SAPM BCU M1 Security Analysis and Portfolio Management

The concept of investment and portfolio of investment. Investment is a sacrifice of money or other resources to have some future economic benefits.The concept of investment and portfolio of investment. Investment is a sacrifice of money or other resources to have some future economic benefits.

1. SAPM MODULE-1 INTRODUTION TO SECURITIES For Bangalore City University By Deepak N C Mob- 6363238970

2. INTRODUCTION An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an Individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth.

3. Investment be broadly categorized Fixed income- bonds, FD Variable- equity, real estate , gold In the Financial sense an investment can refer to any mechanism used for generating future income. This includes the purchase of bonds, stocks, or real estate property, among other examples. Additionally, purchasing a property that can be used to produce goods can be considered an investment.

4. In the Economic sense an investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth. Investment also includes money committed into a new business venture or for expanding an existing business or purchase of interest or share in a business or investment of an asset in a business. The purpose of investment is to make your money work for you or let your money grow.

5. There is always an element of risk associated with an investment. Risk is the likelihood of securing the return of the amount invested. The risk is low in cases such as investments in government securities. The risk is high in case of investment in stocks, new business ventures, business expansion, and so on.

6. Characteristics / Nature of investment Returns Risk Safety Liquidity Capital growth Stability of income Tax shelter Marketability- transferability or saleability

7. Why Investment are important Longer life expectancy Taxation Interest rates Inflation Income

8. Factors favourable for investment Legal safeguards A stable currency Existence of financial institutions & services Form of business organization Choice of investment Risk free vs risky investments

9. Objectives of investment Primary investment objectives Safety Capital gain Income Secondary investment objectives Tax minimization Marketability/liquidity Liquidity Tax savings

10. Importance of investment Transaction motive Precautionary Speculative To meet unexpected expenditure in life Savings act as an inducement for investment Makes a felling of rationality Children education Achieve a feeling of self reliance Security of the family

11. Concept of investment avenue Stocks Bonds Mutual funs ETF Real estate Commodities Crypto currencies FD Government securities Options and futures Peer to peer lending Retirement accounts

12. Features of investment avenues Future earnings will be secure Security Liquidity value The financial ramifications Equilibrium Legality

13. Types or avenues of investment Corporate securities Deposits in banks and non baking companies UTI and other mutual fund scheme Post office deposits and certificates Life insurance polices Provident fund scheme Government and semi government securrites

14. Investment philosophies Value investing Fundamentals investing Growth investing Socially responsible investing Technical investing

15. Various investment strategies No strategy Active vs passive Momentum trading Buy and hold Long short strategy Indexing Pair trading Value vs growth Dividend growth investing Contrarian investment

16. Investment v/s Speculation

17. Investment v/s Gambling Purpose Risk and return Skill and knowledge Time horizon Asset ownership Regulation and legality

18. Gambling v/s Speculation Objective Risk and reward Time horizon Knowledge and analysis Regulation and legality

19. Arbitration v/s Hedging Arbitration- refers to a legal processes where disputes b/w 2 or more parties are resolved by an impartial third party Hedging-refers to risk management strategy used to minimize or offset potential loss or adverse price movements in an investment or portfolio

20. Types of investors Cautious investors Emotional investors Technical investors Busy investors Casual investors Informed investors Passive investors Active investors

21. Factors to be considered for investment Investment goals Risk tolerance Time horizon Asset allocation Investment research Investment strategy Market conditions Cost and fees Diversification Exit strategy

22. Investment policy Is a written document that outlines the guidelines objectives and procedures for managing investment portfolio. Objectives Risk tolerance Asset allocation Investment guidelines Performance benchmark

23. Investment strategies Due diligence process Monitoring and reporting Roles and responsibilities Review and evaluation

24. Types of investment policy Aggressive Conservative Balanced Income oriented Value based Growth oriented Social responsible investment Sector specific investment

