TYBMS SEM 5 Finance: Investment Analysis & Portfolio Management (Q.P. November 2022 with Solution)

Paper/Subject Code: 46003/Finance: Investment Analysis & Portfolio Management

TYBMS SEM 5 

Finance: 

Investment Analysis & 

Portfolio Management 

(Q.P. November 2022 with Solution)

NB: 

(1) All questions are compulsory having internal option. 

(2) Figures to the right indicate marks allocated to each question.

(3) Simple calculator is allowed.

1. (A) Select the right option and rewrite the sentence. (Any 8)        (8 Marks)

i. Markowitz approach has roots in __________

a. Analysing risk and return related to stocks.

b. Estimation of stock return

c. Proper entry and exit in the market. 

d. Good portfolio management

ii. __________ refers to the risk which emerges out of controlled and known variables that are industry or security specific

a. unsystematic risk

b. beta

c. standard deviation.

d. systematic risk

3. __________ measures the amount of systematic risk a security has relative to the whole market. 

a. Beta

b. Range

c. Variance

d. Standard Deviation

iv. under __________ portfolio manager has to assess the performance of portfolio over a period of time.

a. performance evaluation

b. portfolio revision 

c. portfolio execution

d. portfolio diversification

v. Treynor measure consider __________

a. systematic risk and beta

b. unsystematic risk and beta

c. systematic risk

d. unsystematic risk

vi __________ is the last step in process of portfolio management.

a. portfolio evaluation 

b. portfolio performance

c. investment objectives setting.

d. selection of stocks

vii. The _________ model is a model that describe the relationship between systematic risk and expected return for assets, particularly stocks.

a. Capital Asset Pricing

b. Capital Market Line

c. Security Market Line

d. Arbitrage Pricing Theory

viii.  If an asset's expected return plots above the security market line, the asset is _________.

a. under-priced

b. overpriced

c. fairly priced

d. under-priced with unique risk

ix. Under ________ a portfolio manger monitor and review scripts according to market condition 

a. portfolio revision

b. portfolio evaluation

c. portfolio execution

d. portfolio diversification

x. ________ applies to debt investment.

a. Interest rate risk.

b. currency, risk

c. market risk. 

d. legal risk

1. (B) Give True or False: (Any 7)                (7 Marks)

i. Market risk is the risk of investment declining in value of portfolio.

Ans: True

ii. Portfolio evaluation refers to the evaluation of the revision of the portfolio. 

Ans: False

iii. According to Capital market line, the expected return of any efficient portfolio is a function of total risk. 

Ans: True

iv. Credit risk is the risk of loss from reinvesting principal or income at a lower interest rate..

Ans: False

v. The minimum maturity of Treasury bill is 28 days.

Ans: True

vi. Central and state government can issue Gilt-edge Securities. 

Ans: True

vii. Security Market Line graphs define efficient portfolio.

Ans: False

viii. An aggressive common stock would have a beta equal to zero. 

Ans: False

ix. An over price-priced stock will plot on below the security market line.

Ans: True

x. Balance or hybrid scheme of mutual funds invest in both fixed income and equity.

Ans: True

2. (A) What is investment? Explain the process of investment?          (8 Marks)

Investment refers to the allocation of money or resources into assets with the expectation of generating income or profit over time. It involves committing funds to various financial instruments or physical assets to achieve financial goals like wealth creation, capital appreciation, or income generation.

Investments can be classified into different types based on risk and return profiles:

• Financial Investments: Stocks, bonds, mutual funds, fixed deposits, etc.

• Real Assets: Real estate, gold, commodities, etc.

• Business Investments: Starting or expanding a business.

Process of Investment

The investment process involves a systematic and strategic approach to selecting and managing assets to maximize returns while managing risks. It can be broken down into the following steps:

1. Setting Investment Objectives

• Define your financial goals (e.g., retirement planning, buying a house, children's education).

• Identify risk tolerance (conservative, moderate, aggressive).

• Determine the investment horizon (short-term, medium-term, long-term).

Example: If you want to retire in 30 years, you may focus on long-term growth investments like stocks.

2. Asset Allocation

• Diversify investments across different asset classes (equity, debt, real estate, etc.) to reduce risk.

