Table of Contents

Chapter -1 S.kevin...........................................................................................................................2

Introduction..................................................................................................................................2

Basic comparison of Fundamental Analysis and Technical Analysis...............................5

Chapter-3: Risk................................................................................................................................6

Chapter 7..........................................................................................................................................9

Fundamental analysis...................................................................................................................9

Share valuation..............................................................................................................................11

Portfolio analysis...........................................................................................................................11
Chapter -1 S.kevin
Introduction
Normally an investor invest multiple securities instead of investing in a single securities. These
group of securities are called combinely portfolio. Creation of a portfolio helps to reduce risk
without sacrificing returns. Portfolio management deals with the analysis of individual securities
as well as with other theory and practice of optimally combing securities into portfolios.

Definition of Portfolio management

Portfolio management involves building and overseeing a selection of investments that will meet
the long-term financial goals and risk tolerance of an investor.

Active portfolio management requires strategically buying and selling stocks and other assets in
an effort to beat the broader market.

Passive portfolio management seeks to match the returns of the market by mimicking the
makeup of a particular index or indexes.

Portfolio management requires the ability to weigh strengths and weaknesses, opportunities and
threats across the full spectrum of investments. The choices involve trade-offs, from debt versus
equity to domestic versus international and growth versus safety.

Phases of Portfolio management

1) Security Analysis: The initial phase of the portfolio management process and involves the
evaluation and analysis of risk return features of individual securities as there are many types
of securities available in the market including equity shares, preference shares, debentures and
bonds. The basic approach for investing in securities is to sell the overpriced securities and
purchase underpriced securities. The security analysis comprises of Fundamental Analysis and
technical Analysis.

2) Portfolio Analysis: A portfolio refers to a group of securities that are kept together as an
investment. Investors make investment in various securities to diversify the investment to make
it risk averse. A large number of portfolios can be created by using the securities from desired set
of securities obtained from initial phase of security analysis.
By selecting the different sets of securities and varying the amount of investments in each
security, various portfolios are designed. After identifying the range of possible portfolios, the
risk-return characteristics are measured and expressed quantitatively. It involves the
mathematically calculation of return and risk of each portfolio.

3) Portfolio Selection: Portfolio is selected on the basis of input from previous phase Portfolio
Analysis. The main target of the portfolio selection is to build a portfolio that offer highest
returns at a given risk. The portfolios that yield good returns at a level of risk are called as
efficient portfolios. The set of efficient portfolios is formed and from this set of efficient
portfolios, the optimal portfolio is chosen for investment.

The optimal portfolio is determined in an objective and disciplined way by using the analytical
tools and conceptual framework provided by Markowitz’s portfolio theory.

4) Portfolio Revision: The optimal portfolio is required to monitor it constantly to ensure that
the portfolio remains optimal with passage of time. Due to dynamic changes in the economy and
financial markets, the attractive securities may cease to provide profitable returns. These market
changes result in new securities that promises high returns at low risks. In such conditions,
investor needs to do portfolio revision by buying new securities and selling the existing
securities. As a result of portfolio revision, the mix and proportion of securities in the portfolio
changes.

5) Portfolio Evaluation: This phase involves the regular analysis and assessment of portfolio
performances in terms of risk and returns over a period of time. During this phase, the returns are
measured quantitatively along with risk born over a period of time by a portfolio. The
performance of the portfolio is compared with the objective norms. Moreover, this procedure
assists in identifying the weaknesses in the investment processes.

What is Portfolio Revision? And why is it necessary

The art of changing the mix of securities in a portfolio is called as portfolio revision.

The process of addition of more assets in an existing portfolio or changing the ratio of funds
invested is called as portfolio revision. The sale and purchase of assets in an existing portfolio
over a certain period of time to maximize returns and minimize risk is called as Portfolio
revision.

Need for Portfolio Revision

 An individual at certain point of time might feel the need to invest more. The need for
portfolio revision arises when an individual has some additional money to invest.

