEW
»INVESTMENT – BASIC CONCEPTS
»INVESTMENT ALTERNATIVES
»SECURITIES MARKET
2
INVESTMENT
3
Investment alternatives
Non marketable
Financial Equity Shares . Bonds .
Assets .
Mutual fund
Real estate .
Schemes .
4
Investment alternatives
Life
Money Precious
insurance
market . Objects.
Policies .
Financial Preference
Derivatives. shares
5
Non – marketable Financial Assets
1. Bank Deposits
2. Post office Deposits
3. Company Deposits
4. Provident fund Deposits .
6
EQUITY SHARES
7
BONDS
8
Mutual Funds
9
Real Estate
10
Money market Instruments
»The money market is used by participants as a
means for borrowing and lending in the short
term, from several days to just under a year.
»These are debt instruments
» Important money market instruments are :
»Treasury bills
»Commercial paper
»Certificate of deposits
»Repos .
11
Life Insurance
12
Precious Objects
13
Financial Derivatives
» A derivative is a financial instrument or a
financial contract, whose value is derived
from one or more underlying assets.
»The most common underlying assets include
stocks , bonds , commodities , currencies ,
interest rates and market Indexes
» Most important financial derivatives from the
point of view of investors are :
»Options
»Futures .
14
Types of investors
»Individuals
»Institutions
» (a) Mutual Funds
» (b) Pension Funds
» (c ) Endowment funds (used by nonprofits org)
» (d) Insurance Companies
» (e) Banks
15
Criteria for Evaluation
16
Rate of return
Rate of Return =
Annual income + ( Ending price – Beginning price)
Beginning Price
.
17
Example
» Consider the following information about a certain
equity share :
» Price at the beginning of the year Rs 85
» Dividend paid towards the end of the year Rs 4.00
» Price at the end of the year Rs 98
» The rate of return on this share is calculated as follows
:
» 4.00 + ( 98- 85)
85
= 17/85 = 20%
18
Risk
19
»Variance : the is the mean of square deviations
of individual returns around their average value
»Standard deviation : this is square root of
variance
»Beta : this is how volatile is the return from an
investment relative to market swings.
20
Marketability
22
Taxation
23
Taxation
Asset Type Expected Net Return
Return
B 8% tax-free bonds 8% 8%
Although asset A carries a higher coupon rate, the net return for the
investors would be higher for asset B and hence asset B would trade at a
premium as compared to asset A.
In some cases taxation benefits on certain types of income are available
on specific investments. Such taxation benefits should also be
considered before deciding the investment portfolio.
24
TAXATION OF SECURITIES- INDV
Dividends CAPITAL GAINS
SHORT TERM LONG TERM DDT
EQUITY EXEMPT 15 .45% EXEMPT 15% DDT
applies on
dividends
MUTUAL
FUNDS
-Equity EXEMPT 15.45% EXEMPT NA
oriented
-Other than EXEMPT AS PER 10% without indexation or DDT
equity NORMAL RATES 20% with indexation which applies
ever is lower + 3% Cess
GOLD ETF EXEMPT AS PER 10% without indexation or DDT
NORMAL RATES 20% with indexation which applies
ever is lower + 3% Cess
26
MUTUAL FUNDS
What is a Mutual Fund?
2
3
Benefits of Mutual funds
Which Stock should I invest In ? Mutual Funds are run by
professional Managers who have
necessary skills for stock selection
How many shares can I really buy To achieve diversification : lets say
with Rs 1000 there 1000 investors who invest
INR 1000 with a fund, the total
amount with fund will be INR
10,00,000 they can now achieve
the diversification by purchasing
no of shares across various
sectors
4
Lets say they buy 3 stocks
Company No of Cost per share Total Amount Rs
shares (Rs)
HDFC Bank 500 800 500* 800 = 4,00,000
RIL 225 1000 225*1000 = 2,25,000
TCS 250 1500 250* 1500= 3,75,000
TOTAL 10,00,000
Regulator : Frames the rules and regulates the industry . Mutual Fund
are a highly regulated as they have been set up for small investors.
SEBI has strict regulation on fees , reporting standards and audits
6
STURCTURE OF MUTUAL FUND
»SPONSORS : Sponsor is basically the promoter
of the fund.
»ASSEST MANAGEMENT COMPANY : A set of
Financial professionals who manage the fund
»TRUSTEES : Professionals who supervise the
activities of AMC.
»CUSTODIAN : keeps safe custody of
Investments and benefits Interest ÷nds
»TRANSFER AGENTS : maintains record of unit
holders & provide services like purchase ,
transfer and redemption
7
Structure of a mutual fund
8
How do Fund raise money ?
9
What do Mutual Funds Invest In ?
10
Net Asset Value ( NAV)
11
MF NAV Calculation
12
MF NAV Calculation
» XYZ Investments launches a Equity Fund.
» It raises Rs 150 crore by issuing 15 crore units of
funds at Rs 10 each.
» Post issue, investors can buy and sell from the fund.
» Suppose on a particular day, the number of units
outstanding were 15.5 crore, the market value all the
investments ( including cash) was Rs 178.25 crore ,
the dividend income accrued was Rs 1.5 crore and
expenses accrued totaled Rs 3.25 crore
13
NAV EXAMPLE
NAV = Rs 11.387
14
Loads and commissions
15
MUTUAL FUNDS IN INDIA
Mutual finds
in India
Investment Investment
Structure
Objective Plan
16
»Mutual fund can be broadly classified on the
basis of structure into two categories as shown
below.
Based on
Structure
Open
ended fund
Close
ended fund
17
OPEN ENDED FUNDS
19
»The retail investors tend to behave in an
irrational behavior i .e they buy when the
markets are high and sell when the markets
are low
»The fund manager has to do the same thing
as well, to generate cash when you are
selling and invest when you are buying .
»This means he will buy when the markets are
high and sell when the markets are low but he
would ideally like to do the opposite
20
CLOSE ENDED FUND
21
»In order to provide an exit route to the
investors, some close-ended funds give an
option of selling back the units to the mutual
fund through periodic repurchase at NAV
related prices.
»SEBI Regulations stipulate that at least one of
the two exit routes is provided to the investor
ie either repurchase facility or through listing
on stock exchanges.
»These mutual funds schemes disclose NAV
generally on weekly basis.
22
»FIXED CORPUS : As the corpus is fixed , the
fund manager is not subject to the vagaries
like in open ended fund.
»The fund manager knows exactly the cash he
has any time he can decide when to hold
cash and when to invest thereby using his
skills to maximize the returns for the unit
holders
23
Classification on the basis of Investment
Balanced Fund
INVESTMENT OBJECTIVE
24
Growth/Equity oriented schemes
»These funds Invest a major part of their corpus in
equities.
»Such funds have comparatively high risks
»One should invest them for long to medium term
for capital appreciation.
HDFC equity
»Example Scheme- open
ended growth
scheme
25
»Growth schemes can further be classified on the
based on the companies they invest in.
