TYBMS SEM 5 Finance: Investment Analysis & Portfolio Management (Q.P. November 2018 with Solution)

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

TYBMS SEM 5 

Finance: 

Investment Analysis & 

Portfolio Management 

(Q.P. November 2018 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 PPF	A Liquidity ratio
2 NIFTY	B Uncertain & high return
3 Unsystematic Risk	C William sharpe
4 Standard deviation	D Elliot wave theory
5 Net Profit ratio	E Technical Analysis
6 Study of Charts & pattern	F Profitability ratio
7 Dow Theory	G Measure of Risk
8 Capital Assets Pricing model	H Controllable
9 Gambling	I NSE
10 Current ratio	J Highly illiquid

Ans:

Column A	Column B
1 PPF	J Highly illiquid
2 NIFTY	I NSE
3 Unsystematic Risk	H Controllable
4 Standard deviation	G Measure of Risk
5 Net Profit ratio	F Profitability ratio
6 Study of Charts & pattern	E Technical Analysis
7 Dow Theory	D Elliot wave theory
8 Capital Assets Pricing model	C William sharpe
9 Gambling	B Uncertain & high return
10 Current ratio	A Liquidity ratio

1.(B) Give True or False: (Any 7)            (07 Marks)

1) Investments are made with primary objective of deriving returns.

Ans: True

2) Capital gain refers to increase in value of investments over a period of time.

Ans: True

3) Non-Marketable financial assets can be sold in capital market.

Ans: False

4) Public Provident Fund is a savings cum tax saving instrument in India.

Ans: True

5) Treasury Bills are one of the riskiest Money market instruments issued by Central Government

Ans: False

6) Commercial Paper is a short term unsecured promissory note issued by Corporate and Financial Institutions,

Ans: True

7) Equity shareholders does not carry right of dividend.

Ans: False

8) Secondary Market is a market where existing securities are purchased and sold.

Ans: True

9) Merger and Acquisitions are major functions of Investment Bankers.

Ans: True

10) NSDL is the largest central security depository based in Mumbai.

Ans: True

2. (A) Explain the Non- marketable Financial Assets.        (08 Marks)

Definition:

Non-marketable financial assets are financial instruments that cannot be sold or traded in the open market. These assets are typically held by individuals for savings or investment purposes and are not listed on stock exchanges or tradable through brokers.

They are usually issued by the government, financial institutions, or banks, and are intended to be held until maturity or for a fixed period.

Features of Non-Marketable Financial Assets:

1. Non-Transferable:

   • These cannot be transferred or sold to another party.

   • Only the original holder can redeem the investment.

2. Safe and Low-Risk:

   • Often backed by the government or reputable institutions.

   • Provide security of principal.

3. Fixed or Assured Returns:

   • Offer a pre-decided interest rate or maturity amount.

   • Returns are not affected by market fluctuations.

4. Held Till Maturity:

   • Investors usually hold these assets for a specific period (5, 10, 15 years).

   • Early withdrawal may be restricted or penalized.

5. Limited Liquidity:

• Cannot be traded in secondary markets (unlike shares or bonds).

• May not be easily converted to cash before maturity.

Advantages:

• Safety of Capital: Low risk and secure.

• Stable Returns: Predictable and steady income.

• Tax Benefits: Instruments like PPF, NSC offer deductions under Section 80C.

• Ideal for Long-Term Goals: Retirement, education, etc.

Disadvantages:

• Not Tradable: Cannot be sold or transferred in stock markets.

• Low Liquidity: Difficult to access funds before maturity.

• Lower Returns: Compared to equity or mutual funds, returns are modest.

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

Investment refers to the allocation of money into assets or instruments with the expectation of earning returns in the future. People invest based on various financial goals and risk preferences.

Main Objectives of Investment:

1. Income Generation

• To earn regular income through interest, dividends, or rent.
• Common in fixed deposits, bonds, dividend-paying stocks, and rental property.

2. Capital Appreciation

• To increase the value of the investment over time.
• Achieved through long-term investments like equity shares, mutual funds, or real estate.

3. Safety of Capital

• To preserve the principal amount invested.
• Focused on low-risk options like government bonds, PPF, or fixed deposits.

4. Liquidity

• To ensure the investment can be easily converted into cash when needed.
• Stocks and mutual funds offer high liquidity compared to real estate or FDs.

5. Tax Benefits

• To reduce tax liability through investments eligible under tax-saving sections (e.g., 80C).
• Instruments like PPF, ELSS, NSC, and life insurance qualify for tax deductions.

6. Retirement Planning

• To create a corpus for retirement ensuring financial independence.
• Includes investments in pension plans, EPF, PPF, annuities, etc.

7. Beat Inflation

• To ensure the real value of money is maintained over time.
• Investments in equity and mutual funds help generate returns above inflation.

 

OR

2. As Portfolio Management Consultant, you are approached by Mr. Wagh, aged 35 with investible funds of Rs. 10 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 maximum return?