 Change in investment goal also gives rise to revision in portfolio. Depending on the
cash flow, an individual can modify his financial goal, eventually giving rise to changes
in the portfolio i.e. portfolio revision.

 Financial market is subject to risks and uncertainty. An individual might sell off some of
his assets owing to fluctuations in the financial market.

Portfolio evaluation provides a feedback mechanism for improving the entire portfolio
management process

Portfolio Evaluation

Performance Evaluation: The key dimension of portfolio performance evaluation is the rate of
return and risk. Also the performance index models are commonly used to evaluated the
portfolios.

(a) Assessment of return: The return of the portfolio can be calculated by applying the Holding
period return, Annualized return formulas. In case of intermediate additions the technique of
internal rate of return can be applied to find out the return on the portfolio.

(b) Risks: The risk of a portfolio can be measured in various ways. The two most commonly
used measures of risk are variance and beta.

The aim of constructing a portfolio and revising it periodically is, with minimum risk, earn
maximum returns. Portfolio evaluation is the process implicated with assessing the performance
of the portfolio in terms of risk and return during a selected period of time. This requires the risk
generated by the portfolio over the period of investment and quantitative evaluation of real return
accomplished. These have to be compared with objective norms to evaluate the relative
performance of the portfolio. Alternative options of performance evaluation have been acquired
for use by capitalist and portfolio managers. Portfolio evaluation is helpful in yet another way. It
renders a mechanism for distinguishing weaknesses in the investment process and for improving
them. It provides a feedback mechanism for improving the complete portfolio management
process.

Describe the different phases in portfolio management .

Portfolio Management is complex process, which tries to make investment activity more
regarding and less risk. In a word we can say Portfolio Management is provides how to
maximum returns without minimum risk. Portfolio Management comprises all the processes
involved in the creation and maintenance of an investment portfolio. Five phases can be
identified in this process. As following - Security analysis: Security analysis is the initial phases
of the portfolio management process. This step consists of examining the risk - return
characteristics of individual securities. Portfolio analysis: Portfolio analysis phase of portfolio
management consists of identifying the range of possible portfolios that can be constituted form
a given set of securities and calculation their return and risk for further analysis. Portfolio
selection: Portfolio selection phase of portfolio management consists of the goal of portfolio
construction that provides the highest returns at a given level of risk. By this set of efficient
portfolios, the optimal portfolio has to be selected for investment.

Basic comparison of Fundamental Analysis and Technical Analysis

Basis for Fundamental Analysis Technical Analysis

Comparison
Meaning Fundamental Analysis is a practice Technical analysis is a method of
of analyzing securities by determining the future price of the
determining the intrinsic value of stock using charts to identify the
the stock. patterns and trends.
Relevant for Long term investments Short term investments
Function Investing Trading
Objective To identify the intrinsic value of the To identify the right time to enter or
stock. exit the market.
Decision Decisions are based on the Decisions are based on market trends
making information available and statistic and prices of stock.
evaluated.
 Focuses on Both Past and Present data. Past data only.
Form of data Economic reports, news events and Chart Analysis
industry statistics.
Future prices Predicted on the basis of past and Predicted on the basis of charts and
present performance and indicators.
profitability of the company.
Type of trader Long term position trader. Swing trader and short term day
trader.

Chapter-3: Risk
Possibility of incurring losses in any financial transaction is called risk.

Two types of risk

Systematic risk:

Unsystematic risk: Specific Risk, Diversifiable risk, Residual Risk.

