TYBMS SEM 5 Finance: Investment Analysis & Portfolio Management (Q.P. November 2019 with Solution)

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

TYBMS SEM 5 

Finance: 

Investment Analysis & 

Portfolio Management 

(Q.P. November 2019 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.

Q1. (A) Match the following columns. (Any 8)            (8)

Column A	Column B
1. Treynor's Measures	a) Based on an analysis of the fundament and technical factor
2. Sharpe's Measures	b) CAPM
3. Active revision Strategy	c) Standard Deviation
4. Portfolio Evaluation	d) Last step in the process of Portfolio Management
5. Jenson's Measure	e) Beta
6. Equity share	f) Debt Fund
7. Preference share	g) Risky Capital
8. Bond	h) Fixed Dividend
9 PPF	i) Unsecured Deposit
10. Public Deposit	j) Tax Saving Investment

 Ans:

Column A	Column B
1. Treynor's Measures	e) Beta
2. Sharpe's Measures	c) Standard Deviation
3. Active revision Strategy	a) Based on an analysis of the fundament and technical factor
4. Portfolio Evaluation	d) Last step in the process of Portfolio Management
5. Jenson's Measure	b) CAPM
6. Equity share	g) Risky Capital
7. Preference share	h) Fixed Dividend
8. Bond	f) Debt Fund
9 PPF	j) Tax Saving Investment
10. Public Deposit	i) Unsecured Deposit

 

Q1. (B) Give True or False: (Any 7)            (8)

1) Examples of solvency ratio include current ratio and quick ratio

Ans: False

2) Price level and inflation affect the economy of the country.

Ans: True

3) The efficient market hypothesis (EMH) states that the financial markets are inefficient

Ans: False

4) Risk is measured by variability in returtis.

Ans: True

5) A risky asset is one whose return is certain as a Government Security

Ans: False

6) The higher the risk of a security, the lower would be the retum expected.

Ans: False

7) Portfolio revision involves changing the existing mix of securities

Ans: True

8) Portfolio evaluation refers to the evaluation of the performance of the portfolio

Ans: True

9) The total return on a portfolio includes only risk free return

Ans: False

10) Investing in equity share is a tax saving investment.

Ans: False

2. (A) Distinguish among Investment, Speculation and Gambling            (08 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.

 

2. (B) Explain in brief the Investment avenues.                (07 Marks)

Investment avenues refer to the different options available for investing money to generate returns. These avenues can be classified into various categories based on risk, return, and liquidity.

1. Equity Investments

• Includes stocks and shares of companies.

• High risk but potential for high returns.

• Suitable for long-term investors.

2. Debt Investments

• Includes bonds, debentures, and fixed-income securities.

• Lower risk with fixed returns.

• Suitable for conservative investors.

3. Mutual Funds

• A professionally managed investment that pools money from multiple investors.

• Diversified portfolio (equity, debt, hybrid funds).

• Ideal for beginners and those looking for diversification.

4. Fixed Deposits (FDs) & Recurring Deposits (RDs)

• Offered by banks and financial institutions.

• Fixed interest rate with low risk.

• Good for risk-averse investors.

5. Real Estate

• Investment in land, houses, and commercial properties.

• Provides rental income and capital appreciation.

• Requires large capital and long-term commitment.

6. Gold & Commodities

• Includes physical gold, gold ETFs, silver, and other commodities.

• Acts as a hedge against inflation.

• Moderate to high-risk investment.

7. Public Provident Fund (PPF) & National Pension System (NPS)

• Long-term, government-backed savings schemes.

• Offers tax benefits and stable returns.

• Suitable for retirement planning.

8. Exchange-Traded Funds (ETFs)

• Traded on stock exchanges like shares.

• Lower expense ratio than mutual funds.

• Provides diversification at a lower cost.

9. Insurance & Annuity Plans

• Includes life insurance, ULIPs, and pension plans.

• Helps in wealth protection and retirement planning.

10. Alternative Investments

• Includes hedge funds, venture capital, cryptocurrencies, and peer-to-peer lending.

• Higher risk with potential for high returns.

OR

2. (C) Calculation of Beta of each of the following two companies with the help of given information.