(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	Rudra Ltd	Hethvi Ltd.	Market return
1	20	19	20
2	18	16	17
3	17	13	14
4	21	19	20
5	24	23	24

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

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

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

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

OR

3. Following is information about shares of Modi Ltd. and Gandhi Ltd. Under in various economic conditions. At present both the shares are traded at Rs. 100.

		Returns %
Situation	Probability	Modi Ltd.	Gandhi Ltd.
High Growth	0.30	140	150
Low Growth	0.40	110	100
Stagnation	0.20	120	120
Recession	0.10	100	80

(i) Which company has more risk to invest?

(ii) Mr. Kapil wants to invest Rs. 10,000.

(iii) Will your decision change if probabilities are 0.4, 0.4, 0.1, 0.1 respectively.

4. (A) Give a brief on Technical Analysis.

Technical Analysis is a method used to evaluate securities (like stocks) by analyzing past market data, primarily price and volume. It helps investors and traders predict future price movements based on historical patterns and market behavior.

Concepts of Technical Analysis:

1. Price Discounts Everything:

   • All information (economic, political, and market sentiment) is already reflected in the stock price.

2. Prices Move in Trends:

   • Prices generally move in a trend (uptrend, downtrend, or sideways) rather than randomly.

3. History Repeats Itself:

   • Market behavior tends to repeat over time, forming recognizable patterns.

📈 Tools Used in Technical Analysis:

• Charts: Line, Bar, Candlestick (used to visualize price movement)

• Indicators: RSI, MACD, Moving Averages, Bollinger Bands

• Trendlines & Support/Resistance: To identify entry and exit points

• Volume Analysis: Helps confirm price trends

Purpose of Technical Analysis:

• To forecast future price trends

• To identify buy and sell signals

• To make short-term trading decisions

• To manage risk effectively

Example:

If a stock shows a “head and shoulders” pattern, it might indicate a trend reversal. A breakout above resistance may signal a buy opportunity.

(B) what are charts? Explain the types of charts.

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. Following information is available relating to Lokesh Limited and Mayur Limited.

Particulars	Lokesh Limited	Mayur Limited
Equity Share Capital (Rs.10 face value)	Rs.400 lakhs	Rs.500 lakhs
Profit after tax	Rs.100 lakhs	Rs.140 lakhs
Proposed Dividend	Rs.70 lakhs	Rs.80 lakhs
Market Price Per Share	Rs.400	Rs.560
Current Assets	Rs.160 lakhs	Rs.180 lakhs
Current Liabilities	Rs.80 lakhs	Rs.90 lakhs

Calculate

(i) Earnings per share (ii) P/E Ratio (iii) Dividend Payout Ratio (iv) Return on Equity Shares Ratio (v) Current

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
Kotak Ltd.	18	1.6
Ganatra Ltd.	10	0.8
Thakkars Ltd	12	1.2

If the risk free rate is 7% and market returns are 12%. 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 (%)
Nobeta	18	1.4	0.30
Sezuka	12	0.9	0.35
Sunio	16	1.1	0.40
Market Index	14	1.0	0.25

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

5. Give short notes on: (Any Three)

1. CAPM Model

The Capital Asset Pricing Model (CAPM) is a theoretical framework used to determine the expected return on an investment based on its risk. It helps investors decide whether a stock is fairly valued given its risk and the time value of money.

CAPM Formula:

Expected Return (Re)=Rf​+β(Rm​−Rf​)

Where:

• Re = Expected return of the security

• Rf = Risk-free rate (e.g., returns on Government Securities)

• β (Beta) = Measure of the stock’s volatility relative to the market

• Rm = Expected return of the market

• (Rm - Rf) = Market risk premium (extra return for taking market risk)

Interpretation:

• If CAPM return > actual return, the asset is overvalued

• If CAPM return < actual return, the asset is undervalued

• A higher beta means more risk and more expected return

Assumptions of CAPM:

1. Investors are rational and risk-averse

2. Markets are efficient

3. All investors have access to same information

4. No transaction or tax costs

5. Investors can lend and borrow at the risk-free rate

Uses of CAPM:

• To calculate cost of equity for companies

• To evaluate if a stock offers a fair return for its risk

• Used in portfolio management, corporate finance, and valuation

Example:

Suppose:

• Risk-free rate (Rf) = 5%

• Expected market return (Rm) = 12%

• Beta (β) = 1.5

$$Re=5+1.5(12-5)=5+10.5=15.5\%$$

So, the expected return from the asset is 15.5%.

 

2. Elloit Wave Theory

The Elliott Wave Theory is a technical analysis concept developed by Ralph Nelson Elliott in the 1930s. It suggests that financial markets move in repetitive cycles or "waves", driven by investor psychology, sentiment, and behavior.

Core Idea:

Market prices move in a series of waves, which can be identified and used to predict future price direction.

Two Types of Waves:

1. Impulse Waves (Motive Waves):

• Move in the direction of the overall trend.