Systematic Risk Unsystematic Risk

Meaning Associated with the market or the Associated with specific security,
segment as a whole firm or industry
Impact A large number of securities in the Restricted to the specific company or
market firm
Hedging Allocation to assets Diversification of the portfolio
Controllabilit Can’t Controllable
y
Types Interest risk, Market risk Financial and business risk
Factors External Internal
Avoidance Can’t be avoided Avoided or resolved at a quicker pace

Business Risk: It is a function of the operating conditions faced by company and is the varibality
in operating income caused by the operating conditions of the company. Business risk is the
exposure a company or organization has to factor(s) that will lower its profits or lead it to fail.
Anything that threatens a company's ability to achieve its financial goals is considered a business
risk. There are many factors that can converge to create business risk. Sometimes it is a
company's top leadership or management that creates situations where a business may be
exposed to a greater degree of risk.

Financial Risk: It is the function of financial leverage which is the use of debt in the capital
structure.

Interest Rate Risk: Interest rate risk is the potential for investment losses that result from a
change in interest rates. If interest rates rise, for instance, the value of a bond or other fixed-
income investment will decline. The change in a bond's price given a change in interest rates is
known as its duration.

Market Risk: Market risk is the possibility that an individual or other entity will experience
losses due to factors that affect the overall performance of investments in the financial markets.
It affects the share prices to move up and down consistently for some periods.

Purchasing Power Risk: Purchasing power refers to what one is able to buy with a given sum
of money. The risk, then, is that he may be able to buy less with a given sum of money in the
future.

Think about this in the context of your savings. When you set aside money for saving and
investing you inherently give up buying something with that dollar today, to be able to buy
something later. In simple terms, for every $1 you save today that’s $1 less you can spend today,
but it gives you $1 more to spend later.

The idea of purchasing power takes this simple fact a step further and asks what that dollar could
have bought today, and what it will be able to buy later – whenever “later” is. That’s a logical
question since we all recognize that a single dollar won’t go as far in the future.

Measuring risk

Forcasted dividend + Ending Price

R=
Begining Price

Expected return = ∑ Xi * P(Xi)

 r × σ i× σ m
β=
σ2

n ∑ XY −(∑ X )(∑Y )
r = √ n∑ X −( ∑ X ) × √ n ∑Y −( ∑Y )
2 2 2 2

2 2
n ∑Y −( ∑ y )
σ i ¿ N
2
 2 2
n ∑ X −( ∑ X )
σ m ¿ N2

n ∑ XY −(∑ X )(∑ Y )
β= 2
n ∑ X 2− ( ∑ X )

Y = α + βX

Chapter 7
Fundamental analysis
Fundamental analysis: It is a method of assessing the intrinsic value of a security by analyzing
various macroeconomic and microeconomic factors. The ultimate goal of fundamental analysis is
to quantify the intrinsic value of a security. The security’s intrinsic value can then be compared
to its current market price to help with investment decisions.

Fundamental analysis is really a logical and systematic approach to estimating the future the
dividends and share price. It is based on the basic premise that share price is determined by a
number of fundamental factors relating to the economy industry and Company.

Economy

Fundamental
Analysis

Industry Company
Economy analysis:

 Growth rate national income

 Inflation rate
 Interest rate
 Foreign exchange rate
 Government revenue and expenditure and deficits
 Infrastructure
 Economic and political stability

Industry factor:

 Demand and supply gap in the industry

 The emergence of suitable products
 Changes in the govt. policy relating to industry
 Competitive condition of the industry
 Supply of raw materials
 Performance
 Cost structure
Company specific:

 Age of the plant

 The quality of management
 Brand image of the products
 Its labor management relations

Share valuation
D0 (1+g)
Constant growth model, S0 =
K−g

Dt Dn
Multiple growth model = ∑ +
( 1+ K ) ( K −g )( 1+ k )n
t

Portfolio analysis
Rp = ∑ X i Ri

The covariance means a measure of how returns of two securities move together. If the returns of
the two securities move in the same direction, the covariance will be positive and if this happens
in the opposite direction the return will be negative.

Covxy
rxy= σ xσ y

Portfolio variance, σ p = X12 σ 1 + X 2 σ 2 + X 1 X 2 ¿r12 σ 1 σ 2 ¿

2 2 2