• Consider factors like liquidity needs and market conditions.

Example: A young investor may have 70% in equities and 30% in bonds, while a retiree might prefer a more conservative mix.

3. Security Selection

• Choose specific securities or investment products within each asset class.

• Analyze potential investments using fundamental (e.g., financial statements) or technical analysis (e.g., price patterns).

Example: Selecting blue-chip stocks for stability or growth stocks for higher returns.

4. Portfolio Construction

• Build a diversified portfolio tailored to your objectives and risk profile.

• Ensure a balance between risk and expected returns.

Example: Combining high-risk stocks with low-risk bonds to create a balanced portfolio.

5. Portfolio Monitoring and Review

• Regularly track and evaluate the performance of your investments.

• Ensure alignment with financial goals and market changes.

Example: Review your portfolio quarterly to adjust for market fluctuations or life changes.

6. Portfolio Revision

• Rebalance the portfolio by adjusting asset allocation to maintain the desired risk-return balance.

• Replace underperforming assets with better-performing ones.

Example: If equities grow too much, shift some profits to bonds to maintain your 60-40 balance.

7. Performance Evaluation

• Assess whether the portfolio meets expected returns and benchmarks (e.g., comparing to a market index).

• Use performance measures like Sharpe ratio, Treynor ratio, or Jensen’s alpha.

Example: If your portfolio grows 10% annually, compare it to market averages to evaluate success.

(B) Compare Investment, Speculation and Gambling.        (7 Marks)

	Investment	Speculation	Gambling
Definition	Allocating capital to assets (e.g., stocks, bonds) to generate income or long-term growth.	Taking high-risk positions in assets for short-term gains based on price movements.	Wagering money on an uncertain event with no intrinsic value (e.g., casino games, lotteries).
Purpose	Wealth creation, capital appreciation, and regular income.	Quick profits from price fluctuations.	Entertainment or attempting to win money by chance.
Risk Level	Moderate to Low – Managed through research and diversification.	High – Involves greater uncertainty and market volatility.	Extremely High – Pure chance with no control over outcomes.
Time Horizon	Long-term – Years or decades.	Short-term – Days, weeks, or months.	Instant or Very Short-term – Immediate outcomes.
Decision Basis	Fundamental & Technical Analysis – Based on financial performance, industry trends, and economic conditions.	Market Sentiment & Timing – Based on market psychology and price movements.	Pure Luck or Odds – No analytical basis or intrinsic value.
Returns	Moderate but Consistent – Compounded over time (e.g., dividends, interest, capital gains).	High but Uncertain – Large profits or losses.	Unpredictable – Either a win or total loss.
Examples	Buying stocks, bonds, mutual funds, real estate.	Trading options, futures, cryptocurrencies, penny stocks.	Betting on sports, lotteries, casino games (e.g., poker, roulette).
Control Over Outcome	High – Research and strategy reduce uncertainty.	Medium – Informed guesses but influenced by market behavior.	None – Random outcomes beyond participant control
Legal Framework	Highly Regulated – Securities laws ensure investor protection.	Partially Regulated – Some speculative markets have rules, others (like crypto) may not.	Varies – Legal in some regions, illegal or restricted in others.
Ethical Considerations	Generally viewed as responsible financial planning.	Risky but legal if done within regulations.	Often viewed as irresponsible if excessive or addictive.

 

OR

2. You are a Portfolio Manager Consultant practicing as freelancer. Mr. Arpit approached you for his investment planning. His age is 65 years with investible funds of Rs. 2 Crores.
He needs guidance in respect of following area. Explain in brief.         (15 Marks)
i. What are the investment avenues available to him which will give a suitable return with maximum return?
ii. What are the various types of risks?

3. (A) Calculate Beta for Apple Ltd.                            (8 Marks)

Particulars	1	2	3	4	5	6	7	8	9	10
Return on security (%)	11	14	18	10	8	11	18	12	20	10
Market Return (%)	12	10	10	15	12	14	15	20	22	10

3. (B) Mr Mahesh has à portfolio of two sécurities with 50% investments in security.M'and 50% investment in security N. The characteristics of return under three different situations with different probability for the two securities and the portfolio are given below.        (7 Marks)

Particulars	Boom	Normal	Recession
Probability	0.35	0.50	0.15
Return of Stock of M Ltd. (%)	20	30	40
Return of Stock of N Ltd. (%)	40	30	20

Calculate the expected return and standard deviation of return on both the stocks.