26
» Sectoral Funds these funds are at the highest end
of the risk spectrum as they mainly invest in one
sector. This could be in FMCG , telecom etc
»Example : SBI FMCG
Open ended equity
scheme
COMPANY ALLOCATION
ITC 44%
Hindustan lever 8%
Untied spirits 7%
Titan industries 3%
Others 38%
27
Income/Debt oriented scheme
29
»Income funds can be classified based on
tenor and nature of debt securities they invest
in.
Based on Tenor
Dynamic/flexible
30
Based on Debt
security
»Gilt Funds
»Kotak Gilt Inv Regular
31
Example : Regular Fund
others
10%
G Sec G Sec
money market
43%
18% Corporate
money market
others
Corporate
29%
32
Balanced /Hybrid schemes
»These schemes invest both in equities and fixed
income securities in a certain stable proportion .
» These will carry a higher risk as compared to
income funds but lower than growth fund .
»They generally invest 40-60 per cent in equity
and debt instruments.
» These funds are also affected because of
fluctuations in share prices in the stock markets.
»However, NAVs of such funds are likely to be less
volatile compared to pure equity funds.
33
Example : Balanced Fund
»HDFC Balanced Fund , Open ended scheme
Cash and
cash equv, , 0
Debt, 5%
25.00% Equity
Debt
Cash and cash equv
Equity,
70.00%
34
Money Market or Liquid fund
36
Index Funds
37
Example : Index Fund
38
Principal protected / Capital Guaranteed
39
»The money is allocated between debt and
equity in such a way that the principal amount
is recoupable and does not get eroded in case
of negative market swings
40
Example : Capital Guaranteed
41
Fixed Maturity Plans
43
Taxation of FMP’s
44
»long-term capital gains (if investments are
held for more than 365 days), the tax liability
is determined based on the lower of with
indexation (charged at 20% plus surcharge)
and without indexation (charged at 10% plus
surcharge).
»With the indexation benefit, FMPs end up
delivering more tax efficient returns than FDs.
45
TYPES OF MUTUAL FUND : INVESTMENT PLAN
46
Growth Plans
47
Dividend Plan
48
Systematic Investment Plan ( SIP)
49
EXCHANGE TRADED FUNDS (ETF’S)
50
»A security that tracks an index, a
commodity or a basket of assets like
an index fund, but trades like a stock
on an exchange.
» ETFs experience price changes
throughout the day as they are bought
and sold.
51
»Exchange Traded Funds (ETFs) represent a
basket of securities that is traded on an
exchange, similar to a stock.
» Hence, unlike conventional mutual funds, ETFs
are listed on a recognised stock exchange and
their units are directly traded on stock exchange
during the trading hours.
» In ETFs, since the trading is largely done over
stock exchange, there is minimal interaction
between investors and the fund house.
52
53
54
55
56
»ETFs are either actively or passively managed.
Actively managed ETFs try to outperform the
benchmark index, whereas passively-managed
ETFs attempt to replicate the performance of a
designated benchmark index.
57
BONDS BASICS
BONDS
» A bond is a fixed income security (debt instrument)
that typically carries
1. A specific rate of interest called coupon rate that
the bond issuer agrees to pay to the bond holder
2. And the promise to repay the principal at maturity
It as a loan taken by the issuer of the bond. The
bond certificate is the proof of borrowing or a
promise to repay
Bonds are traded in India are primarily OTC ( over the counter)
There are bonds traded on the stock exchange also to
encourage retail participation
2
COUPON RATE
4
Yield
At the time when the bonds are issued in the primary market,
the return to the investor is the coupon rate…i.e. the percentage
Of face value.
Thereafter the bond is traded in the secondary market , the
Investor pays price different from the face value. hence his return
at that time is : Coupon amount / price
The return will be different from the coupon rate as he has
invested different amount than the face value
5
»Market price of the bond keeps varying, the yield
in the market also keep varying
6
»Now let’s say the 1 year interest rate in market
falls to 7% what does this mean ?
»This means that if a fresh bond is issued , it
can be issued at only at 7%
»So now we have 2 bonds , one with a coupon
of 9% and another with 7%.
»Which bond will command higher price in the
market – Of course the 9% bond , as it gives
you a fixed annual cash flow of Rs 9 as
opposed to 7% bond
7
»Every one think the same way, and want to
buy the 9% bond will then go up , but by how
much ? The price will go up in such a way
that the return (yield) on this bond will also be
7% .
»Therefore , the price has to now increase such
that coupon of Rs 9 gives a return of 7%on
this price.
»That price will be Rs 128.5 ( 9/128.5 = 7%)
8
»This shows two things
»All 1 year bonds will now yield of 7%
irrespective of coupon as this is the prevailing
market interest rate for 1 year
»As prevailing market interest rate (yield) goes
down the bond prices goes up and vice –
versa . Hence bond price and yield have an
inverse relationship
9
Yield to maturity (YTM)
10
»The following equation will help us
understand the YTM as it relates to the market
price of a bond.
»Note that the final cash flow should include both
the principal and the coupon.
11
»If the YTM is less (greater) than the bond’s
coupon rate, the market price is greater (lesser)
than the par value, and we say the bond is
selling at a premium (at a discount).
»If YTM is more than the coupon rate, we say the
bond is selling at a discount. If the YTM is equal
to the coupon rate, the bond is trading at its par
value (selling at par).
12
SELF CHECK
13
SELF CHECK
14
YIELD CURVE
15
POSITIVE YIELD CURVE
A positive yield curve is a curve where interest rate for
shorter maturities are lower than the rates for longer
maturities
Y
I
E
L
D
Y
I
E
L
D
However,
TENORthe yield curve can be inverted and
downward-sloping if the economy is expected to slow
or a recession is imminent. 17
FLAT YIELD CURVE
A Flat yield curve is a curve where interest rates are the
same across maturities
Y
I
E
L
D
Yield Curve:
Economy Good = Increasing Upward
Economy Bad = Inverted
19
SELF CHECK
20
SELF CHECK
21
Self Check
22
Self Check
23
CREDIT RATING
Government of India wants to issue a 10 year bond to borrow money .
The current 10 year yield on government bond is 8% .
The coupon on the new bond , will be around 8%
Now if any company say Tata Motors comes to the market to issue
A 10 year Bond …..At what rate can they raise money
Now DLF comes to the market and issues a 10 year bond . At what
Can it issue the bond ? It will depend on credit rating of DLF
24
CREDIT RATING AGENCIES
26
BOND MARKET
27
Classification of Bonds
Bond
Types of issuer
characteristics
28
BY ISSUER : GOVERNMENT BONDS
»These bonds are issued by the government of a
country , to fund their fiscal deficit. These bonds
are called by different names in different countries
»In India they are called G- secs or Gilts. They are
very safe investments as they are backed by the
Government
»G-secs are available for maturities as high as 30
years . These bonds require high investment and
the market is therefore limited to Institutional
players . Individuals therefore invest through
mutual funds
29
BY ISSUER : CORPORATE BONDS
30
»They are traded primarily OTC like G-secs ,
though a few are listed on the stock exchange
31
BONDS CHARACTERSICS
CALLABLE BOND
32
BONDS CHARACTERSICS
PUTAABLE BOND
When the market yield is higher than the coupon , the investor
Will sell the lower coupon bonds held by him and use the money to
Buy bonds in the market at the prevailing yield
33
Convertible Bonds
34
»Convertible bonds carry a lower coupon
because of the obvious benefit to the
investors.
