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

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

TYBMS SEM 5 

Finance: 

Investment Analysis & 

Portfolio Management 

(Q.P. April 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
(a) Equity share	(1) Debt Fund
(b) Preference share	(2) Risky Capital
(c) Bond	(3) Fixed Dividend
(d) PPF	(4) Unsecured Deposit
(e) Public Deposit	(5) Tax Saving Investment
(f) Investment Bank	(6) Global electronic market place for buying and selling securities
(g) Stock Market Index	(7) Initial public offering
(h) Nasdaq	(8) Scripless trading system
(i) Depository Settlement	(9) Shows the performance of the market
(j) Market Capitalization	(10) Total market value of a company's outstanding shares

Ans:

Column A	Column B
(a) Equity share	(2) Risky Capital
(b) Preference share	(3) Fixed Dividend
(c) Bond	(1) Debt Fund
(d) PPF	(5) Tax Saving Investment
(e) Public Deposit	(4) Unsecured Deposit
(f) Investment Bank	(7) Initial public offering
(g) Stock Market Index	(9) Shows the performance of the market
(h) Nasdaq	(6) Global electronic market place for buying and selling securities
(i) Depository Settlement	(8) Scripless trading system
(j) Market Capitalization	(10) Total market value of a company's outstanding shares

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

1) Small-cap stocks tend to offer more growth potential than large-cap-stocks.

Ans: True

2) Systematic risk arises due to the micro-economic factors.

Ans: False

3) Diversification helps to reduce unsystematic risk.

Ans: True

4) Fundamental analysis is a method of evaluating a security.

Ans: True

5) Examples of solvency ratio include current ratio and quick ratio.

Ans: False

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

Ans: True

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

Ans: False

8) Risk is measured by variability in returns.

Ans: True

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

Ans: False

10) The higher the risk of a security, the lower would be the return expected from it.

Ans: False

2. (A) Distinguish between Equity shares and Preference shares.            (08 Marks)

Points	Equity Shares	Preference Shares
Meaning	Shares that are not preference shares are called equity shares i.e. these shares do not have preferential right for payment of dividend and repayment of capital.	Preferences shares are Shares that carry preferential right as to payment of : a) Dividend and b) Repayment of capital.
Rate of Dividend	Equity shares are given dividend at fluctuating rate depending upon the profits of the company.	Preference shareholders get dividend at fixed rate.
Voting Rights	Equity shareholders enjoy normal voting right. They participate in the management of their company.	Preference shareholder do not enjoy normal voting right. They can vote only on matters affecting their interest.
Return of Capital	Equity capital can not be returned during the life time of the company. (except in case of buy back)	A company can issue redeemable preference shares, which can be repaid during the life time of the company.
Nature of Capital	Equity capital is known as 'Risk Capital.'	Preference capital is ‘Safe Capital’ with stable return.
Nature of investor	The investors who are ready to take risk invest in equity shares.	The investors who are cautious about safety of their investment, invest in preference shares.
Face value	The face value of equity shares is generally ` 1/- or ` 10/- it is relatively low.	The face value of preference shares is relatively higher i.e. ` 100/- and so on.
Right and Bonus issue	Equity shareholder is entitled to get bonus and right issue.	Preference shareholders are not eligible for bonus and right issue.

2. (B) Explain in brief on Money Market Securities.        (07 Marks)

Money Market Securities are short-term debt instruments that are highly liquid and considered safe investments. They are typically issued by governments, financial institutions, and corporations to meet short-term funding needs.

Features:

• Short Maturity: Usually less than one year.

• Low Risk: Due to high credit quality and short duration.

• High Liquidity: Easily tradable in the market.

• Lower Returns: Compared to long-term securities, as the risk is lower.

