Security Analysis &

Portfolio Management

By: Dr. Asgar Ali

 SAPM
Pre-Mid-Sem Post Mid-Sem
• Overview of Investment • Portfolio Theory
Process/Investment • Portfolio Optimization
Alternatives and • CAPM /Factor Models
Environment
• Active and Passive
• Market Efficiency Investing
• Behavioral Finance • Portfolio Construction and
• Security Analysis Evaluation
– Fundamental
• Derivatives
– Technical
 Expectations Vs Promise
• We shall focus on investors not the
traders (speculators).

• Market is a difficult place to make money.

• Course is not going to give you tips to earn

super-normal profits.
 Evaluation
Quiz 1 10%

Mid Sem 30%

Project and Presentation 20%

Comprehensive Exam 40%

Finance Books
What is Investment?
 What is an Investment

Certain
Today

Tomorrow

Uncertain
 Time and Risk and return
are important attributes
of “Investment”

An investor trades a known rupee

amount today for some expected
(but risky) future stream of
payments that will be greater than
the current outlay (return).

Return is a compensation for:

•Time
•Inflation
•Uncertainty.
E(R i ) = Comp.for waiting
+ Comp. for Inflation
+ Comp. for Risk
Investment may be in real assets or in
financial assets
 What is a Real Asset
• Real assets represent the society’s
wealth.
• The productive capacity of an economy
is the function of real asset
• Real Assets may be:
– Tangible
– Intangible
 What is Financial Asset
• Financial Assets do not represent society’s
wealth.
• One person’s financial assets are other
person’s liability.
 Then, why do we
need financial assets
in the economy?

• Separation of ownership and

management
• Efficient allocation of Capital
• Allocation of risk
 Financial
Assets

Hybrid Derivative Indirect

Ownership/ Claims
Creditor s Investing
Equity
Claims Claims (Preferred (Claims on
(Mutual Funds)

(Bonds) Stocks) other Financial (Hedge Funds)

(Equity Assets)
Shares)
Process of Investment Management
Set your Investment Objectives,
Expected return, Risk Tolerance
and Time Horizon etc.

Major Asset Allocation

Asset/Security Selection

Executing

Performance Review and

Revising the Portfolio
 The Investment Objectives
• Return
– Regular Income Vs Capital Appreciation
• Safety / Risk
• Liquidity
• Tax Factors
• Ease of Management
• Legal and Regulatory Factors
• Unique Needs and Preference
 Continued…
• For how long do I want to be invested?
• How frequently do I want to evaluate the
performance of my portfolio/ or want to
revise the portfolio?
 Investment Fables,
Aswath Damodaran
 Indian Equity Market
• Does the low-risk anomaly exist in the
Indian equity market? A test using
alternative risk measures

https://www.emerald.com/insight/content/doi
/10.1108/JES-07-2021-0374/full/html
 Asset Allocation
• Allocation among two Major Asset Types :
What factors affect them?
• Fixed Income Securities : How Fixed is
your income?
• Equity Investment : Is it always a risky
proportion?
• Strategic Vs Tactical Asset Allocation.
 Security Selection
• Stocks have their peculiar Characteristics
– Growth vs Value
– Cyclic vs Defensive.

• Security Selection in context to portfolio

investment.
 Execution/Market Timing
• Is it a suitable time to invest?
 Performance Review and
Portfolio Revision
• Portfolio Evaluation
• Track Your Portfolio's Performance and Compare it with
benchmark returns.

• Portfolio Revision
• The process of inclusion/exclusion of assets in an
existing portfolio or changing the ratio of funds invested
is called portfolio revision
Return
What Constitutes Return

What you get What is your cost

• Dividend / Interest • Investment (money)
• Reinvestment Income • Time
• Capital appreciation
• Tax Considerations
 Return for a period
Simple returns: Multiperiod return is the geometric sum of
individual period returns.