»In India , Corporate bonds tend to be
mandatorily convertible after a period.
35
SELF CHECK
1 2 3 4 5 6 7 8
36
SELF CHECK
37
Models of Risk and
Return
Parvesh Aghi
CONCEPT
2
CAPITAL PRICING ASSET MODEL
3
CAPM MODEL
Rs = Rf + bs(Rm - Rf)
4
As per CAPM the investors needs to be
compensated in two ways: time value of
money and risk
5
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 ).
6
The CAPM says that the expected return of a
security or a portfolio equals the rate on a
risk-free security plus a risk premium.
7
Security Market line
8
CAPM ASSUMPTIONS
9
Total Risk = Systematic Risk + Unsystematic Risk
10
UNSYSTEMATIC RISK
11
SYSTEMATIC RISK
12
What is BETA ?
Rs = Rf + bs(Rm - Rf)
13
Beta is calculated using regression analysis,
and you can think of beta as the tendency
of a security's returns to respond to swings
in the market.
It measures the sensitivity of a stock’s returns to
changes in returns on the market portfolio
15
BETA FORMULA
16
Calculating “Beta”
YEARS MARKET RETURN XYZ LTD RETURNS
Rm (%) Rx (%)
1 20 25
2 -18 -32
3 40 55
4 -8 -13
5 36 45
ESTIMATION OF BETA
YEA MARKET XYZ LTD Market Stock
RS RETURN Rx % Deviation deviation (4) X (5) (Rm-Rm )²
% Rm-Rm Rx -Rx
3 40 55 26 39 1014 676
5 36 45 22 29 638 484
α = 16 – 1.434 X 14
= 16 – 20.076
= - 4.076 % is the return from unsystematic risk
Thus the characteristic line of XYZ Ltd is :
Rx = -4.076 + 1.434 Rm
20
We can plot the observed returns on market and
XYZ ltd and fit A regression line as shown in the
figure . The fitted line is as per the equation A ,
the regression line as per the market model is called
The characteristics line
21
Security Characteristic line
Characteristic line
Slope = beta
MARKET RETURN
Characteristic Line
Security Characteristic line
23
The Market Model
24
Rx b x Rm ex
Equation A
25
The value of β and α in the regression are given
by the following equations
26
MARKET STOCK
Year RETURN RETURN X Y XY X² Y²
1 20 25 6.00 9.00 54 36 81
2 -18 -32 -32.00 -48.00 1536 1024 2304
3 40 55 26.00 39.00 1014 676 1521
4 -8 -13 -22.00 -29.00 638 484 841
5 36 45 22.00 29.00 638 484 841
14.00 16.00
0 0 3880 2704 5588
28
Risk Premium = (Rm-Rf)
assume:
several factors affect E(R)
does not specify factors
30
MACRO ECONOMIC FACTORS
Implications
E(R) is a function of several Macro
Economic factors, F each with its
own b .
E( R ) R f b1F1 b2 F2 b3F3 .... bN FN
31
APT vs. CAPM
32
CONCLUSION
33
Arbitrage pricing theory (APT)
34
Sensex market return 2002-13 = 15%
35
10 year Govt Bond ( 2002-13) = 8%
36
»Market risk premium= Rm-Rf = 15% -8% =7%
»-
37
PORT FOLIO
THEORY
Parvesh Aghi
If you were to craft the perfect investment, you would
probably want its attributes to include high returns
coupled with low risk. The reality, of course, is that this
kind of investment is next to impossible to find.
Not surprisingly, people spend a lot of time developing
methods and strategies that come close to the
"perfect investment".
2
MODERN PORTFOLIO THEORY (MPT)
3
MODERN PORTFOLIO THEORY (MPT)
4
NORMAL DISTRIBUTION
5
NORMAL DISTRIBUTION
6
NORMAL DISTRIBUTION
7
MODERN PORTFOLIO THEORY (MPT)
»The portfolio
A portfolio theory
is a bundle provides
or a combination a normative
of individual assets
or securities to investors to make decisions to invest
approach
their wealth in assets or securities under risk.
The portfolio theory provides a normative approach to investors
to make decisions to invest their wealth in assets or securities
under risk.
8
MODERN PORTFOLIO THEORY (MPT)
9
Diversification and portfolio risk
10
Probability distribution of returns
State of Probability Return of Stock Return of Stock
economy A B
1 .2 15% -5%
2 .2 -5% 15%
3 .2 5 25
4 .2 35 5
5 .2 25 35
11
EXPECTED RETURN OF PORTFOLIO
State of Probability Return of Return of Return of
economy Stock A Stock B Portfolio
1 .2 15% -5% 5%
2 .2 -5% 15% 5%
3 .2 5 25 15%
4 .2 35 5 20%
5 .2 25 35 30%
2 .2 -5% 15% 5% 1
3 .2 5 25 15% 3
4 .2 35 5 20% 4
5 .2 25 35 30% 6
13
Expected Return and Standard Deviation
Expected Return
Stock A .2 (15%)+.2 (-5%)+.2(5%)+.2(35%)+.2(25%)= 15%
Stock B .2 (-5%)+.2 (15%)+.2(25%)+.2(5%)+.2(35%)= 15%
Standard Deviation
Stock A .2( 15-15)2+ .2(-5-15)+.2(5-15)+.2(35-15)+.2(25-15)=200
A
(200 )½ 14.14%
A
Stock B .2( -5-15)+.2(5-15)+.2(15-15)+.2(20-15)+.2(30-15)=200
(200 )½= 14.14%
Portfolio (A+B) .2(5-15)+.2(5-15)+.2(15-15)+.2(20-15)+.2(30-15)= 90
(90 )½= 9.49%
14
Last slide shows that if you invest only in stock A , the expected
Return is 15% and the standard deviation is 14.4%.
Like wise if you invest only in stock B , the expected return is
15% and standard deviation is 14.4%
15
In General , if returns on securities do not move in perfect
lockstep , diversification reduces risk.
16
Relationship between diversification & Risk
Market risk
17
Market risk versus Unique risk
Notice that the portfolio risk does not fall below a certain level ,
irrespective of how wide the diversification is.
18
Market risk versus Unique risk
Hence , the unique risk of a stock can be washed away by combining
it other stocks. In a diversified portfolio unique risks of different stocks
tend to cancel each other favorable development in one firm may
offset an adverse happening in another and vice versa . Unique risk
is also referred to as diversifiable risk or unsystematic risk
The market risk of a stock represents that portion of its risk which is
attributable to economy wide factors like the growth rate of GDP
, the level of government spending , money supply, interest rate s
tructure and inflation rate
Since these factors affect all firms to a greater or lesser degree , investors
cannot avoid the risk arising from them , however diversified their
portfolios may be . Hence it is also referred to as systematic
risk or non diversifiable risk
19
Portfolio return and risk
20
Portfolio Risk Just as the risk of an individual security is
measured by the variance (or Standard deviation) of its return,
the risk of a portfolio too is measured by the variance or
standard deviation of its return.
