TYBMS SEM 5 Finance: Investment Analysis & Portfolio Management (Q.P. November 2024 with Solution)

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

TYBMS SEM 5 

Finance: 

Investment Analysis & 

Portfolio Management 

(Q.P. November 2024 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)        (08)

i. ________ measures the systematic risk.

a. Beta

b. Range

c. Variance

d. Standard Deviation

ii. Shares are offered by company before commencement of the  business is known as _______.

a. Initial Public Offering (IPO)

b. Follow on Public Offer (FPO)

c. New Fund Offer (NFO)

d. Private Placement (PP)

iii. SEBI is formed in the year ________ by the Parliament of India.

a: 1990

b. 1992

c. 1980

d. 1988

iv _________ securities are called as ownership capital.

a. Bonds

b. Equity shares

c. Debentures

d. Public deposits

v. ________ is the last step for Portfolio Management

a. Identification of objectives

b. Develop and implement strategies

c. Review and Monitoring

d. Evaluation

vi. The Standard Current Ratio is _______.

a. 12:1

b. 121

c. 3:1

d.1:2

vii. Debentures are ________ fund.

a Own

b. Debt

c. Risky

d. Dividend earning

viii. The analyst draws ________ chart on graph or Logarithmic paper.

a. Candlestick

b. Line

c. Bar

d. Trend

ix _______ is the father of Modern Technical Analysis.

a. Charles Dow

b. Adams Smith

c. Newton

d. Charlie Chaplin

d. Dividend earning

x. Jensen's measure of portfolio performance is based on the ________.

a. CAPM

b. Beta

c. Standard Deviation

d. Risk free return

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

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

Ans: True

ii. The maximum deduction which can be claimed under section 80 C is Rs.1,50,000

Ans: True

iii. India is the highest consumer of gold in the world.

Ans: False

iv. The Dow Theory consists of 3 types of market movement.

Ans: True

v. An Oscillator is a technical analysis tool.

Ans: True

vi. India is the highest consumer of gold in the world.

Ans: False

vii. The maximum deduction which can be claimed under section 80C is Rs. 1,50,000.

Ans: True

viii. The maximum maturity of Treasury bill is 3 years.

Ans: False

ix. Stock Market Index is the method of showing the overall performance of all the companies listed in Stock market with a single number.

Ans: False

x. NIFTY is the stock market Index of India's Bombay Stock Exchange.

Ans: False

2. (A) What are the factors influencing for the selection of Investment Alternatives. Explain in brief.                    (08 Marks)

1. Return on Investment (ROI)

• One of the primary goals of investing is to earn a return.

• Investors assess the potential earnings from an investment through interest, dividends, or capital appreciation.

2. Risk Tolerance

• Every investment carries some level of risk.

• Investors choose alternatives based on their ability and willingness to bear risk, which depends on age, income, financial goals, etc.

3. Liquidity

• Refers to how quickly and easily an investment can be converted into cash without significant loss of value.

• Higher liquidity is preferred if the investor may need funds in the short term.

4. Investment Horizon

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

• Long-term investments may allow for higher risk and potential returns, while short-term investments require safety and liquidity.

5. Tax Benefits

• Some investments offer tax deductions or exemptions, like those under Section 80C in India.

• Tax efficiency is a key factor for many investors when choosing between alternatives.

6. Safety and Security

• Investors consider the stability of the investment, especially for capital preservation.

• Government bonds, fixed deposits, etc., are safer compared to stocks or mutual funds.

7. Inflation Protection

• Investments should ideally generate returns that outpace inflation, preserving the purchasing power of money.

• Equity and real estate are often preferred for inflation hedging.

8. Diversification

• A well-diversified portfolio reduces risk.

• Investors consider alternatives that complement their existing investments to balance overall risk and return.

9. Market Conditions

• Prevailing economic conditions, interest rates, and political stability affect investment decisions.

• Investors may prefer safer options during uncertainty and riskier ones in bullish markets.

10. Personal Financial Goals

• Whether it's for retirement, buying a house, or children’s education, investment choices depend on the nature and urgency of financial goals.