• Always consist of 5 sub-waves:

  • Wave 1, 2, 3, 4, 5

• Among them, Wave 3 is usually the strongest and longest.

• Example: In a bull market, prices rise in waves 1, 3, and 5; fall in waves 2 and 4.

2. Corrective Waves:

• Move against the trend.

• Consist of 3 sub-waves:

  • Wave A, B, C

• These represent market pullbacks or corrections.

• Helps traders identify trend phases and potential reversals

• Useful for setting entry/exit points

• Commonly combined with Fibonacci retracement levels for precision

3. Hybrid Schemes

Hybrid Schemes are mutual fund schemes that invest in two or more asset classes, mainly equity (stocks) and debt (bonds, fixed-income instruments). Some hybrid schemes also invest in gold or other commodities.

The aim is to balance risk and return by combining the growth potential of equities with the stability and income of debt instruments.

Objectives of Hybrid Schemes:

1. Capital Appreciation through equity investment

2. Regular Income and stability through debt investment

3. Risk Management through diversification

4. Suitable for investors with moderate risk appetite

Features:

Diversification	Spread investments across equity and debt to reduce risk
Asset Allocation	Fixed or dynamic proportion of assets depending on market conditions
Moderate Risk	Risk is lower than pure equity but higher than pure debt
Flexible Options	Available in different combinations based on investor needs

Types of Hybrid Schemes:

1. Aggressive Hybrid Fund

• Equity: 65–80%

• Debt: 20–35%

• Best for: Investors seeking higher returns and are comfortable with moderate risk

2. Conservative Hybrid Fund

• Equity: 10–25%

• Debt: 75–90%

• Best for: Conservative investors looking for regular income with low risk

3. Balanced Hybrid Fund

• Equity & Debt: 40–60% each

• Best for: Balanced risk-return seekers (not common due to regulatory restrictions)

4. Dynamic Asset Allocation Fund / Balanced Advantage Fund

• Equity & Debt: Changes dynamically based on market conditions

• Best for: Investors wanting professional asset rebalancing

5. Multi Asset Allocation Fund

• Invests in: At least three asset classes (e.g., equity, debt, gold)

• Best for: Broad diversification and long-term wealth building

Advantages of Hybrid Schemes:

• Risk Reduction through asset diversification

• Growth Potential from equity exposure

• Steady Income from debt allocation

• Flexibility in asset reallocation

• Suitable for new or cautious investors

Limitations:

• Returns may underperform in strong bull markets compared to pure equity funds

• Frequent rebalancing may affect returns

• Taxation varies based on the type of hybrid fund (equity-oriented or debt-oriented)

Example :

You invest ₹1,00,000 in an Aggressive Hybrid Fund:

• ₹70,000 is allocated to equity (stocks)

• ₹30,000 is allocated to debt (bonds)

This gives you a chance to grow your money through stocks while still earning stable returns from bonds.

4. Secondary market

Definition:

The secondary market is a platform where previously issued financial instruments such as shares, debentures, bonds, and other securities are traded between investors, without the involvement of the issuing company.

Features:

1. Trading of Existing Securities

   • Securities are bought and sold after being initially issued in the primary market.

2. Liquidity Provider

   • Investors can easily buy or sell their holdings, making their investments liquid.

3. Market Price Determination

   • Prices are determined by demand and supply, and reflect the true market value of a security.

4. No Fund Flow to Issuer

   • The issuing company does not receive money in secondary transactions; the trade is between investors.

Examples of Secondary Markets:

• Stock Exchanges:

  • NSE (National Stock Exchange) – India

  • BSE (Bombay Stock Exchange) – India

  • NYSE (New York Stock Exchange) – USA

  • Nasdaq – USA

Types of Secondary Market:

1. Stock Market – For equity shares

2. Bond Market – For debt instruments

3. Over-the-Counter (OTC) Market – Direct trades between parties

4. Auction Market – Buyers and sellers publicly declare prices (like stock exchanges)

Functions of Secondary Market:

• Provides Liquidity to investors

• Helps in Price Discovery

• Encourages Capital Formation

• Gives Investors an Exit Route

The secondary market is where investors buy and sell existing securities, making it an essential component of a healthy financial system by providing liquidity, transparency, and efficient capital allocation.

5. Sensex

The Sensex (Sensitivity Index) is the benchmark stock index of the Bombay Stock Exchange (BSE) in India. It was introduced in 1986 and represents the performance of 30 well-established and financially sound companies across key sectors of the Indian economy. These companies are selected based on factors such as market capitalization, liquidity, and sector representation.

The Sensex serves as a barometer of the Indian stock market, reflecting investor sentiment and overall economic trends. Movements in the Sensex are influenced by various factors including corporate earnings, government policies, global market trends, and geopolitical events.

As one of the oldest and most widely followed indices in India, the Sensex provides investors and analysts with a snapshot of the country's stock market performance and economic health.

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