Year	Rudra Ltd (%)	Market return (%)
1	19	20
2	16	17
3	13	14
4	19	20
5	23	24

2. (D) The rate of return of stock M. Ltd. and V Ltd. As under

Particular	Boom	Normal	Recession
Probability	0.30	0.45	0.25
Return on stock M Ltd. (%)	35	55	70
Return of stock V Ltd. (%)	70	55	35

Calculate the expected return and standard deviation of both the stock

3. (A) Compare the following portfolios according to Jen evaluation and rank them.

Portfolio	Return on portfolio (%)	Beta	Risk free return
HDFC	15	0.8	7%
Kotak	16	1	7%
ICICI	12	1.5	7%
Market Index	14	1.2	7%

3 . (B) Calculate Expected Return and Standard Deviation.            (7)

Probability	Returns (%)
	Sam Ltd.	Cam Ltd.
0.33	6	9
0.33	30	12
0.34	18	18

OR

C) The Security return and Beta factors of 4 securities are as follows:

Security	Security Return (%)	Beta
Modi Ltd.	18	1.6
Gandhi Ltd.	10	0.8
Mehta. Ltd.	12	1.2
Sardar Ltd.	15	1.5

If the risk free rate is 7%. Calculate Average Market return and Expected return for each security under CAPM.

3. (D) The details of three portfolios are given below.                (05 Marks)

Portfolio	Average Return (%)	Beta	Standard Deviation
Padma	18	1.4	0.30
Jharana	12	0.9	0.35
Meenakshi	16	1.1	0.40
Market Index	14	1.0	0.25

Compare these portfolio on performance using Sharpe and Treynor measure Risk Free return is 8%.

4. (A) Distinguish between Fundamental Analysis & Technical Analysis.  (08 Marks)

	Fundamental Analysis	Technical Analysis
Definition	Focuses on evaluating a company’s intrinsic value based on its financial performance, business model, industry conditions, and macroeconomic factors.   It involves analyzing a company’s financial statements (such as balance sheets, income statements, and cash flow statements) to determine whether a stock is overvalued or undervalued.	Focuses on studying price movements and trading volumes of stocks or securities to predict future price trends.   It is based on the idea that past market data (price charts, patterns, and indicators) can help forecast future price movements.
Focus	Concentrates on the company’s business performance, such as revenue, profit margins, earnings growth, and management quality.   Considers economic indicators, industry trends, and competitive positioning.   Aims to identify whether the company has a strong foundation and good growth potential in the long run.	Concentrates on historical price charts and trading volumes.   Uses technical indicators like moving averages, RSI (Relative Strength Index), MACD (Moving Average Convergence Divergence), and chart patterns (e.g., head and shoulders, double top/bottom).   Aims to identify trends, price levels, and market sentiment to make short-term trading decisions.
Objective	Aims to determine the intrinsic value of a stock or asset and assess whether it is undervalued or overvalued.   Suitable for long-term investors who want to invest in fundamentally strong companies and hold them over time.	Aims to identify buying and selling opportunities based on price trends and patterns.   Suitable for short-term traders (like day traders or swing traders) who want to capitalize on market movements over a short period.
Time Horizon	Has a long-term perspective, as it involves understanding a company’s prospects and potential growth over time.   Investors may hold a stock for years if they believe the underlying business is strong and undervalued.	Has a short-term to medium-term perspective, focusing on quick price movements and trends.   Positions may be held for a few days, weeks, or even minutes, depending on the trading strategy.
Data Sources	Relies on financial reports, such as balance sheets, income statements, cash flow statements, and annual reports.   Uses qualitative factors like management quality, industry conditions, and macroeconomic indicators (e.g., GDP, inflation rates).	Relies on price charts, trading volume data, and various technical indicators.   Data is obtained from historical price movements and market trends rather than company-specific information.
Tools & Techniques	Uses tools like Price-to-Earnings (P/E) ratio, Price-to-Book (P/B) ratio, Dividend Discount Model (DDM), and Discounted Cash Flow (DCF) analysis.   Evaluates economic indicators and industry analysis to determine how external factors might impact a company’s performance.	Uses tools like candlestick charts, moving averages, support and resistance levels, Bollinger Bands, and Fibonacci retracements.   Identifies patterns such as head and shoulders, triangles, and double tops/bottoms for forecasting price movements.
Approach to Market	Believes that a stock’s intrinsic value will eventually be reflected in its market price.   Assumes that the market can be inefficient in the short term but becomes efficient in the long run, where prices align with intrinsic value.	Believes that market prices reflect all available information (including fundamentals).   Assumes that history repeats itself, with price movements showing repetitive patterns due to market psychology.
Strengths & Limitations	Strengths: Provides a comprehensive understanding of a company’s financial health and long-term potential; suitable for building a long-term investment portfolio.   Limitations: Time-consuming and may not be effective for short-term price movements; relies on accurate financial information which may be difficult to obtain for smaller companies.	Strengths: Helps identify precise entry and exit points, making it suitable for short-term trading; allows for quick decision-making.   Limitations: Ignores the fundamental aspects of a company, which can lead to misleading signals in volatile or low-volume stocks; trends may not always be reliable.