21
What Does Covariance Mean?
A measure of the degree to which returns on two risky assets move in
tandem.
22
Possessing financial assets that provide returns and have a high
covariance with each other will not provide very much diversification.
For example, if stock A's return is high whenever stock B's return
is high and the same can be said for low returns, then these stocks
are said to have a positive covariance.
If an investor wants a portfolio whose assets have diversified
earnings, he or she should pick financial assets that have low
covariance to each other.
23
What Does Correlation Coefficient Mean?
A measure that determines the degree to which two variable's
movements are associated.
24
25
Types of correleationships
26
Total Risk of A & B DOES NOT EQUAL to ( Risk of A )+ (Risk of B)
27
Portfolio Risk: Two-Asset Case
» The portfolio variance or standard deviation depends
on the co-movement of returns on two assets.
Covariance of returns on two assets measures their
co-movement.
» The formula for calculating covariance of returns of
the two securities X and Y is as follows:
» Covariance XY = Standard deviation X ´ Standard
deviation Y ´ Correlation XY
» The variance of two-security portfolio is given by the
following equation:
p2 x2 wx2 y2 wy2 2wx wy Co varxy
x2 wx2 y2 wy2 2wx wy x y Corxy
» P = Variance of the portfolio
Wx and Wy are the weights of securities
29
Efficient frontier
30
Efficiency frontier
31
The investor can combine securities A and B in a portfolio in a number of ways by
simply changing the proportions of funds allocated to them
Standard
PROPORTION PROPORTION Expected Deviation
PORTFOLIO A B return
0.2 B
5
4
0.15
Return
A
0.1 2
0.05
0
0.00% 10.00% 20.00% 30.00% 40.00% 50.00%
Risk ( STANDARD DEVIATION )
33
»The six options described are plotted graphically
A few important points about this graph may be
noted.
1. The benefits of diversification arises when the
correlation between the two securities is less
than 1. Because the correlation between the
securities is -.20 , the effect of diversification
can been seen by comparing the curved line
between points A and B
2. Portfolio 3 represents the minimum variance
portfolio
34
3. The investor considering a portfolio of A and B
faces an opportunity set or feasible set
represented by the curve AB . By choosing an
appropriate mix between the securities , the
investor can achieve any point on the curve .
4 the curve bends backward between points A and
3 ( the minimum variance portfolio) . This
means that for a portion of the feasible set ,
standard deviation decreases although the
expected return increases.
35
»5. Although the entire curve from A and B is
feasible , investors would consider only the
segment fro 3 to B . This is called the efficency
set or the efficiency frontier. Points lying along
the efficient frontier are called efficient portfolio.
36
Risk Reduction Through Diversification
37
Risk Reduction Through Diversification
Y
Expected return
r = -0.5
r = -1 r = +1
B A
r = 0.5
Z
r=0
C X
Std. dev.
Introducing Borrowing and Lending : Risk Free Asset
39
Bundle of Risky Assets + Risk free Rate
Returns
T Bill Equity
(safe) (Risky)
SD 0% 24.87%
Coefficient of correlation 0
40
New Portfolio with Risk
41
Example : Transformation Line
35
30
R 0.5 lending +
e 25 0.5 in 1 risky bundle
t 20
u
r 15 No borrowing/
no lending
n 10
-0.5 borrowing +
5 All lending 1.5 in 1 risky bundle
0
0 5 10 15 20 25 30 35 40
Expected Return, N
Borrowing/
leverage
Z
Lending
X all wealth in risky asset
L
Q
r
all wealth in
risk-free asset
X Standard Deviation, N
The CML – Best Transformation Line
(CML) is the tangent line drawn from the point of the risk-free
asset to the feasible region for risky assets
Transformation line 3
– best possible one
ERp Portfolio M
Transformation line 2
Transformation line 1
rf
Portfolio A
p
The Capital Market Line (CML)
rf
20 Std. dev., i
The Security Market Line (SML)
rf
Objective :
Maximise Sharpe ratio (or Treynor ratio, or
Jensen’s alpha)
47
CAPITAL MARKET LINE
48
In Exhibit 1, the risk-free rate is assumed to
be 5%, and a tangent line—called the
capital market line— has been drawn to the
efficient frontier passing through the
risk-free rate.
The point of tangency corresponds to a
portfolio on the efficient frontier.
That portfolio is called the super-efficient
portfolio.
49
Using the risk-free asset, investors who hold
the super-efficient portfolio may:
50
The resulting portfolios have risk-reward
profiles which all fall on the capital market
line.
Accordingly, portfolios which combine the
risk free asset with the super-efficient
portfolio are superior from a risk-reward
standpoint to the portfolios on the
efficient frontier.
51
Tobin concluded that portfolio construction
should be a two-step process.
52
Significantly, the composition of the
super-efficient portfolio is independent of
the investor's appetite for risk.
The two decisions:
(A)the composition of the risky portion of the
investor's portfolio, and
(A)the amount of leverage to use,
are entirely independent of one another.
One decision has no effect on the other.
This is called Tobin's separation theorem
53
William Sharpe's (1964)
capital asset pricing model (CAPM)
demonstrates that, given strong simplifying
assumptions, the super-efficient portfolio
must be the market portfolio.
From this standpoint, all investors should
hold the market portfolio leveraged or
de-leveraged to achieve whatever level of
risk they desire.
54
'Efficient Market Hypothesis - EMH'
55
Although it is a cornerstone of modern financial
theory, the EMH is highly controversial and often
disputed.
Believers argue it is pointless to search for
undervalued stocks or to try to predict trends in the
market through either fundamental or technical
analysis.
56
Meanwhile, while academics point to a large body of
evidence in support of EMH, an equal amount of
dissension also exists.
For example, investors, such as Warren Buffett
have consistently beaten the market over long
periods of time, which by definition is impossible
according to the EMH. Detractors of the EMH also
point to events, such as the 1987 stock market
crash when the Dow Jones Industrial Average
(DJIA) fell by over 20% in a single day, as evidence
that stock prices can seriously deviate from their
fair values.
57
Random Walk Theory'
58
Random Walk Theory
60
THE BENEFITS OF INTERNATIONAL EQUITY
INVESTING
B. International Diversification
61
INTERNATIONAL PORTFOLIO INVESTMENT
62
INTERNATIONAL PORTFOLIO INVESTMENT
63
INTERNATIONAL PORTFOLIO INVESTMENT
3 .Recent History
a. National stock markets
have wide differences in returns
and risk.
b. Emerging markets have higher risk
and return than developed markets.
c. Cross-market correlations have
been relatively low.
64
Thank you
65
Fundamental Analysis
Parvesh Aghi
The methods used to analyze securities
and make investment decisions fall into
two very broad categories:
2
Fundamental analysis involves analyzing the characteristics of a
company in order to estimate its value.