Types of Money Market Securities:

1. Treasury Bills (T-Bills): Issued by the government with maturities of 91, 182, or 364 days.

2. Commercial Paper (CP): Unsecured, short-term promissory notes issued by corporations.

3. Certificates of Deposit (CD): Time deposits offered by banks with fixed interest and maturity.

4. Repurchase Agreements (Repos): Short-term borrowing for dealers in government securities.

5. Call/Notice Money: Very short-term loans between banks, repayable on demand or within a few days.

Purpose:

Money Market Securities help in:

• Meeting short-term liquidity needs.

• Managing working capital efficiently.

• Providing a safe investment avenue for surplus funds.

OR

2. As Portfolio Management Consultant, you are approached by Mr. Thakore, aged 45 with investible funds of Rs. 35 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 with minimum risk?

(ii) What are the various types of risks?

3. (A) Calculation of Beta of each of the following two companies with the help of given information. (08 Marks)

Year	Sachi Ltd	Navi Ltd	Market return
1	20	19	20
2	20	16	17
3	16	13	14
4	20	19	20
5	24	23	24

3. (B) The rate of return of stock A and B under different status of economy are given below:                                (07 Marks)

Particular	Boom	Normal	Recession
Probability	0.30	0.50	0.15
Return on stock A Ltd. (%)	30	50	70
Return of stock B Ltd. (%)	70	50	30

a) Calculate the expected return and standard deviation of return on both the stock.

b) If you could invest in either stock A or stock B, but not in both. Which stock would you prefer?

OR

3. (P) Given Below are the likely return in case of SKK Ltd. & TKK Ltd. in various economic conditions.                            (08 Marks)

		Returns %
Situation	Probability	SKK Ltd.	TKK Ltd.
High Growth	0.20	- 13	-4
Low Growth	0.15	16	-2
Stagnation	0.40	32	21
Recession	0.25	12	20

Calculate the Expected return & standard deviation of both the companies Advice in which stock would you prefer to invest.

3. (Q) Compute Beta factor for Riddhi Ltd.        (07 Marks)

Year	Riddhi Ltd	Market (%)
2014	20	18
2015	20	14
2016	16	13
2017	24	15
2018	25	15

4. (A) What are Charts? Explain any three Charting Patterns.

Charts are graphical representations of price movements of securities (like stocks, commodities, indices) over a specific time period. They are used in technical analysis to identify trends, patterns, and potential price movements based on historical data.

Charts help traders and investors make informed decisions by visualizing:

• Price trends

• Volume

• Support and resistance levels

• Market sentiment

Three Common Charting Patterns:

1. Head and Shoulders Pattern

• Type: Reversal Pattern

• Shape: One peak (head) between two lower peaks (shoulders).

• Indicates: A trend reversal from bullish to bearish (for standard pattern) or bearish to bullish (for inverse pattern).

• Signal: When the price breaks below the “neckline,” it suggests a potential downtrend.

2. Double Top and Double Bottom

• Type: Reversal Pattern

• Double Top:

  • Appears after an uptrend.

  • Price forms two peaks at the same level.

  • Indicates a potential bearish reversal.

• Double Bottom:

  • Appears after a downtrend.

  • Price forms two troughs at the same level.

  • Indicates a potential bullish reversal.

3. Triangle Patterns

• Type: Continuation Pattern

• Types: Ascending, Descending, and Symmetrical Triangles.

• Indicates: A consolidation period before the price continues in the direction of the trend.

• Example:

  • Ascending Triangle: Flat top with rising lows → bullish breakout expected.

  • Descending Triangle: Flat bottom with falling highs → bearish breakout expected.

(B) What are the factors affecting investment decision.

Investment decisions are influenced by a combination of personal, economic, and market factors. Here are the factors:

1. Risk Tolerance

• The investor's ability and willingness to take risk.

• Higher risk tolerance may lead to investments in stocks or mutual funds; lower risk tolerance may favor fixed deposits or government bonds.

2. Return Expectations

• The desired profit or income from the investment.

• Higher expected returns may involve higher risk instruments.

3. Investment Horizon

• The duration for which the investor plans to hold the investment.

• Long-term horizon may support equity investments, while short-term may favor money market instruments.

4. Liquidity Needs

• The ease with which the investment can be converted into cash.