4. (B) What are Charts? Explain the types of charts.            (7)

Charts are graphical representations of data that help visualize trends, patterns, and relationships in financial markets, business analysis, and statistical data. In investments and technical analysis, charts are widely used to track stock prices, trading volumes, and other market indicators.

Types of Charts

1. Line Chart

• A simple chart that connects closing prices of an asset over time with a continuous line.

• Helps identify trends and overall direction (uptrend, downtrend, sideways).

• Long-term trend analysis.

2. Bar Chart

• Displays open, high, low, and close (OHLC) prices for a specific period.

• Each bar consists of:

  • Vertical line → Represents the price range (high to low).

  • Left tick → Opening price.

  • Right tick → Closing price.

• Detailed price movements and volatility analysis.

3. Candlestick Chart

• Similar to a bar chart but uses "candles" to represent OHLC prices.

• Green/White Candle → Closing price is higher than the opening (bullish).

• Red/Black Candle → Closing price is lower than the opening (bearish).

• Identifying patterns, trends, and reversals in price movements.

4. Point & Figure Chart

• Focuses on price movements without considering time.

• Uses X (price rise) and O (price fall) in a grid format.

• Helps filter out minor price fluctuations.

• Identifying breakouts and long-term trends.

5. Renko Chart

• Similar to a Point & Figure Chart but uses "bricks" to represent price changes.

• Ignores time and focuses only on price movements.

• Identifying strong trends with reduced noise.

6. Heikin-Ashi Chart

• A modified version of the candlestick chart that smooths out price fluctuations.

• Helps identify strong trends by averaging price data.

• Spotting trend direction and reducing market noise.

7. Area Chart

• A variation of the line chart, but the area below the line is shaded.

• Useful for visualizing cumulative values.

• Showing overall trends over time.

8. Volume Chart

• Represents trading volume along with price movements.

• Helps determine the strength of a price move.

• Confirming trends with volume analysis.

OR

4. Hero Ltd. has presented its financial information for the year ended 31st March, 2019.        (15)

Earnings before interest and taxes	16,00,000
2,00,000 Equity shares of 10 each	20,00,000
10% Debentures	30,00,000
Reserve and surplus	10,00,000
Provision for taxation	30%
Proposed Dividend	20%
Market price per share	32

Calculate: (i) EPS (ii) P/E Ratio (iii) Dividend payout ratio (iv) Dividend Yield (v) Debt Equity Ratio

5. As Portfolio Management Consultant, you are approached by Mr. Puri, aged 27 with investible funds of Rs. 50 lakhs. He wants to know from you the following: (15 Marks)

(i) What are the investment avenues available to him which will give a suitable return will maximum return?

(ii) What are the various types of risks?

OR

5. Give short notes on: (Any Three)                (15)

1) Public Provident Fund

The Public Provident Fund (PPF) is a long-term savings and investment scheme backed by the Government of India, offering tax benefits and a stable return. It is one of the most popular savings instruments, especially for individuals looking for risk-free, tax-efficient investment options.

Features of PPF

1. Eligibility:

   • Available to Indian residents (individuals only).

   • NRIs are not eligible to open a PPF account.

2. Investment Limits:

   • Minimum: ₹500 per year

   • Maximum: ₹1.5 lakh per year

   • Can be deposited in lumpsum or in 12 installments per financial year.

3. Tenure:

   • 15 years (mandatory), extendable in blocks of 5 years.

4. Interest Rate:

   • Government decides quarterly.

   • As of recent updates, the PPF interest rate is around 7.1% p.a. (compounded annually).