OR

3. Following is the information about shares of A Ltd. and B Ltd. in various economic conditions. Give answers for the questions given below.

Economic Condition	Probability	Expected price of A Ltd. (Rs.)	Expected price of B Ltd. (Rs.)
High Growth	0.4	40	30
Low Growth	0.2	10	30
Stagnation	0.2	20	20
Recession	0.2	30	20

a. Which company has more risk to invest?

b. Will your decision change if probabilities are 0.1, 0.2, 0.3, 0.4 respectively? (15 Marks)

4. (A) What is portfolio management? Explain portfolio management process. (8 Marks)

Portfolio management is the process of designing, implementing, and monitoring a collection of investments to achieve specific financial goals while managing risk. It involves selecting and maintaining an appropriate mix of assets such as stocks, bonds, real estate, and other securities to maximize returns in line with the investor’s risk tolerance, investment horizon, and objectives.

Portfolio management can be:

• Active: Involves frequent buying and selling of securities to outperform a benchmark.
• Passive: Focuses on replicating the performance of a market index with minimal trading.
• Discretionary: The portfolio manager makes decisions on behalf of the client.
• Non-discretionary: The manager advises, but the client makes the final investment decisions.

Portfolio Management Process

The portfolio management process involves several structured steps to ensure investments align with the investor’s goals and risk appetite.

1. Policy Statement (Understanding Objectives)

   • Define the investor’s financial goals, risk tolerance, time horizon, and income requirements.
   • Document investment constraints, such as tax considerations or liquidity needs.

2. Investment Strategy Design

   • Asset Allocation: Determine the proportion of different asset classes (e.g., equities, bonds) based on the investor’s profile.
   • Choose between active or passive management styles and decide on geographic and sectoral exposures.

3. Portfolio Construction

   • Select specific securities or funds within the chosen asset classes.
   • Focus on diversification to minimize unsystematic risk.

4. Implementation

   • Execute the investment plan by purchasing securities in alignment with the chosen strategy.
   • Monitor transaction costs to ensure cost-efficiency.

5. Monitoring and Rebalancing

   • Regularly review portfolio performance against benchmarks or objectives.
   • Adjust the portfolio to maintain the desired asset allocation or respond to changes in market conditions or life circumstances.

6. Performance Evaluation

   • Measure returns relative to the initial goals and benchmarks.
   • Assess risk-adjusted performance using metrics like the Sharpe ratio, alpha, or beta.

Importance of Portfolio Management

• Maximizes Returns: Aligns investments with financial goals.
• Risk Management: Balances risk and reward through diversification and strategic adjustments.
• Customizable: Tailored to individual needs and market conditions.
• Discipline: Encourages systematic and informed decision-making.

(B) What is technical analysis? Explain the different types of charting techniques.  (7 Marks)

Technical analysis is a method of evaluating securities by analyzing historical price movements, trading volume, and market patterns to forecast future price trends. Unlike fundamental analysis, which focuses on a company’s financial performance and intrinsic value, technical analysis relies on charts and statistical tools to identify opportunities based on market behavior.

The underlying assumptions of technical analysis are:

1. Prices Move in Trends: Securities tend to move in identifiable patterns or trends over time.
2. Market Discounts Everything: All available information is already reflected in the current price.
3. History Repeats Itself: Patterns observed in the past are likely to recur.

Charting Techniques in Technical Analysis

Charts are the primary tools of technical analysis, used to visualize price movements and identify trends, patterns, and potential reversals. Common types of charting techniques include:

1. Line Chart

• Description: The simplest type of chart, created by connecting closing prices over a period with a continuous line.
• Advantages: Easy to understand and provides a clear view of price trends.
• Disadvantages: Lacks detailed information about intra-day price movements (e.g., opening, high, low prices).
• Use Case: Suitable for long-term trend analysis.