• Liquid investments (like mutual funds) are preferred when frequent access to funds is needed.

5. Economic Conditions

• Inflation, interest rates, and GDP growth impact investment choices.

• For example, high inflation may lead to preference for real assets or inflation-indexed bonds.

6. Tax Considerations

• Tax benefits or liabilities associated with certain investments.

• Investors often choose tax-saving instruments like PPF, ELSS, or NPS to reduce tax burden.

7. Market Trends and Sentiment

• Current performance of the stock market, investor confidence, and global events can affect decisions.

• Bullish markets may encourage equity investment; bearish may prompt conservative choices.

8. Financial Goals

• Purpose of investment (e.g., retirement, education, buying a house) influences the choice of instruments and risk level.

9. Regulatory and Legal Factors

• Rules, regulations, and government policies can impact investment attractiveness or restrictions.

10. Knowledge and Experience

• An informed investor is more likely to make confident and strategic decisions.

• Lack of knowledge may lead to conservative or misinformed choices.

OR

4. Following information is available relating to X Limited and Y Limited.    (15 Marks)

Particulars	X Limited	Y Limited
Equity Share Capital (Rs.10 face value)	Rs.300 lakhs	Rs.350 lakhs
Profit after tax	Rs.50 lakhs	Rs.70 lakhs
Proposed Dividend	Rs.35 lakhs	Rs.40 lakhs
Market Price Per Share	Rs.200	Rs.280
Current Assets	Rs.80 lakhs	Rs.90 lakhs
Current Liabilities	Rs.40 lakhs	Rs.45 lakhs

Calculate

(i) Earnings per share 

(ii) P/E Ratio

(iii) Dividend Payout Ratio

(iv) Return on Equity Shares

(v) Current Ratio

As an analyst inform the investor which is good in investing.

5. (A) The Expected return and Beta factors of 3 securities are as follows:

Securities	Expected Return (%)	Beta
Amar Ltd	16	1.4
Akbar Ltd	10	0.8
Anthony Ltd	12	1.2

If the risk free rate is 7% and market returns are 14%. Calculate returns for each security under CAPM.

5. (B) The details of three portfolios are given below.    (08 Marks)

Portfolio	Average Return on Portfolio (%)	Beta	Standard Deviation (%)
Sony	18	1.2	28
mony	12	0.8	32
Tony	16	1.1	36
Market Index	14	1.0	22

Compare these portfolio on performance using Sharpe and Treynor measures.

Risk Free return is 8%.

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

1. Security Market Line

The Security Market Line (SML) is a graphical representation of the Capital Asset Pricing Model (CAPM). It shows the relationship between the expected return of a security and its systematic risk (measured by Beta).

Formula of SML / CAPM:

Expected Return (E)=Rf​+β(Rm​−Rf​)

Where:

• $R_f$= Risk-free rate

• $\beta$ = Beta of the security

• $R$= Expected market return

• $(R_m-R_f)$ = Market risk premium

Features of SML:

• X-axis: Beta (systematic risk)

• Y-axis: Expected return

• Intercept: Risk-free rate

• Slope: Market risk premium (i.e., $R_m - R_f$)

Interpretation:

• Points on the line: Fairly priced securities

• Points above the line: Undervalued securities (offering higher return for the level of risk) → Good investment opportunity

• Points below the line: Overvalued securities (offering lower return for the level of risk) → Avoid

Use of SML:

• To assess whether a security is overvalued, undervalued, or fairly priced

• Helps in making informed investment decisions based on risk and return trade-off

• Useful for portfolio management and performance analysis

2. Efficient Market Hypothesis

The Efficient Market Hypothesis (EMH) is a financial theory that states:

"All available information is fully and instantly reflected in stock prices."

This means that it is impossible to consistently earn higher returns than the overall market using publicly available information, because the market has already priced in all known data.