5. Tax Benefits:

   • Exempt-Exempt-Exempt (EEE) status:

     • Investments: Deductible under Section 80C of the Income Tax Act (up to ₹1.5 lakh).

     • Interest earned: Tax-free.

     • Maturity proceeds: Tax-free.

6. Withdrawal Rules:

   • Partial Withdrawal: Allowed from the 7th year onwards (up to 50% of the balance).

   • Full Withdrawal: Allowed after 15 years (or on maturity).

7. Loan Facility:

   • Can avail a loan between the 3rd and 6th year of account opening.

   • Loan amount: Up to 25% of the balance at the end of the 2nd year preceding the year of loan application.

8. Where to Open a PPF Account?

   • Banks: SBI, ICICI, HDFC, PNB, etc.

   • Post Offices: Any India Post branch.

2) Random Walk Theory

The Random Walk Theory is a financial theory that suggests stock price movements are completely random and unpredictable. This theory, popularized by economist Burton Malkiel in his book "A Random Walk Down Wall Street," argues that asset prices follow a "random walk," meaning that past movements or trends cannot be used to predict future price movements. According to this theory, stock prices respond to new information, which is unpredictable, causing prices to move in a random and efficient manner.

Concepts of Random Walk Theory:

Unpredictability of Stock Prices:

The theory asserts that stock prices move in a random and unpredictable way, much like the steps in a random walk. As a result, no one can consistently outperform the market by trying to time price movements.

Efficient Market Hypothesis (EMH):

Random Walk Theory is closely tied to the Efficient Market Hypothesis, which states that all known information is already reflected in stock prices. Since new information arrives randomly and unexpectedly, price changes are also random.

No Predictable Patterns:

According to the theory, price patterns, technical analysis, and historical data offer no advantage in predicting future price movements. Investors cannot reliably use past performance to predict the future.

Passive Investment Strategy:

The theory supports the idea that it is difficult to consistently "beat the market." As a result, it advocates for a passive investment strategy (such as investing in index funds) rather than attempting active management or market timing.

Advantages of Random Walk Theory:

Supports Efficient Markets: It reinforces the idea that financial markets are highly efficient and that trying to time the market is futile.

Simplifies Investing: The theory encourages investors to focus on long-term, passive strategies, which can reduce trading costs and stress.

Criticisms of Random Walk Theory:

Ignores Market Anomalies: Critics argue that markets are not always fully efficient, and there are anomalies (such as momentum, bubbles, or market psychology) that can lead to price trends.

Overlooks Behavioral Finance: The theory doesn't account for irrational investor behavior, which can influence market prices in a non-random way.

3) Debt Fund Investment

A Debt Fund is a type of mutual fund that primarily invests in fixed-income securities like bonds, treasury bills, corporate debt, and government securities. These funds are suitable for investors seeking stable returns with lower risk compared to equity funds.

Types of Debt Funds

1. Liquid Funds – Invest in short-term debt instruments (maturity ≤ 91 days). Suitable for parking surplus cash with higher liquidity.

2. Ultra Short-Term Funds – Invest in securities with maturities between 3 to 6 months. Offers slightly higher returns than liquid funds.

3. Short-Term Funds – Invest in bonds with maturities between 1 to 3 years. Ideal for investors with a short-term horizon.

4. Corporate Bond Funds – Invest at least 80% in highly-rated corporate bonds. Suitable for moderate-risk investors.

5. Gilt Funds – Invest 100% in government securities (G-Secs). No credit risk, but may have interest rate risk.

6. Dynamic Bond Funds – Fund manager changes portfolio allocation based on interest rate movements.

7. Credit Risk Funds – Invest at least 65% in low-rated corporate bonds to generate higher yields. Higher risk than corporate bond funds.

8. Fixed Maturity Plans (FMPs) – Close-ended debt funds with a fixed tenure, offering predictable returns.

9. Banking & PSU Debt Funds – Invest at least 80% in debt instruments of banks, PSUs, and public finance institutions.

Benefits of Debt Funds

Better Returns than FDs – Typically offer higher returns than fixed deposits, especially for higher tax bracket investors.
Liquidity – Can be redeemed anytime (except FMPs), unlike fixed deposits.
Tax Efficiency – Lower tax rates for long-term investments (holding >3 years).
Low to Moderate Risk – Suitable for conservative investors.
Diversification – Offers exposure to multiple fixed-income securities.