2. Bar Chart

• Description: Represents each time period (e.g., day, week) with a vertical line showing the range of prices (high and low) and horizontal dashes for opening and closing prices.
• Advantages: Displays detailed price information, including the open, high, low, and close (OHLC).
• Disadvantages: Can be visually complex for beginners.
• Use Case: Commonly used for detailed analysis of market trends and price volatility.

3. Candlestick Chart

• Description: Similar to bar charts but more visually appealing, using colored "candles" to represent price movements. The body shows the difference between open and close, while wicks show high and low.
  • Green/white candle: Closing price higher than opening (bullish).
  • Red/black candle: Closing price lower than opening (bearish).
• Advantages: Provides clear signals of market sentiment and is ideal for identifying patterns like "doji," "hammer," or "engulfing."
• Disadvantages: Requires understanding specific candlestick patterns for effective use.
• Use Case: Widely used for short-term and intraday trading analysis.

4. Point and Figure Chart

• Description: Focuses only on price movements, ignoring time and volume. It uses X's to indicate rising prices and O's for falling prices.
• Advantages: Highlights significant price movements and removes noise from minor fluctuations.
• Disadvantages: Less detailed, as it omits time and volume data.
• Use Case: Useful for long-term analysis and identifying breakout levels.

5. Renko Chart

• Description: Constructed using "bricks" that represent price movements of a fixed amount, ignoring time. A new brick is added only when the price moves significantly.
• Advantages: Simplifies trends and removes market noise.
• Disadvantages: Can lag behind actual price action due to its reliance on preset price movements.
• Use Case: Ideal for identifying trends and support/resistance levels.

6. Heikin Ashi Chart

• Description: A variation of candlestick charts that smoothens price action to highlight trends, using average price data for the open, close, high, and low.
• Advantages: Reduces market noise, making trends more visually clear.
• Disadvantages: Not as precise for pinpointing exact price levels.
• Use Case: Best suited for trend-following strategies.

OR

4. Following is the Balance Sheet of Music Ltd as on 31 March 2022.

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
Share Capital (Face Value Rs. 10 each)	8,00,000	Fixed Assets	10,00,000
Reserves & Surplus	2,00,000	Current Assets	3,60,000
8% Debentures	2,00,000
Sundry Creditors	1,60,000
Total →	13,60,000	Total →	13,60,000

Additional Information:

a) Net operating profit before tax is Rs 2,80,000.

b ) Assume Tax Rate at 50%

c) Dividend declared Rs 1,20,000.

Calculate:

i. Earnings per share

ii. Return on Capital Employed iii. Return on shareholder's Fund

iv. Debt Equity Ratio

v. Dividend Yield Ratio

Also advise to the Investor, which is good for Investing.

5. (A) The information for three portfolios is given below: 

Portfolio	Average Return on Beta Portfolio (%)	Beta	Standard Deviation
A	14	1.25	0.25
B	10	1.10	0.15
Market Index	12	1.20	0.25

Compare these portfolios on performance using Sharpe and Treynor Measures. Risk free rate of return is 8%.                         (15 Marks)

5. (B) The Expected return and Beta factor of three securities are as follows:    (8 Marks)

The following information the securities are as follows:

Securities	Expected Return on Portfolio (%)	Beta
A	18	1.6
B	10	0.8
C	12	1.2
D	15	1.5

           

If the risk-free rate is 7% and market return are 13%. Calculate returns for each security under CAPM.             (07 Marks)

OR

5. Give Short Notes on: (Any Three)

i. Non-marketable financial assets

Non-marketable financial assets are financial instruments that cannot be easily sold or exchanged in secondary markets due to their illiquid nature or restrictions on transfer. These assets are typically not traded on organized markets or exchanges and are often held for the long term by their owners.

Characteristics

1. Lack of Liquidity: Non-marketable financial assets cannot be quickly converted into cash at fair market value.
2. Restricted Transferability: These assets may have legal or contractual limitations that prevent them from being traded.
3. Valuation Challenges: The absence of a secondary market makes pricing these assets difficult, often relying on estimated or intrinsic value.
4. Long-Term Holding: These assets are generally intended for investment over an extended period.