25. Advantages of investment policy Clear objectives and guidelines Consistency and discipline Risk management Long term focus Accountability and transparency Reduced behavioural biases Flexibility and adaptability Professionalism and governance

26. Disadvantages of investment policy Rigidity Lack of flexibility Overemphasis on past performance Limited individual considerations Complexity and maintenance Behavioural constraints Unforeseen events or black swan events

27. RISK Is a probability or threat of damage injury, liability or loss, or any negative occurrence. Nature of risk General economic conditions Industry factors Company factors

28. Types of risk Financial risk Static and dynamic risk Fundamental and particular risk Pure and speculative risk Exchange rate risk Business risk Liquidity risk Country risk Market risk Credit risk Operational risk

29. Techniques of measuring risk Sensitivity analysis Scenario analysis Break even analysis Hillier model Simulation analysis Decision tree analysis Corporate risk analysis Selection of project under risk Practical risk analysis

30. Diversification of risk Risk adjusted discount rate approach- estimation of the present value of cash for high risk investment Under CAPM or CAPITAL ASSET PRICING MODEL- Risk premium= (market rate of return-risk free rate)x beta of the project.

31. Common risk analysis in practice Conservative estimation of revenues Safety margin in cost figures Flexible investment yardsticks Acceptable overall certainty index Judgement on three point estimates- A=the best case estimate, M= the most likely estimate , B= the worst-case estimate

32. Financial risk Credit risk Currency risk Country risk Political risk Economic risk Liquidity risk

33. Risk appetite Objective and goals Risk tolerance Financial capacity Time horizon Regulatory and compliance requirement Market conditions and economic outlook

34. Benefit of understanding risk appetite Risk management Goal alignment Investment strategy Decision making consistency Stakeholder communications

35. Types of risk appetite Aggressive risk Moderate risk appetite Conservative Risk-averse appetite Risk seeking appetite

36. Types of risk in investment Market risk Credit risk Liquidity risk Inflation risk Interest rate risk Currency risk Political and regulatory risk Operational risk Concentration risk Event risk

37. Source of risk Environmental and social risk Economic risk Political risk Regulatory risk Technology risk

38. Approaches to risk measurement Probability based Volatility Measures Scenario Analysis Stress testing Risk indicators

39. Standard deviation - statistical measure that qualifies the dispersion or variability of a set of values Covariance -measures the extent to which two variables move together BETA -measure of systematic risk Correlation - measures the strength and direction of the linear relation b/w 2 variables

40. STANDARD DEVIATION, COVARIANCE, BETA, CORRELATION The statistical measures (standard deviation, covariance, beta, and correlation) are commonly used in financial and investment analysis to assess risk, evaluate the relationship between investments, and construct portfolios that align with an investor's risk tolerance and objectives.

41. Standard Deviation: Standard deviation is a statistical measure that quantifies the dispersion or variability of a set of values. In the context of risk measurement, it is commonly used to assess the volatility or risk associated with an investment or portfolio. A higher standard deviation indicates a greater degree of variability and, therefore, higher potential risk.

42. Covariance: Covariance measures the extent to which two variables move together. In the context of risk measurement, covariance is used to assess the relationship between the returns of two different investments. A positive covariance suggests that the returns of the two. investments tend to move in the same direction, while a negative covariance indicates that the returns move in opposite directions. Covariance alone does not provide a standardized measure of risk.

43. Beta: Beta is a measure of systematic risk or the sensitivity of an investment's returns to the overall market movements. It compares the price volatility of an investment to that of the broader market. A beta of 1 indicates that the investment tends to move in line with the market, while a beta greater than 1 suggests higher volatility than the market, and a beta less than 1 indicates lower volatility. Beta is commonly used in the Capital Asset Pricing Model (CAPM) to estimate the expected return of an investment based on its level of risk.