Forms of EMH:

EMH is categorized into three forms, based on the type of information:

Form	Information Reflected in Prices	Implication
Weak Form	Past prices and trading volumes (technical analysis is ineffective)	No one can beat the market using technical analysis alone
Semi-Strong Form	All publicly available information (news, financial reports, etc.)	No one can beat the market using technical analysis alone
Strong Form	All information (public + private or insider)	Even insider trading cannot lead to consistent outperformance

Implications of EMH:

• Stock prices follow a random walk — future movements are unpredictable.

• Active portfolio management (trying to beat the market) may not be worth the cost.

• Supports passive investing like index funds.

Criticism of EMH:

• Market anomalies (e.g., January effect, bubbles, crashes) challenge EMH.

• Behavioral finance argues that investor psychology can lead to irrational pricing.

• Insider trading and delayed reactions to news question strong and semi-strong forms.

3. NSDL

NSDL is India’s first and largest depository, established in 1996 to facilitate the holding and transfer of securities in electronic (dematerialized) form.

Key Facts about NSDL:

• Full Form: National Securities Depository Limited

• Established: 1996

• Headquarters: Mumbai, India

• Regulated by: SEBI (Securities and Exchange Board of India)

• Website: www.nsdl.co.in

Main Functions of NSDL:

1. Dematerialization:
   Converts physical share certificates into electronic form.

2. Rematerialization:
   Converts electronic holdings back into physical form (if needed).

3. Settlement of Trades:
   Facilitates smooth settlement of securities after trading on stock exchanges.

4. Transfer of Ownership:
   Easy and paperless transfer of securities between buyers and sellers.

5. Pledging of Securities:
   Allows investors to pledge securities as collateral for loans.

6. Corporate Actions:
   Helps in crediting bonuses, dividends, rights, etc., directly to investors’ accounts.

Benefits of NSDL to Investors:

• Safer than physical certificates (no theft, loss, or forgery)

• Faster settlement and transfer

• Reduced paperwork and transaction costs

• Access to various services via DPs (Depository Participants)

4. Primary Market

The Primary Market is the segment of the financial market where new securities are issued and sold for the first time. It is also known as the new issue market.

Features of the Primary Market:

• First-time issuance: Companies raise capital by issuing shares, debentures, or bonds directly to investors.

• Funds go to the issuer: The money raised goes directly to the company (unlike in the secondary market, where securities are traded between investors).

• No trading – only issuing.

Main Types of Issues in the Primary Market:

1. Initial Public Offering (IPO):

   • First time a private company offers shares to the public.

   • Example: A startup becoming publicly listed.

2. Follow-on Public Offering (FPO):

   • A listed company issues additional shares to raise more capital.

3. Rights Issue:

   • Shares are offered to existing shareholders at a discounted price, in proportion to their current holdings.

4. Private Placement:

   • Securities are sold to a select group of investors (not the general public), such as institutional investors.

5. Preferential Allotment:

   • Shares are issued to specific individuals or companies at a fixed price.

Functions and Importance:

• Helps companies raise long-term capital.

• Promotes industrial and economic development.

• Encourages wider ownership of securities.

• Provides an opportunity for investors to participate in a company’s growth from the start.

5. Stock Market Index

A Stock Market Index is a statistical measure that represents the performance of a group of selected stocks from a stock exchange. It reflects the overall market trend and serves as a benchmark for comparing investment returns.

Features:

• Represents a specific segment of the market (e.g., top companies by market cap, sector-wise, etc.)

• Used to track the performance of the stock market or a particular sector.

• Helps investors understand market movements and make informed decisions.

How It Works:

• Indexes are created by selecting a group of stocks based on criteria like market capitalization, liquidity, or sector.

• The index value changes as the prices of the constituent stocks rise or fall.

• It can be price-weighted, market-cap weighted, or equal-weighted.

Uses of Stock Market Index:

• Benchmarking: Compare mutual funds or portfolios with index performance.

• Market Sentiment: Gauge the overall direction of the economy or market.

• Investment Tool: Many index funds and ETFs replicate index performance.

• Analysis: Used in technical and fundamental analysis for market trends.