Taxation of Debt Funds (Revised Tax Rules from April 1, 2023)

• Short-Term (Holding < 3 years): Taxed as per slab rate.

• Long-Term (Holding > 3 years): No longer eligible for indexation benefits. Taxed at slab rates (previously, LTCG was taxed at 20% with indexation).

4) Bonds

A bond is a fixed-income security that represents a loan made by an investor to a government, corporation, or other entity. Bonds pay periodic interest (coupon payments) and return the principal amount at maturity. They are a popular investment for stable income and capital preservation.

Types of Bonds

1. Government Bonds

• Issued by the Government of India (GoI) or state governments.

• Risk-free (sovereign guarantee).

• Examples: G-Secs (Government Securities), Treasury Bills, RBI Floating Rate Bonds.

2. Corporate Bonds

• Issued by private or public companies to raise capital.

• Offers higher returns than government bonds but carries credit risk.

• Rated by agencies like CRISIL, ICRA, CARE (e.g., AAA, AA, A ratings).

3. Municipal Bonds

• Issued by local government bodies to fund infrastructure projects.

• Relatively low risk but not very liquid in India.

4. Zero-Coupon Bonds

• No periodic interest payments.

• Issued at a discounted price and redeemed at face value.

• Suitable for long-term investors.

5. Convertible Bonds

• Can be converted into company shares at a predetermined price.

• Combines fixed income with equity upside.

6. Inflation-Indexed Bonds (IIBs)

• Protects against inflation as returns are linked to CPI or WPI.

• Example: RBI's Inflation-Protected Savings Bonds.

7. Sovereign Gold Bonds (SGBs)

• Issued by the Government of India, linked to gold prices.

• Pays 2.5% annual interest, and no capital gains tax if held till maturity (8 years).

Features of Bonds

✔ Fixed Interest (Coupon Payments) – Paid annually, semi-annually, or quarterly.
✔ Maturity Period – Can range from short-term (less than 1 year) to long-term (10+ years).
✔ Tradability – Some bonds are listed on stock exchanges for liquidity.
✔ Credit Ratings – Determines risk level (AAA is highest quality).

Bond Investment Benefits

Stable & Predictable Income – Suitable for conservative investors.
Lower Risk than Equities – Government bonds are risk-free.
Diversification – Reduces overall portfolio risk.
Tax Benefits – Some bonds offer tax-free interest income (e.g., PPF, EPF, Tax-Free Bonds).

5) Mutual Fund

A Mutual Fund is an investment vehicle that pools money from multiple investors to invest in stocks, bonds, or other assets, managed by professional fund managers. They are ideal for investors looking for diversification, professional management, and convenience.

Types of Mutual Funds

1. Based on Asset Class

Equity Mutual Funds – Invest primarily in stocks for high growth potential.
Debt Mutual Funds – Invest in bonds & fixed-income securities for stability.
Hybrid/Balanced Funds – A mix of equity & debt to balance risk & return.
Commodity Funds – Invest in gold, silver, or other commodities.

2. Based on Investment Style

🔹 Active Funds – Fund managers actively buy & sell securities to generate returns.
🔹 Passive Funds – Track an index (e.g., Nifty 50, Sensex) with low-cost investing.

3. Based on Structure

🔸 Open-Ended Funds – Can be bought/sold anytime (high liquidity).
🔸 Close-Ended Funds – Have a fixed maturity period and trade on exchanges.
🔸 Exchange-Traded Funds (ETFs) – Trade like stocks, tracking an index or commodity.

4. Based on Risk Level

⚡ Low-Risk – Liquid, Overnight, Gilt & Debt Funds.
⚡ Medium-Risk – Hybrid Funds, Banking & PSU Funds.
⚡ High-Risk – Equity, Sectoral, Thematic & Small-Cap Funds.

Top Mutual Fund Categories

1. Large-Cap Funds – Invest in top 100 large companies for stable growth.

2. Mid-Cap Funds – Invest in 101st-250th largest companies for higher returns. 

3. Small-Cap Funds – Invest in companies ranked 251+, with high risk & growth.

4. Index Funds – Passively track indices like Nifty 50 or Sensex.

5. ELSS (Equity-Linked Savings Scheme) – Tax-saving mutual fund under Section 80C (₹1.5 lakh exemption).