44. Correlation: Correlation measures the strength and direction of the linear relationship between two variables. In the context of risk measurement, correlation is used to assess the relationship between the returns of two investments. A correlation coefficient ranges from -1 to 1. A value of 1 indicates a perfect positive correlation (both investments move in the same direction), a value of -1 indicates a perfect negative correlation (investments move in opposite directions), and a value of 0 indicates no correlation (no linear relationship between the investments' returns)

45. PRACTICAL PROBLEMS ON STANDARD DEVIATION Most investors do not hold stocks in isolation. Instead, they choose to hold a portfolio of several stocks. When this is the case, a portion of an individual stock's risk can be eliminated, Le., diversified away. Portfolio Expected Return The Expected Return on a Portfolio is computed as the weighted average of the expected returns on the stocks which comprise the portfolio. The weights reflect the proportion of the portfolio invested in the stocks. This can be expressed as follows:

46. Portfolio Expected Return E[ Rp ]= ∑ n  wiE [ R_i ] Where E[ Rp ]= the expected return on the portfolio, N= the number of stocks in the portfolio, wi = the proportion of the portfolio invested in stock i , and E[ Ri ]= the expected return on stock i . For a portfolio consisting of two assets, the above equation can be expressed as E[ Rp ]=w1E[R1]+[1-w1)E[R2]

47. Portfolio Variance and Standard Deviation The variance/standard deviation of a portfolio reflects not only the variance/standard deviation of the stocks that make up the portfolio but also how the returns on the stocks which comprise the portfolio vary together. Two measures of how the returns on a pair of stocks vary together are the covariance and the correlation co-efficient.

48. LEGAL FRAMEWORK AND REGULATORY COVER FOR INVESTMENT IN INDIA Investment in India is governed by a legal framework and regulatory system that aims to promote transparency, protect investors' rights, and facilitate ease of doing business. Here are some key components of the legal framework and regulatory cover for investment in India. 1 . Foreign Exchange Management Act (FEMA) FEMA is a crucial legislation that governs foreign exchange transactions and regulates cross-border investments in India. It provides guidelines for foreign direct investment (FDI), external commercial borrowing, foreign portfolio investment, and repatriation of funds. The Reserve Bank of India (RBI) is the regulatory authority responsible for enforcing FEMA regulations. 2. Securities and Exchange Board of India (SEBI) SEBI is the regulatory body for the securities market in India. It formulates rules and regulations to protect the interests of investors, promote fair and transparent trading practices, and regulate entities such as stock exchanges, brokers, and market intermediaries. SEBI regulates various investment vehicles, including mutual funds, venture capital funds, and alternative investment funds. 3 . Companies Act, 2013 The Companies Act governs the incorporation, operation, and governance of companies in India. It lays down provisions related to shareholders' rights, corporate governance, disclosure requirements, and investor protection. The Act provides a legal framework for investments in Indian companies and ensures transparency and accountability in corporate affairs.

49. 4. Insolvency and Bankruptcy Code (IBC ) The IBC is a comprehensive legislation that addresses insolvency and bankruptcy proceedings in India. It provides a time-bound and creditor-friendly mechanism for the resolution of distressed companies. The IBC aims to enhance the ease of doing business and protect the interests of investors by ensuring a streamlined process for resolving insolvency-related issues 5. Competition Act, 2002 The Competition Act promotes fair competition and prevents anti-competitive practices in India. It prohibits anti-competitive agreements, abuse of dominant market position, and regulates mergers and acquisitions that may have an adverse impact on competition. The Act aims to create a level playing field for investors and protect consumer interests. 6 . Taxation Laws India has a comprehensive taxation system that includes direct and indirect taxes. The Income Tax Act governs the taxation of individuals, businesses, and foreign investors in India. The Goods and Services Tax (GST) is a unified indirect tax that replaced multiple taxes at the national and state levels. Understanding the tax implications and complying with tax obligations is essential for investors in India.

50. Thank You