.

1
SECURITY ANALYSIS AND
PORTFOLIO MANAGEMENT
DEFINITION:
2

Investment is the current commitment of money for a
particular period of time in order to derive anticipated
future benefits that will compensate for:
a) The time for which funds are committed.
b) The expected rate of Inflation.
C) The uncertainty of future payment.
Investments refers to sacrifice of current resources
in anticipation of a future benefit.
Investment involves commitment of certain current
cash flow in anticipation of an uncertain future cash
flows.

DEFINITION:
3
Investment involves employment of own funds or
borrowed funds on a real or financial asset for a
certain period of time in anticipation of a return in
future.
Investment thus refers to postponement of current
consumption in anticipation of a future benefit.
The investor can be an Individual, Government,
Pension fund, or a Corporation.

Investment Attributes
4
Rate of Return e.g. stock return of two types
Risk
transacted easily
Marketability-Three factors Low
transaction cost
Price change b/w
transactions is low

Tax shelter
Convenience
Nature and Scope of Investment Decision:
5

Higher the Risk, Higher is the Expected Return.
A well diversified Portfolio reduces Unsystematic
risk by a large way.
Higher the time period of investment, lesser is the
uncertainties of Investment.
Investor prefers among securities which yield
higher return for the same risk or lower risk for the
same return.
Investment decisions are based on Investment
objectives and Constraints.

INVESTMENT Vs
SPECULATION
6
Investor Speculator
Planning horizon Longer Planning
horizon
At least one year
Very Short planning
horizon
A few days or few
moths
Risk Disposition Does not assume more
than moderate risk
Willing to assume high
risk
Return Expectation Seeks a moderate rate
of return
High rate of return in
exchange of high risk
borne
INVESTMENT Vs
SPECULATION
7
.
Investor Speculator
Basis for Decisions An investor attaches
greater significance to
fundamental factors
and careful evaluation
is done.
Relies more on
hearsay, technical
charts and market
psychology
Leverage Generally uses his own
funds and eschews
borrowed funds
Normally resorts to
substantial borrowings
Volume of trade Smaller volume Larger volume.
INVESTMENT Vs GAMBLING:
8

Gambling is defined as an act of betting on an uncertain
outcome.

Results of gambling are known in quick time.

E.g. Roll of a dice, Turn of a card etc.

The outcome of gambling is largely a matter of luck.

The risk that gamblers assume is highly disproportionate
to that of their expected return.
INVESTMENT Vs GAMBLING:
9
Gambling does not involve a bet on economic
activity rather it is a bet on artificial risk.

Gamblers show a sign of addiction and fun loving.

The results of gambling are random in nature and it
is not correlated with an past events.
INVESTMENT
CLASSIFICATION:
1
0
Real Vs Financial.


Security Vs Non Security.
Real Vs Financial assets:
1
1

Real assets includes assets like land, building,
machinery, furniture, knowledge etc, where as
Financial assets includes assets like cash, bonds,
shares, derivative instruments etc.
Real assets appear only on the asset side of the
balance sheet where as Financial assets appear
both on asset side and liability side of Balance
Sheet.
Real asset are destroyed only by accident or by
wearing out over time where as Financial assets are
created and destroyed in ordinary course of doing
business.

Security Vs Non Security:
1
2
Security investments are traded in the market and
are transferable in nature. Ex: Shares,
Debentures etc.

Non Security investments are neither traded nor
transferable. Ex: Post office savings deposits,
Deposits with commercial banks, etc.

INVESTMENT PROCESS
1
3
Setting up of Investment Objectives.
e.g. Current income, risk , liquidity, taxes etc.

Choice of Asset mix.

Formulation of Portfolio strategy.
Active portfolio passive portfolio strategy

Selection of securities.
For Stocks-Fundamental analysis, Technical Analysis
For bondsAnalyze YTM, tax shelter, credit rating etc


INVESTMENT PROCESS

Portfolio Execution.
Buying and Selling

Portfolio Revision.
a)Stocks Bonds
b)Change the shares or bonds etc.

Portfolio Evaluation.
Risk and Return evaluation

Approaches to Investment
Decision


Fundamental approach
Psychological approach
Academic approach
Eclectic Approach
15
Fundamental approach

Intrinsic Value of a security
Intrinsic Value Depends on Company, Industry
and Economy.
Market Price will always fall in line with Intrinsic
Value
Buying Undervalued shares and Selling
overvalued shares.
Psychological approach

Stock Prices are guided by emotion rather than
reason
Good news greedMarkets price rise
Bad newsDespair Market prices fall

Psychic values appear to be more important than
intrinsic value

This approach also involves Technical analysis.
Academic approach

Stock markets are reasonably efficient in reacting
quickly and rationally to the flow of the
information

Stock prices reflect the intrinsic value fairly well

Stock prices corresponds to the random walk.
Past behavior cannot be used to predict the
future price behavior.

There is a linear relationship between risk and
return.
Eclectic Approach

Draws conclusion from all the three different
approaches.

Fundamental analysis helps in establishing basic
standards and benchmarks but exclusive reliance
should be avoided.

Technical analysis helps in studying the market and
the mood of the investors but exclusive reliance
should be avoided.

Market is neither well ordered as academic approach.

We should combine the results of the three
approaches and then take decisions.
Errors in Investment
Management
Inadequate comprehension of risk and return
Vaguely formulated Investment policy
Nave extrapolation of the past
Cursory Decision making
Simultaneous switching
Misplaced love for cheap stocks
Over diversification and under-diversification
Buying Shares of Familiar companies
Wrong attitude towards losses and profits
Tendency to speculate
20