SECURITY ANALYSIS AND

PORTFOLIO MANAGEMENT
 By Sarita Devi
UNIT-1 INTRODUCTION
 Investment- employment of current funds to
earn future income
 Financial assets vs real assets
 Features of investment

i) Return
ii) Risk
iii) Liquidity
iv) Marketability
v) Tax benefits
vi) Hedge against inflation
vii) Safety of capital
INTRODUCTION (CONTD.)
 Investment vs speculation
 Speculation vs gambling
 INVESTMENT ALTERNATIVES
Instrument Return Risk Marketabilit TAX Safety of
y BENEFIT capital
Equity shares High High High Low Low

Conventional Low and Low Low Depends on type High

constant of bond
Bonds
PPF Moderate Low nil Very high High

Gold and Moderate to Moderate to High no Moderate

high high
Silver
IIB Fluctuating Moderate nil no High
and Moderate
FD Moderate to Low nil No, only on tax High
low saver FD
COMMODITIES High High High no Low

Real estate Moderate to Moderate to Moderate no Moderate

high high
 INFLUENCE OF TAXES
 Always consider post tax return
 Compare 8% PPF and 8% Bond, assuming tax
rate of 30%
 Post tax return= pre-tax return (1-tax rate)
 8= pre-tax return (1-.3)
 11.42%= pre-tax return for PPF
 Post tax return= 8 (1-.3)
 Post tax return= 5.6% for bond
INFLUENCE OF INFLATION
 Nominal and real rate of return
 Real Rate of return adjusted for inflation.
 Real rate= {(1+nominal rate)/(1+inflation
rate)} -1
 Approx. real rate= nominal rate(1-inflation
rate)
RISK-RETURN TRADE OFF
 TYPES AND SOURCES OF RETURNS
AND RISKS AND THEIR MEASUREMNET
 Risk- variability in expected return.
 Types of Risk

1. Systematic risk- beyond the control of

specific co. or individual
Q. Can it be diversified away using efficient
portfolio?
2. Unsystematic risk- within the control of
specific co. or individual
 TYPES AND SOURCES OF RETURNS AND
RISKS AND THEIR MEASUREMNET (CONTD.)
 Sources of Systematic Risk-
1. Market Risk- covers the heard mentality or
sentiments of investors in the mkt.
2. Interest Rate Risk- it has 2 opposite risks
i) Price Risk
ii) Re-investment rate risk
3. Purchasing Power Risk- arises due to increasing
inflation
4. Exchange Rate Risk- due to fluctuations in
exchange rate
5. Global Risk- due to changes in global economy
6. Political Risk- country risk
 TYPES AND SOURCES OF RETURNS AND
RISKS AND THEIR MEASUREMNET (CONTD.)
 Sources of Unsystematic Risk-
1. Business Risk- due to fixed operating cost-
Operating risk
DOL=Contribution/EBIT
Financial Risk- due to fixed financial cost
DOFL- % ∆EPS/% ∆EBIT
2. Default Risk- risk arising when co. unable to
repay
 TYPES AND SOURCES OF RETURNS AND
RISKS AND THEIR MEASUREMNET (CONTD.)
 IDENTIFY THE TYPE OF RISK????
1. Risk Governance
2. Increase in oil prices
3. Labor unrest
4. Microsoft acquired CyberX
5. Increase in interest rate by RBI
6. Decrease in GDP growth rate
7. Global financial crisis
8. Yes Bank Fraud
9. Political Risk
10. Corporate Governance by Govt. Of India
RETURN
 Expected Return
 Realized Return
RETURN AND IT’S
MEASUREMENT
 Holding Period Return
Total return generated over the investment horizon
HPR= (Total Income+ Diff. in prices)/ Purchase Price
Ex 1. An investor buys the share for Rs. 100 in the beginning
of the year 2004. At the end of the yr. 2013, he sells the
share for Rs. 150. Assume no dividends are paid. Calculate
HPR.
Q1. If you commit Rs.200 to an investment at the beginning
of the year and you get back Rs. 220 at the end of the
year, what is your return for the period.
Limitation:
 Fails to consider how long it took to earn the return
 2 alternatives with diff. holding periods cannot be
compared
RETURN AND IT’S
MEASUREMENT
 Effective Annualized Return
 Improvement over HPR. This annualized reurn
computation assumes a constant annual yield for
each year.
EAR= (1+HPR) -11/T

T denotes time in years

Ex 2. An investor buys the share for Rs. 100 in the
beginning of the year 2004. At the end of the yr.
2013, he sells the share for Rs. 150. Assume no
dividends are paid. Calculate EAR.
Q2. Consider an investment that cost Rs. 250 and is
worth Rs.350 after being held for two years.
EFFECTIVE ANNUALIZED RETURN (CONTD.)
 Q3. An investor wants to invest in a zero-
coupon bond having face value of Rs. 100.
There are 3 bonds available with different
times to maturity.
BOND TIME PRICE (Rs.)
1 6 months 97
2 1 yr 95
3 25 yrs 22