Common Examples

1. Savings Bonds: Particularly government-issued savings bonds, which are typically non-transferable and can only be redeemed by the holder with the issuer.
2. Bank Deposits: Fixed-term deposits or certificates of deposit (CDs) that cannot be sold but can be withdrawn under specific conditions.
3. Non-Traded Equity: Shares in privately held companies or closely held corporations.
4. Pension Funds: Contributions to retirement plans like 401(k)s or individual retirement accounts (IRAs), which have restrictions on withdrawal or transfer.
5. Loans and Mortgages: Held by banks or financial institutions, these represent non-marketable debts due to their unique agreements between parties.

ii. Unsystematic risk

Unsystematic risk is the type of risk specific to a particular company, industry, or sector, as opposed to the broader market. It is also known as specific risk, idiosyncratic risk, or diversifiable risk, because it can be reduced or eliminated through diversification of investments.

Characteristics

1. Specific to an Entity or Sector: This risk arises from factors unique to a company or industry, such as management decisions, product recalls, labor strikes, or competitive changes.
2. Can Be Mitigated: Unlike systematic risk (market risk), unsystematic risk can be reduced by spreading investments across various companies and industries.
3. Independent of Market Movements: It does not correlate with the overall market or economy and stems from internal or microeconomic factors.

Examples of Unsystematic Risk

1. Business Risk: Poor management decisions, operational inefficiencies, or weak product demand impacting a company's performance.
2. Financial Risk: High leverage or poor financial health leading to bankruptcy risk.
3. Regulatory Risk: New regulations or changes that disproportionately impact certain industries or businesses.
4. Legal Risk: Litigation or legal disputes specific to a company.
5. Competitive Risk: Loss of market share due to a competitor's superior innovation or pricing.

Managing Unsystematic Risk

• Diversification: Investing in a wide variety of assets across different sectors and regions reduces the impact of unsystematic risk on a portfolio.
• Research and Due Diligence: Thorough analysis of companies and industries before investing can help identify potential risks.
• Hedging: Use of financial instruments like options or futures to offset specific risks.

iii. Primary market

The primary market is the financial market where new securities are issued and sold for the first time, enabling entities like companies, governments, or organizations to raise fresh capital. Investors buy securities directly from the issuer, making it a crucial platform for capital formation. Common offerings in the primary market include Initial Public Offerings (IPOs), where companies go public; Follow-on Public Offerings (FPOs); private placements; and rights issues.

Investment banks often assist issuers in pricing, underwriting, and marketing these securities. Unlike the secondary market, where securities are traded among investors, the primary market focuses on raising funds for issuers. It plays a vital role in supporting business expansion, reducing debt, and promoting economic growth.

iv. Economic Analysis

Economic analysis is the systematic study of economic conditions, trends, and factors to understand and evaluate the performance of an economy or market. It involves examining various economic indicators such as GDP growth, inflation, unemployment rates, interest rates, and trade balances to assess the overall health and direction of an economy.

Economic analysis can be conducted at different levels:

• Microeconomic Analysis: Focuses on individual entities like businesses or households and their decision-making processes.
• Macroeconomic Analysis: Examines broader economic phenomena, including national income, fiscal policies, and global trade dynamics.

It helps policymakers, businesses, and investors make informed decisions by identifying opportunities, risks, and the impact of external factors like monetary policies or international events.

v . portfolio strategy Mix

A portfolio strategy mix refers to the combination of investment approaches and asset allocations designed to achieve specific financial goals while managing risk. It involves balancing various asset classes such as stocks, bonds, real estate, and cash equivalents, as well as adopting different investment styles like growth, value, or income strategies.

Components of a Portfolio Strategy Mix:

1. Asset Allocation: Dividing investments across asset classes to match the investor's risk tolerance and objectives.
2. Diversification: Spreading investments across sectors, geographies, and instruments to minimize unsystematic risk.
3. Risk Management: Adjusting the portfolio's composition to align with changing market conditions and the investor's risk appetite.
4. Time Horizon: Structuring the portfolio based on short-term or long-term goals.

Common Strategies:

• Aggressive Mix: Focuses on high-growth, high-risk assets, ideal for long-term goals.
• Conservative Mix: Prioritizes stability and income, with a larger allocation to bonds or cash.
• Balanced Mix: Combines growth and income, suitable for moderate risk-tolerant investors.