3
FUNDAMENTAL ANALYSIS
A method of evaluating a security that entails attempting to
measure its intrinsic value by examining related economic,
financial and other qualitative and quantitative factors.
4
Fundamental stock analysis requires , among other things ,
a close examination of the financial statements for the company
to determine Its current financial strength , future growth and
profitability prospects and current management skills . In order
to estimate whether the stock price is undervalued or overvalued.
5
Numerous ratios derived from balance sheet and income statement
data are used In fundamental analysis including such widely used
ratios as Working Capital Ratio Debt-equity Ratio Return on
Equity Ratio Earnings per Share etc
6
The Concept of Intrinsic Value
One of the primary assumptions of fundamental analysis is that
the price on the stock market does not fully reflect a stock’s “real”
value.
After all, why would you be doing price analysis if the stock market
were always correct? In financial jargon, this true value is known
as the intrinsic value.
For example, let’s say that a company’s stock was trading at Rs200.
After doing extensive homework on the company, you determine
that it really is worth Rs 300.
7
In other words, you determine the intrinsic value of the firm to be
Rs 300.
This is clearly relevant because an investor wants to buy stocks
that are trading at prices significantly below their estimated
intrinsic value.
8
»
This is what fundamental analysis is all about. By focusing on
a particular business, an investor can estimate the intrinsic value
of a firm and thus find opportunities where he or she can buy at
a discount
If all goes well, the investment will pay off over time as the
Market catches up to the fundamentals.
9
Fundamental analysis serves to answer questions,
such as:
Is the company’s revenue growing?
Is it actually making a profit?
Is it in a strong-enough position to beat out its
competitors in the future?
Is it able to repay its debts?
Is management trying to "cook the books"?
10
Even though there is no one clear-cut method a breakdown is
presented below in the order an investor might proceed.
11
Economic Forecast
12
Group Selection
13
To assess a industry groups potential an investor would want
to consider the overall growth rate ,market size and importance
to the economy.
When stocks move they usually move as groups there are very
few lone guns out there.
14
Narrow Within the Group
15
A comparative analysis of the competition within a sector
will help identify those companies with an edge and those
most likely to keep it.
16
Company Analysis
17
Business Model
Even before an investor looks at a company's financial
statements or does any research, one of the most
important questions that should be asked is:
What exactly does the company do? This is referred
to as a company's business model – it's how a
company makes money. You can get a good
overview of a company's business model by
checking out its website
19
Operational effectiveness means a company is better
than rivals at similar activities while competitive
advantage means a company is performing better than
rivals by doing different activities or performing similar
activities in different ways.
20
Business Plan
21
Management
22
In order to execute a business plan a company
requires top-quality management. Investors might
look at management to assess their capabilities
strengths and weaknesses
Some of the questions to ask might include How
talented is the management team? Do they have a track
record ?How long have they worked together? Can
management deliver on its promises? If management
is a problem it is sometimes best to move on.
Even the best-laid plans in the most dynamic industries can go to
waste with bad management (JK synthetics in Nylon 6). Alternatively
even strong management can make for extraordinary success in
a mature industry (Bharti Airtel in telcom or SRF in Nylon 6).
23
Corporate Governance
Has the company set systems, processes and
principles which ensure that a company is
governed in the best interest of all stakeholders
The purpose of corporate governance policies is to ensure
that proper checks and balances are in place, making it
more difficult for anyone to conduct unethical and illegal activities
25
Market Share
Understanding a company's present market share can
tell volumes about the company's business
26
Industry Growth
27
Competition
28
Regulation
29
All in all, investors should always be on the lookout for
regulations that could potentially have
a material impact upon a business' bottom line.
Investors should keep these regulatory costs in mind as
they assess the potential risks and rewards of investing.
30
»For example, value investors that follow
fundamental analysis look at both qualitative
(business model, governance, target market
factors etc.) and quantitative (ratios, financial
statement analysis, etc.) aspects of a business to
see if the business is currently out of favor with
the market and is really worth much more than its
current valuation.
»Competitive land scape, Competitive advantage,
business plan
31
FINANCIAL MARKETS
Parvesh Aghi
Financial Markets
T -Bills
Equity Debt
CPs, CDs,
2
Financial markets can mainly be classified into money
markets and capital markets.
3
Both bond market and money market instruments
are fixed-income securities but bond market instruments
are generally of longer maturity period as compared
to money market instruments.
Money market instruments are of very short maturity
period.
The financial markets can be further classified into the
primary and the secondary market.
4
PRIMARY AND SECONDARY MARKETS
5
A primary market is that segment of the capital market,
which deals with the raising of capital from investors
via issuance of new securities
6
When an issuer wants to issue more securities of a
category that is already in existence in the market it is
referred to as Follow-up Offerings.
7
It is generally easier to price a security during a
Follow-up Offering since the market price of the security
is actually available before the company
comes up with the offer, whereas in the case of an IPO
it is very difficult to price the offer since there is no
prevailing market for the security.
It is in the interest of the company to estimate the
correct price of the offer, since there is a risk of failure
of the issue in case of non-subscription if the offer
is overpriced.
If the issue is underpriced, the company stands to
lose notionally since the securities will be sold at a price
lower than its intrinsic value, resulting in lower realizations
8
The secondary market (also known as ‘aftermarket’) is
the financial market where securities, which have been
issued before are traded.
9
Thus the primary market facilitates capital formation
in the economy and secondary market provides liquidity
to the securities.
There is another market place, which is widely referred
to as the third market in the investment world. It is
called the over-the-counter market or OTC market.
10
Trading in the OTC market is generally open to all
Registered broker-dealers. There may be regulatory
restrictions on trading some products in the OTC
markets.
11
Money Market
12
These securities are of very large denominations,
very liquid, very safe but offer relatively low interest
rates.
14
T-bills are circulated both in primary as well as
in secondary markets.
15
In India, T-bills are issued by the Reserve Bank of India
for maturities of 91-days, 182 days and 364 days.
They are issued weekly (91-days maturity) and
fortnightly (182-days and 364- days maturity).
16
Commercial Paper
17
Commercial paper Features
18
CPs can be issued in denominations of rs 5 lakh or
multiples thereof They can be issued for a maturity
of 15 days and a maximum of one year from the date
of issue
19
Certificates of Deposit
20
Repos and Reverse Repos
21
The difference between the sale price and the
repurchase price represents the yield to the buyer
(lender of funds) for the period.
22
Reverse repo is the mirror image of a repo, i.e., a repo
for the borrower is a reverse repo for the lender
23
Repurchase Agreement (repos)
I want I am ready
Rs 100 Crore To lend at
for one day 3.5% p.a
ICICI BANK Standard
for the one
Chartered Bank
day loan
24
I have got Rs 100 crore If you give me collateral
G-secs with me. I will lend you at
I will that to you as 3%
Collateral
Standard
ICICI BANK Chartered Bank
26
Thank You
27
Technical Analysis
Parvesh Aghi
The methods used to analyze securities
and make investment decisions fall into
two categories:
2
Fundamental analysis involves analyzing the economic, financial
and other qualitative and quantitative factors characteristics of a
company in order to estimate its value.