Pt − Pt −1
Rt =
Pt −1
Continuous returns can directly be added (Arithmetic sum of
individual period returns)

Rt = ln( Pt ) − ln( Pt −1 )
 Return on Infosys Tech.
• Price on 18 July 2019 Rs 789.05
• Price on 17 July 2020 Rs 903.15
Dividend Paid
23-10-2019 8.00
29-05-2020 9.50
Total 17.50

– Returns 16.68%
– Returns (precisely) 16.83%
 Returns and Tax
• Returns are affected by the tax.
• Dividend income is subject to full taxation. Regardless of
whether it amounts to one or ten lakhs, dividends are fully
taxable. However, you can still benefit from the basic
exemption limit based on your taxable income slab.
• On short-term (less than 12 months) capital gain 15% tax is
payable.
• If the long-term capital gain on the sale of equity shares or
equity-oriented mutual fund units exceeds Rs. 1 lakh, it will
incur a 10% tax on long-term capital gains.
We do not make decisions for
past!
• Decisions are always made for future
based on expectations.
 Expected Return
Current Price Future Price Prob. Return
130 8% 30%
120 30% 20%
110 25% 10%
100 100 15% 0%
90 12% -10%
80 8% -20%
70 2% -30%

Expected Return 7.50%

 How do we form expectations regarding the
future

• One possible way- based on the past

behaviour of the variable.
• But future may be very different from the
past.
• We may consider other factors ( economy,
industry etc.) which may affect future
returns
 Future is always uncertain !
• This introduce an element of Risk in our
decision.
Risk
 What is Risk?

The chance that the actual

return from an investment
would differ from its expected
return is referred as risk.
Statistically it is quantified as the Standard
Deviation (or Variance) of the expected
returns
How to estimate RISK and RETURN from
the past data?
• The mean of the return can be taken as a
proxy for the Expected Return.
• The standard deviation (or variance) of
the past data can be taken as a proxy of
the risk.
 20
40
60
80
10
15
20
25
30

-60
-40
-20
0
-25
-20
-15
-10
0
5

-5
Dec-99 Dec-99
Mar-00 Mar-00
Jun-00 Jun-00
Sep-00 Sep-00
Dec-00 Dec-00
Mar-01 Mar-01
Jun-01 Jun-01
Sep-01 Sep-01
Dec-01 Dec-01
Mar-02 Mar-02
Jun-02 Jun-02
Sep-02 Sep-02
Dec-02 Dec-02
Mar-03 Mar-03
Jun-03 Jun-03
Sep-03 Sep-03
Dec-03 Dec-03
Mar-04 Mar-04
Jun-04 Jun-04
Sep-04 Sep-04
Dec-04 Dec-04
HUL

Mar-05 Mar-05
Tata Steel

Jun-05 Jun-05
Sep-05 Sep-05
Dec-05 Dec-05
Mar-06 Mar-06
Jun-06 Jun-06
Sep-06 Sep-06
Dec-06 Dec-06
Mar-07 Mar-07
Jun-07 Jun-07
Sep-07 Sep-07
Dec-07 Dec-07
SD = 9.03%

Mar-08 Mar-08
SD = 15.89%

Jun-08 Jun-08
Average =0.94%

Sep-08 Sep-08
Average =3.37%

Dec-08 Dec-08
Mar-09 Mar-09
Jun-09 Jun-09
Sep-09 Sep-09
Dec-09 Dec-09
 R
i
s
k
P
r
e Equity Shares
m
i Preference Shares
u
m Unsecured Loans

Corporate Bonds

Risk-free Govt Bonds

returns

Risk
 Exercise
• Download the daily closing prices spanning from January 1, 2005, to
February 22nd, 2023, for SENSEX and a company of your choice,
from either the BSE website or Yahoo Finance.
• Upon obtaining the aforementioned data, carry out the following
tasks:
1. Create graphs for both price and return trends.
2. Compute the average daily, weekly, and monthly returns.
3. Calculate standard deviations using data from daily, weekly, and
monthly intervals. Additionally, annualise the standard deviations.
4. Finally, analyse the results to determine whether there is an
observable relationship between risk and return.