 Which bond you recommend purely on the

basis of return.
 AVERAGE RETURN BASED ON
ARITHMETIC MEAN
 Avg. Annual return= Sum total of all the returns/ No. of yrs
Q4. A co.’s shares are currently available at a price of Rs. 160 on
31st Dec, 2019. The share prices at the end of the yr.:
2014 100
2015 118
2016 130
2017 120
2018 140
2019 160

The share did not pay any dividend over these years. Calculate
Avg. Annual return of this share using AM.
AVERAGE RETURN BASED ON
ARITHMETIC MEAN (CONTD. )
 Limitation
 Ignores the effect of compounding and at
times provides misleading return. To avoid
this limitation, Geometric mean is used.
Q5. An investor buys a share for Rs. 20. At the
end of 1st yr, the share price became Rs. 25
but the investor holds it. At the end of 2nd Yr,
the price becomes Rs. 20. Now the investor
sells it. Has the investor earned any return.
If yes, how much?
 AVERAGE RETURN BASED ON
GEOMETRIC MEAN
It is smaller than AM as it considers compounding effect.
GM Avg. Return= {(1+R1)(1+R2)(1+R3)………(1+Rn)}1/n-1
Q6. A co.’s shares are currently available at a price of Rs. 160 on 31 st
Dec, 2019. The share prices at the end of the yr.:
2014 100
2015 118
2016 130
2017 120
2018 140
2019 160

The share did not pay any dividend over these years. Calculate Avg.
Annual return of this share using GM.
 AVERAGE RETURN BASED ON
GEOMETRIC MEAN (CONTD.)
Q7. You invested Rs. 100 in Mutual Fund which earns 25%
annually for 3 yrs., in 4th yr there was a bad yr, it looses 75%
during that yr and earned 25% annually for next 3 yrs. Can we
say that a total of 75% return is earned over 7 yrs which is 10.7
annually?
Q8. Calculate avg. return using AM and GMs for the investment
with the following data:
YEAR Beginning value Ending value
1 100 115
2 115 138
3 138 110.4
ABSOLUTE RETURN
 Return generated on an investment without
adjusting for underlying risk
 Sharpe Ratio= (Avg. Return-Risk free return)/
Total risk
 Higher the better
 Risk premium= (Avg. Return-Risk free return)
 Market Risk premium= (Return on market
portfolio-Risk free return)
 Market Risk premium= (Rm-Rf)
 Jensen Alpha= (Avg. Return-Expected Return)
 Abnormal return= (Avg. Return-Expected Return)
EXPECTED RETURN
 EXPECTED RETURN
Q9. Calculate ER from the following data:
Return Probability
30% .4
-20% .4
50% .2

Q10. The investor might estimate probabilities for each of

these economic scenarios based on past experience and the
current outlook as given below and identify ER.
ECONOMIC CONDITIONS PROBABILITY RETURN
Strong economy, no inflation 0.15 0.20
Weak economy, above-average inflation 0.15 -0.20

No major change in economy 0.70 0.10

EXPECTED RETURN USING
CAPM
 Rs= Rf+(Rm-Rf)β
 β measures the sensitivity of security’s
return with respect to the market return
TOTAL RISK
 measured using S.D. or Variance
 CoV relative measure, lower is better used
for comparison, higher value higher risk
 CoV= SD/Mean Return
 Q11. Calculate total risk using the data of
Q9.
 Q12. Calculate total risk using the data of
Q10.
 If probability is not given
 SD= √∑n i=1(Ri-Ṝ)2 /n

Q13. Calculate total risk of security:

year return
1 10
2 12
3 8
4 5
5 10
6 13
7 7
8 5
9 8
10 12
 Q14 . Calculate total risk of security:
Return Prob.
20 .1
15 .2
-5 .2
10 .3
25 .2

 Q15. Analyze these securities:

Security Expected return S.D. of return
A 20 15
B 30 18

 Which security is more risky?

Q16. Analyze these securities:
Security Expected return S.D. of return
A .07 .05
B .12 .07

Which security is more risky?

Q17. During the past five years, you owned two
stocks that had the following annual rates of
return:
YEAR STOCK T STOCK B
1 0.19 0.08
2 0.08 0.03
3 -0.12 -0.09
4 -0.03 0.02
5 .15 .04
A. Compute the arithmetic mean annual rate of
return for each stock. Which stock is most
desirable by this measure?
b. Compute the standard deviation of the annual
rate of return for each stock. By this measure,
which is the preferable stock?
c. Compute the coefficient of variation for each
stock. By this relative measure of risk, which
stock is preferable?
d. Compute the geometric mean rate of return for
each stock. Discuss the difference between the
arithmetic mean return and the geometric mean
return for each stock.
INVESTMENT DECISION
PROCESS
 Deciding about what, how and when of
investments.
 Deciding about the timing of constructing
first portfolio
 Deciding about the timing of reconstructing
the existing portfolio
 2 Types of decisions involved