(B) Explain the types of Investors with their qualities.                (07 Marks)

1. Conservative Investor

• Risk-averse – Prefers safety of capital over high returns.

• Invests in low-risk instruments like fixed deposits, PPF, bonds, or blue-chip stocks.

• Prioritizes capital preservation and steady income.

• Usually has short-term goals or limited knowledge of markets.

2. Moderate Investor

• Willing to take moderate risks for better returns.

• Seeks a balanced portfolio with a mix of equity and debt.

• Focuses on wealth creation over the medium to long term.

• Typically open to mutual funds, diversified stocks, or balanced funds.

3. Aggressive Investor

• High risk tolerance and expects high returns.

• Actively invests in equities, derivatives, cryptocurrencies, or start-ups.

• Comfortable with market volatility.

• Often has long-term investment horizon and strong market knowledge.

4. Speculative Investor

• Invests based on market speculation or short-term trends.

• Frequently trades in stocks, options, futures, and other volatile instruments.

• Focused on quick gains, but risks are very high.

• Needs sharp market analysis skills and quick decision-making.

5. Institutional Investor

• Large organizations like mutual funds, insurance companies, pension funds, etc.

• Make bulk investments, often influencing market trends.

• Backed by research teams and structured investment strategies.

• Focus on long-term value and risk-adjusted returns.

6. Retail Investor

• Individual investors using their own money.

• Vary widely in investment knowledge and goals.

• Typically use stock brokers or mutual funds.

• May have limited capital but increasing influence in markets.

OR

2. (C) The security return on stock of Dr. Reddy's Lab. and Alkem Lab, under different status of economy are given below:                (08 Marks)

Particular	Boom	Low Growth	Stagnation	Recession
Probability	0.30	0.20	0.30	0.20
Return on stock of Dr. Reddy's Lab. (%)	50	45	30	25
Return on stock of Alkem Lab. (%)	45	50	40	30

Calculate the expected return and standard deviation of return on both the stocks and advise to invest in one of them.

2 . (D) The security return of Bawa Shoe Ltd. and market return are given below: (8)

Particulars	1	2	3	4	5	6	7
Return on security of Bawa Shoe Ltd. (%)	10	13	15	14	15	18	20
Market Return (%)	14	16	18	20	22	24	26

Calculate Beta on security of Bawa Shoe Ltd.

3.(A) Distinguish between Fundamental Analysis and Technical Analysis.

	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.

3.(B) Give a brief note on Systematic Risk and Unsystematic Risk.

Systematic Risk

• Definition: This is the risk that affects the entire market or economy and cannot be eliminated through diversification.

• Also known as market risk.

• Caused by factors like:

  • Changes in interest rates

  • Inflation

  • Recession

  • Political instability

  • Global events (e.g., wars, pandemics)

• Examples:

  • A rise in interest rates reducing stock prices across the board.

  • An economic downturn affecting all sectors.

Systematic risk cannot be controlled or diversified away — it is inherent in the entire market.

Unsystematic Risk

• Definition: This is the risk that is specific to a company or industry, and can be reduced or eliminated through diversification.

• Also called specific risk or idiosyncratic risk.

• Caused by:

  • Poor management decisions

  • Company fraud

  • Labor strikes

  • Product recalls

• Examples:

  • A company’s stock price falling due to a bad earnings report.

  • A fire at a factory disrupting production.

Unsystematic risk can be minimized by investing in a diversified portfolio of assets.

OR

3. The Balance Sheet of L&T Realty Ltd. as on 31 March 2023 was as under: (15 Marks)

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
6,000 Equity Shares of Rs. 100 each fully paid	6,00,000	Fixed Assets	8,70,000
10% Preference shares	3,00,000	Investments	2,00,000
General Reserve	1,80,000	Inventories	1,80,000
9% Debentures	2,50,000	Debtors	1,75,000
Bank Overdraft	90,000	Cash & Bank	45,000
Sundry Creditors	85,000	Advance Salary	40,000
Outstanding Expenses	55,000	Preliminary Expenses	50,000
Total→	15,60,000	Total→	15,60,000

Profit after Tax Rs. 4,00,000

Market Price per Share Rs. 230

Dividend per share Rs. 30

Calculate:

i. Liquid Ratio

ii. Earnings Per Share

iii. Price-Earnings Ratio 

iv. Dividend Pay-out Ratio

v. Debt Equity Ratio

4.(A) Define Portfolio Management. Explain the steps in the process of Portfolio Management.                    (8 Marks)

Portfolio Management refers to the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation, and balancing risk against performance.
It involves building and managing a selection of investments (like stocks, bonds, mutual funds, etc.) that align with an investor’s goals, risk tolerance, and time horizon.