3
TECHNICAL ANALYSIS
•PRICE ACTION
4
Technical Analysis meaning
5
Difference between the two
8
Price discounts everything
A criticism of technical analysis is that it only
considers price movement, ignoring the fundamental
factors of the company.
The chartists believe that the prices of the market
reflect all the possible causes such as fundamental,
political, psychological etc. Therefore the study of
prices and volume is all that is required.
10
History repeats itself over time!
Another important idea in technical analysis is that
history tends to repeat itself, mainly in terms of price movement.
11
PRICE CHART
12
TECHNICAL CONCEPTS
1. TREND
2. SUPPORT & RESISTANCE
3. VOLUME
4. CHARTS & CHART PATTERNS
5. MOVING AVERAGES
13
TREND
14
Types of Trend
15
It isn't hard to see that the trend in Figure is up.
However, it's not always this easy to see a trend:
16
There are lots of ups and downs in this chart, but there
isn't a clear indication of which direction this security is headed.
17
»For example, an uptrend is indicated by
higher highs and higher lows. By connecting
the lows together, we get an upward sloping
trend line. When the trend line is sloping
upwards, we have an uptrend.
18
»A downtrend is indicated by lower highs and
lower lows. By connecting these points
together, we can draw a downward sloping
trend line. And when the trend line is sloping
downwards, we have a downtrend.
19
The Importance of Trend
20
SUPPORT AND RESISTANCE
21
» As you can see in Figure , support is the price level through which a stock or
market seldom falls (illustrated by the green line). Resistance, on the other hand,
is the price level that a stock or market seldom surpasses (illustrated by the red
line).
22
Role Reversal
23
» If the price goes up through resistance by a good
way, then that resistance level becomes a support
level when the price comes back down. Here’s an
illustration of that.
24
»And in the same way, when you have a
downtrend, often the support which gets
penetrated becomes a resistance next time
the price rises, as you can see here.
25
Volume
To this point, we've only discussed the price of a security.
While price is the primary item of concern in
technical analysis, volume is also extremely important.
What is Volume?
Volume is simply the number of shares or contracts
that trade over a given period of time, usually a day.
The higher the volume, the more active the security.
26
27
Why Volume is Important
Volume is an important aspect of technical analysis because
it is used to confirm trends and chart patterns.
28
If volume is high during the day relative to the average
daily volume, it is a sign that the reversal is probably for real.
29
Volume should move with the trend. If prices are
moving in an upward trend, volume should increase
(and vice versa).
30
What is a Moving Average ?
31
MOVING AVERAGES
Moving averages smooth the price data to form a trend
following indicator. They do not predict price direction,
but rather define the current direction with a lag.
32
Simple Moving Average
A simple moving average is formed by computing the average
price of a security over a specific number of periods.
33
SMA CALCULATION
Example of a 5-day moving average evolving over
three days.
The first day of the moving average simply covers the last five
days. The second day of the moving average drops the first data
point (10) and adds the new data point (15). The third day of the
moving average continues by dropping the first data point (11)
and adding the new data point (16).
34
Simple Moving Average Example
36
Exponential Moving Average
With simple averages the calculation is, well, simple. The simplicity
of the calculation can sometimes cause a bit of a flaw to the SMA.
The flaw is due to spikes in the price of a security.
For example, if you were to calculate the 4 day SMA of stock ABC
where its closing prices were, 2.75, 2.90, 3.00 and 2.95 the
SMA would work just fine and smooth the price out to 2.90.
Great, that sounds and looks normal.
In comes trouble, in our second example stock ABC has a huge news
event on day 2. Its closing prices over this 4 day span are 2.75, 5.05,
3.40, 3.20 See the large spike on day 2? That would cause the 4 day
SMA to average the price out to 3.60, which is a bit high.
The exponential moving average to the rescue! With the EMA the
calculation is a bit more complex in that it weighs the different
closing prices within the moving average range.
37
The EMA gives more weight to prices near the end of the range and less to those
prices in the beginning of the range. This gives more influence to the current
market activities of the stock. Which as you know, what is happening now in
the market is what is most important to pay attention to.
As you can see , a 30-period EMA rises and falls faster than a 30-period SMA.
This slight difference doesn’t seem like much, but it is an important factor to be aware of
since it can affect returns.
38
Major Uses of Moving Averages
39
Another method of determining momentum is to look at
the order of a pair of moving averages. When a
short-term average is above a longer-term average,
the trend is up.
On the other hand, a long-term average above a
shorter-term average signals a downward movement in
the trend.
Moving average trend reversals are formed in two
main ways: when the price moves through a moving
average and when it moves through moving
average crossovers
40
The first common signal is when the price moves
through an important moving average. For example,
when the price of a security that was in an uptrend
falls below a 50-period moving average
41
Notice the short term average crossing
above the long term average signals
beginning of an uptrend
42
Trend reverses once the price breaks above
The 30 DMA
43
If the periods used in the calculation are relatively short,
for example 10 and 30, this could signal a short-term trend reversal.
It is not uncommon to see a stock that has been falling stop its
decline and reverse direction once it hits the support of a
major moving average. A move through a major moving
average is often used as a signal by technical traders that
the trend is reversing.
44
For example, if the price breaks through the 200-day
moving average in a downward direction, it is a signal
that the uptrend is reversing.
45
The most common time frames that are used when
Creating moving averages are the 200-day, 100-day,
50-day, 20-day and 10-day.
46
The Big question
47
Market movements can be characterized by two
distinct types of phases
48
These two different phases of the market require the
use of different types of technical indicators :
49
VALUATION
-Parvesh Aghi
VALUATION
2
Equity Discounted Cash flow Models
3
Common Share Valuation using DDM
4
Constant Growth Dividend Discount Model
D1 D2 Dn
P0 ...
(1 kc ) (1 kc )
1 2
(1 kc ) n
Problems:
Companies that do not pay dividends.
The formula assumes that the growth rate will remain the same
in period 1 through infinity.
5
Gordon Growth Model
The DDM is most suitable when:
the company is dividend-paying
the board of directors has a dividend policy that
has an understandable relationship to profitability
the investor has a non-control perspective.
D0 (1 g )1 D0 (1 g ) 2 D0 (1 g )
P0 ...