1. Asset allocation decision

2. Security Analysis- Fundamental and
Technical Analysis
RISK AVERSION
TYPES OF INVESTORS
1. Pre-Investor
2. Passive Investor
3. Active Investor
SOCIALLY RESPONSIBLE
INVESTING
 Socially responsible investing, also known as ethical
and green investing, means avoiding industries that
negatively affect the environment and its people.
This includes companies that produce or invest in
alcohol, tobacco, gambling and weapons. Instead,
SRI involves investing in companies engaged in
ethical and socially conscious themes, like
environmental sustainability and social justice.
 Some investors also consider SRI to stand for
sustainable, responsible and impact investing.
Regardless of your preferred definition, socially
responsible investing works toward both positive
change and financial gain.
 HOW DOES SOCIALLY
RESPONSIBLE INVESTING WORK?
 Socially responsible investing considers environmental, social and corporate
governance, also known as ESG criteria. These criteria help many socially responsible
investors decide which companies or funds to invest in. This includes companies that
respect the environment, treat their employees and suppliers fairly and promote
ethical policies. Some investors believe that companies that practice good citizenship
can yield greater returns than those that don’t.
 SRI works the same way as any other style of investing. But SRI adds company ethics
and social responsibility into the equation, instead of simply putting your money into
securities for growth. SRI tends to follow political and social trends. This means
they’ve been dedicated to women’s rights, civil rights and anti-war efforts in the past.
Now, socially responsible investors’ focus has shifted to mostly sustainable solutions to
21st century challenges. This includes climate change and ethical business practices.
 SG (Environmental, Social and Governance) investing refers to a class of investing that
is also known as “sustainable investing.” This is an umbrella term for investments that
seek positive returns and long-term impact on society, environment and the
performance of the business. There are several different categories of sustainable
investing. They include impact investing, socially responsible investing (SRI), ESG and
values-based investing. Another school of thought puts ESG under the umbrella term of
SRI. Under SRI are ethical investing, ESG investing and impact investing.
 ESG also refers to environmental, social and governance issues that an
investor may consider when making an investment. Following are examples of
ESG issues.
 Environmental risks created by business activities have actual or potential
negative impact on air, land, water, ecosystems and human health. Company
environmental activities considered ESG factors include managing resources
and preventing pollution, reducing emissions and climate impact, and
executing environmental reporting or disclosure. Environmental positive
outcomes include avoiding or minimizing environmental liabilities, lowering
costs and increasing profitability through energy and other efficiencies, and
reducing regulatory, litigation and reputational risk.
 Social risks refer to the impact that companies can have on society. They are
addressed by company social activities such as promoting health and safety,
encouraging labor-management relations, protecting human rights and
focusing on product integrity. Social positive outcomes include increasing
productivity and morale, reducing turnover and absenteeism, and improving
brand loyalty.
 Governance risks concern the way companies are run. It addresses areas such
as corporate brand independence and diversity, corporate risk management
and excessive executive compensation, through company governance
activities such as increasing diversity and accountability of the board,
protecting shareholders and their rights, and reporting and disclosing
information. Governance positive outcomes include aligning interests of
shareowners and management, and avoiding unpleasant financial surprises.
 ETHICAL INVESTING
 Ethical investing is a type of investing process that takes into
account the investor’s personal values (be it social, moral, religious,
political or environmental values) prior to making the investment
decisions.
 There are two ways in which ethical investing could be done –
 Positive Impact: Choosing industries/sectors/companies whose
values align with that of the investor’s values.
For example: If the investor is from a particular region, then he/she
is more prone to buy products that are suitable to their region and
invest in them. People from the Southern States are more prone to
investing in farming and farming-related industries.
 Negative Impact: Avoiding industries/sectors/companies whose
values directly differ from that of the investor’s values.
For example: If the investor believes that a particular company’s
production process is harming the society and the environment, then
the investor would avoid investing in that particular company’s
shares.
TYPES OF ETHICAL INVESTING

 Investments Based on Social Values

 Investments based on Moral Values
 Investments based on Religious Values
 Investments based on Political Values
 Investments based on Environmental
Values/Green Investing
ADVANTAGES OF ETHICAL
INVESTING
 The following are some advantages of ethical
investing –
 Ethical investing ensures that investments
are made in line with the investor’s values.
 With more people choosing to invest
ethically, it positively impacts both the
society and the environment in such a way
that it discourages other industries.
 The returns on these investments are not
just monetary but have an overall impact on
the investor as well as the planet.
DISADVANTAGES OF ETHICAL
INVESTING
 Although ethical investing is theoretically good, it
faces the following disadvantages –
 Ethical investing might not fetch the same returns
as other industries. The returns on ethical
companies/industries tend to be lower than their
counterparts and the time is taken to generate any
return would also be longer.
 There could be instances wherein companies allege
to be eco-friendly but in reality that might not be
the case.
 Ethical investing is based on every particular
investor. What is acceptable to some may not be
acceptable to others. The field is highly subjective.
 THANKYOU!