(1 kc )1
(1 kc ) 2
(1 kc )
P0 = Share Price
D0 = current dividend D0 (1 g ) D1
g = Growth P0
Kc = Cost of Equity kc g kc g
D1 = Dividend next year
6
Example
Po = 85(1.12)
16%-12%
P0 = 95.2 / 4% = Rs 2380/-
7
Two-stage DDM
gs = growth period
gL = growth stable period
P0
8
Assume the following values
D0 is Rs 1.00
gS is 30%
Supernormal growth continues for 6 years
gL is 6%
The required rate of return is 12%
Present Values
Time Value Calculation Dt or Vt Dt/(1.12)t or Vt/(1.12)t
1 D1 1.00(1.30) 1.30 1.161
2 D2 1.00(1.30)2 1.69 1.347
3 D3 1.00(1.30)3 2.197 1.564
4 D4 1.00(1.30)4 2.856 1.815
5 D5 1.00(1.30)5 3.713 2.107
6 D6 1.00(1.30)6 4.827 2.445
6 V6 1.00(1.30)6(1.06) / (0.12 – 0.06) 85.273 43.202
Total 53.641
9
WALTER’S MODEL
10
From the following information , determine the market value of the
equity share of a company as per Walter’s Model :
-Earning of the Company =Rs. 30 Lakh
-Dividend paid = Rs. 10 Lakh
-No. of shares outstanding = 2,00,000
-Ke= 10%
-Rate of return on Investment =12%
Rs
Earning of the company 30,00,000 EPS = 15
Dividend paid 10,00,000 Dividend = 5
No. of shares outstanding 2,00,000
Cost of Equity Ke= 10%
Rate of return on Investment 12%
P0 = DIV + r/k(EPS – DIV) 5+ .12 /.10 (15-5)
k .10
= Rs 170
11
The following information is available for
ABC Ltd.
Earnings per share : Rs. 4
Rate of return on investments : 18 percent
Rate of return required by shareholders : 15 %
What will be the price per share as per the
walter model if the payout
Ratio is 40 percent? 50 percent? 60 percent?
12
Given E = Rs 4, r = 0.18 ,and k = 0.15, the value of P
for the three different payout ratios is as follow:
13
Company Valuation Methods
14
Net Asset Value / Book value
Book value is the per share rupee value that would be
received if the assets were liquated for the values
at which the assets are kept on books minus the
monies that must be paid to liquidate the liabilities
and preferred stock.
Book value is also called net worth or net assets value.
16
LIQUIDATION VALUE
17
Current cost valuation
All assets are taken at current value and summed to
arrive at value This includes tangible assets, intangible
assets, investments, stock, receivables
18
DISCOUNTED CASH FLOW METHOD
19
DCF analysis says that a company is worth all of the
cash that it could make available to investors in the
future
20
STEPS
Merits of the DCF
STRENGTHS:
•It produces closest thing to an intrinsic stock value
•Scientific
•Widely used
•Based on cash flow
WEAKNESSES:
•Almost always results in overvaluation.
•Can we ever predict the future?
•Based on many assumptions
•Which assumptions are the most critical?
•5 years vs. 10 years estimation
22
Calculating Business Value
Terminal Value =
FCFn(1+ Growth Rate)
(Discount Rate –Growth Rate)
23
A publicly traded firm potentially has an infinite life.
The value is therefore the present value of cash
flows forever.
24
The value of the firm is obtained by discounting
expected cash flows to the firm, i.e., the residual
cash flows after meeting all operating expenses and
taxes, but prior to debt payments, at the weighted
average cost of capital, which is the cost of the
different components of financing used by the firm,
weighted by their market value proportions.
Free cash flows are those cash flows , that are available
to capital providers, both equity holders as well as
debt holders, after necessary deductions have been
made for capital expenditures that are needed to
maintain the continuity of the cash flow stream in future
25
Working capital investments and taxes paid are also
deducted
26
CASH REVENUES
Working capital
Investment Cash operating
expenses
Including taxes but
Fixed capital excluding interest
investment
FCFF
Interest payment to
bond holders
+ Depreciation and non cash charges + Depreciation and non cash charges
– Repayment of Debt
28
Calculating FCFF from net income
NI : Net Income
NCC : Non Cash Charges (Deprecation)
INT : Interest
FCInv : Capital expenditure – proceeds from long
term assets
WCInv : Working Capital Investment
29
Calculating FCFE from net income
NI : Net Income
NCC : Non Cash Charges (Deprecation)
FCInv : Capital expenditure – proceeds from long
term assets
WCInv : Working Capital Investment
Net Borrowings : Long & Short term debt issues
– long & short term debt payments
30
Calculating FCFF from EBIT
Dep : Depreciation
31
Estimating Cash Flows
32
The cash flow of a firm from the point of view of equity
share holders is the cash flow available
to equity share holders after paying taxes , meeting
investments needs , and fulfilling debt related
commitments. It is estimated as follows
Cash flow to equity share holders = Profit after Tax
+ Depreciation and other non cash charges
–Capital Expenditures – Changes in Working capital
– Repayment of Debt + Proceeds from debt issues
33
What are Free cash flows and determine the free cash flows
of XYZ Limited from following projected figures ( in Lakhs
Rs lakhs
Interest 55 56 58 62 77
Tax 35%
34
FREE CASH FLOW OF XYZ LTD
35
FREE CASH FLOW FOR EQUITY
FREE CASH
2011
FLOW
2012
FOR2013
EQUITY
2014 2015
EBIDT 350 400 470 525 600
Depreciation 100 135 145 110 90
Interest 55 56 58 62 77
EBT 195 209 267 353 433
Tax 68.25 73.15 93.45 123.55 151.55
PAT 126.75 135.85 173.6 229.45 281.45
Depreciation 100 135 145 110 90
Capital
Expenditure 250 100 75 20 55
Inc in Working
Capital 35 38 42 45 52
Repayment of
debt 50 450
Proceeds from
Debt issue 500
37
Estimating – Sustainable Growth
g b ROE
Clearly, the value of the firm will rise if the firm retains and
reinvests its profits at a rate of return (ROE) greater than kc
Under such conditions, g increases more than kc
38
Estimating Growth
g b ROE
39
Estimating Inputs: Discount Rates
40
Estimating Inputs: Discount Rates
41
Estimating Inputs: Discount Rates
42
COST OF EQUITY
Inputs Needed
1. Risk free rate
2. Beta relative to market portfolio
3. Market risk premium
43
Estimating the Cost of Debt
44
Weights for the Cost of Capital Computation
45
EXAMPLE
46
COMPUTATION OF FREE CASH FLOW
Year EBIT TAX NOPAT Depreciation CAPEX Inc FREE CASH
WC FLOW
47
PV OF FREE CASH FLOW
Year FREE W ACC @ Present value
CASH 13%
FLOW
48
EXAMPLE
49
Solution
50
Relative Valuation
6-51
What is relative valuation?
52
Adjusting for differences across assets
53
Relative valuation is pervasive…
54
Comparable multiples
Comparable multiples are regularly used to value
businesses.
They are quick and easy method to come up with a
value for a company.
There are two basic steps in using comparable
multiple analysis :
1.Selecting the correct multiple and then
2.Applying it to the relevant earning base
1.PE Ratios
2.Enterprise value / EBITDA
3.EV/EBIT
4.EV/Sales
5.EV/ Free Cash flows
6.Equity Value/ Book value
56
PE Ratio
57
Enterprise value / EBITDA
58
Exercise in Valuation
59
Value estimated
60
STOCK EXCHANGES, INDICES,
DEPOSITORY SYSTEM &
MARKET REGULATORS
-Parvesh Aghi
CONTENTS
•STOCK EXCHANGES
•TRADING MECHANISM
•MARKET INDEXES
•MARKET REGULATION
•DEPOSITORY SYSTEM
•TRADING IN SECONDARY MARKETS
2
STOCK EXCHANGES
3
Almost all the significant firms of India are listed on
both the exchanges.
4
Trading Mechanism
5
All orders in the trading system need to be placed
through brokers, many of which provide online trading
facility to retail customers.
6
Settlement Cycle and Trading Hours
7
Market Indexes
8
Market Regulation
9
DEPOSITORY SYSTEM
10
It also provides services related to transactions in
securities. At present two Depositories viz. National
Securities Depository Limited (NSDL) and Central
Depository Services (India) Limited (CDSL)
are registered with SEBI.
11
Public financial institutions, scheduled commercial
banks, foreign banks operating in India with the
approval of the Reserve Bank of India, state financial
corporations, custodians, stock-brokers, clearing
corporations ,clearing houses, NBFCs and Registrar
to an Issue or Share Transfer Agent complying with
the requirements prescribed by SEBI can be
registered as DP.
12
Legal framework for a Depository
13
Constituents of a Depository System
1. Depository
2. Depository Participant (DP)
3. Securities, Issuers and Registrars
4. Share Transfer Agents
5. Stock Exchanges and Stock Brokers
6. Clearing Corporation/ Clearing House
7. Clearing Members
8. Banking system
9. Investors
14
Facilities offered by Depository System
15
Dematerialisation
16
Dematerialization Procedure
First open a Demat account with any Depository of
investor’s choice
Obtain account number from his Depository
Participant
A dematerialisation request form (DRF) to be submitted
to the DP who intimates depository of the request
18
Trading in Secondary Markets
19
Advances in technology have led to most secondary
markets of the world becoming electronic exchanges.
20
Types of Orders
21
Market Price/Order: Here the constraint is the
time of execution and not the price.
22
If it is a sale order, the order is matched against the
best bid (buy) price and if it is a purchase order, the
order is matched against the best ask (sell) price.
The best bid price is the order with the highest buy
price and the best ask price is the order with the lowest
sell price.
23
When the market reaches the threshold or
pre-determined price, the stop loss order is triggered
and enters into the system as a market/limit order
and is executed at the market price / limit order price
or better price.
24
A buy order in the stop loss book gets triggered when
the last traded price in the normal market reaches or
exceeds the trigger price of the order.
The trigger price should be less than the limit price
in case of a purchase order and vice versa.
25
Examples-Trigger price – sell order
26
Examples-Trigger price – Buy order
27
Rolling Settlement
28
Rolling Settlement ( Cont)
PAY IN .
Pay in day is the day when the brokers shall make
Payment or delivery of securities to the exchange.
PAY OUT
Pay out day is the day when the exchange makes
payment or delivery of securities to the broker
29
Example
Transaction Sale Value Purchase Settlement PAY OUT
on MONDAY Value on
Wednesday
PAY IN
Sold 40 Rs.9430
shares of XYZ
Co. At Rs.
235.75 per
share
Bought 75 Rs.17,325
shares of XYZ
Co of Rs.231
per share
Gross basis 40 shares of 75 shares of
XYZ Co. and XYZ Co.
Rs.7,895
Net basis Rs.7,895 35 shares of
XYZ co.
UPDATE
Update
• Receives the • NSDL
share from the Demat Account • CDSL
stock exchange or if in physical
on behalf of his form send it to
client Registrar and
Transfer Agent Electronic
Brokers Database
Maintenance
Transfer to
investors through Brokers
Clearing Bank
REASONS
34
Depository system
35
Thank You
Models of Risk and
Return
CONCEPT
2
CAPITAL PRICING ASSET MODEL
3
CAPM MODEL
Rs = Rf + bs(Rm - Rf)
4
As per CAPM the investors needs to be
compensated in two ways: time value of
money and risk
5
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 ).
6
The CAPM says that the expected return of a
security or a portfolio equals the rate on a
risk-free security plus a risk premium.
7
Security Market line
8
CAPM ASSUMPTIONS
9
Total Risk = Systematic Risk + Unsystematic Risk
10
UNSYSTEMATIC RISK
11
SYSTEMATIC RISK
12
What is BETA ?
Rs = Rf + bs(Rm - Rf)
13
Beta is calculated using regression analysis,
and you can think of beta as the tendency
of a security's returns to respond to swings
in the market.
It measures the sensitivity of a stock’s returns to
changes in returns on the market portfolio
15
BETA FORMULA
16
Calculating “Beta”
YEARS MARKET RETURN XYZ LTD RETURNS
Rm (%) Rx (%)
1 20 25
2 -18 -32
3 40 55
4 -8 -13
5 36 45
ESTIMATION OF BETA
YEA MARKET XYZ LTD Market Stock
RS RETURN Rx % Deviation deviation (4) X (5) (Rm-Rm )²
% Rm-Rm Rx -Rx
3 40 55 26 39 1014 676
5 36 45 22 29 638 484
α = 16 – 1.434 X 14
= 16 – 20.076
= - 4.076 % is the return from unsystematic risk
Thus the characteristic line of XYZ Ltd is :
Rx = -4.076 + 1.434 Rm
20
We can plot the observed returns on market and
XYZ ltd and fit A regression line as shown in the
figure . The fitted line is as per the equation A ,
the regression line as per the market model is called
The characteristics line
21
Security Characteristic line
Characteristic line
Slope = beta
MARKET RETURN
Characteristic Line
Security Characteristic line
23
The Market Model
24
Rx b x Rm ex
Equation A
25
The value of β and α in the regression are given
by the following equations
26
MARKET STOCK
Year RETURN RETURN X Y XY X² Y²
1 20 25 6.00 9.00 54 36 81
2 -18 -32 -32.00 -48.00 1536 1024 2304
3 40 55 26.00 39.00 1014 676 1521
4 -8 -13 -22.00 -29.00 638 484 841
5 36 45 22.00 29.00 638 484 841
14.00 16.00
0 0 3880 2704 5588
28
Risk Premium = (Rm-Rf)
assume:
several factors affect E(R)
does not specify factors
30
MACRO ECONOMIC FACTORS
Implications
E(R) is a function of several Macro
Economic factors, F each with its
own b .
E( R ) R f b1F1 b2 F2 b3F3 .... bN FN
31
APT vs. CAPM
32
CONCLUSION
33
Arbitrage pricing theory (APT)
34
»Thanks
35
PORTFOLIO
MANAGEMENT
FRAMEWORK
Introduction
2
Formation of an optimal portfolio
3
Investment objective and constraints
4
Objectives
5
Constraints
6
PHASES OF PORTFOLIO MANAGEMENT
7
SECURITY ANALYSIS
10
Modern portfolio theory (MPT) :is a theory
that attempts to maximize portfolio
expected return for a given amount
of portfolio risk, or equivalently minimize
risk for a given level of expected return, by
carefully choosing the proportions of
various assets
11
PORTFOLIO REVISION
13
PORTFOLIO REVISION
14
PORTFOLIO EVALUATION
15
THANK YOU
16