Steps in the Process of Portfolio Management:

1. Assessment of Investor’s Objectives and Constraints

• Understand the investor’s financial goals, risk appetite, investment horizon, and liquidity needs.

• Consider constraints like legal restrictions, tax situations, and ethical preferences.

2. Asset Allocation

• Decide how to distribute investment across different asset classes (e.g., equities, debt, real estate, gold).

• Aim is to maximize returns for a given level of risk.

3. Security Selection

• Choose specific securities or financial instruments within each asset class.

• Example: Selecting particular stocks in the equity portion, or government bonds in the fixed-income portion.

4. Portfolio Execution

• Actual purchase and implementation of investment decisions.

• May involve timing the market, using brokers, and managing transaction costs.

5. Monitoring and Review

• Regularly track the performance of the portfolio against benchmarks or goals.

• Reassess if the portfolio still aligns with the investor’s needs and market conditions.

6. Rebalancing the Portfolio

• Adjust the portfolio periodically to maintain the original asset allocation.

• For example, if equity has grown beyond target allocation due to a bull market, some profits may be booked and reinvested in other assets.

7. Performance Evaluation

• Analyze returns and compare with standard benchmarks (like NIFTY, SENSEX).

• Also assess whether the risk-adjusted returns are acceptable.

(B) Explain Elliott Wave Theory in Brief.                        (7 Marks)

Elliott Wave Theory is a form of technical analysis that was developed by Ralph Nelson Elliott in the 1930s.
It is based on the idea that financial markets move in repetitive cycles or waves, influenced by investor psychology and crowd behavior.

Concepts of Elliott Wave Theory:

1. Wave Patterns:

Elliott proposed that market movements follow a 5-3 wave pattern:

• Impulse Wave (5 Waves) – Moves in the direction of the main trend:

  1. Wave 1: Market starts to move up.

  2. Wave 2: Minor correction.

  3. Wave 3: Strongest upward movement.

  4. Wave 4: Another correction.

  5. Wave 5: Final push upward before reversal or larger correction.

• Corrective Wave (3 Waves) – Moves against the trend:

  • Wave A: Initial drop.

  • Wave B: Temporary recovery.

  • Wave C: Final drop completing the correction.

2. Fractal Nature:

• Waves are fractal, meaning each wave can be broken down into smaller wave patterns, and those into smaller ones again.

• This makes Elliott Wave applicable to all time frames – from minutes to decades.

3. Wave Characteristics:

• Wave 3 is usually the strongest and longest.

• Wave 2 and Wave 4 are corrective in nature and alternate in complexity.

• Wave C in a correction often mirrors the power of Wave A.

Use in Trading:

• Helps traders identify market trends and potential reversal points.

• Can be combined with other tools like Fibonacci retracements, momentum indicators, etc.

OR

4.(C) The information for three portfolios of Garments Industries are given below:

Portfolio	Average Return on Portfolio (%)	Beta	Standard Deviation (%)
Welspun	18	0.9	0.48
Sutlej	19	1.4	0.38
Raymond	22	1.1	0.28
Market Index	24	1.0	0.32

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

4.(D) The following information the securities are as follows:

Securities	Expected Return (%)	Beta
Archies	22	1.5
Faber Castell	21	1.2
DOMS	23	0.8
Market Index	24	1.0

If the risk-free rate is 7%. Calculate returns for each security under CAPM. Identify the securities are undervalued or overvalued or at par and advise to Invest.  (07 Marks)

5. Adv. Hari, aged 62 years a Practicing Senior Doctor. He is having Rs. 1,50,00,000 investible fund.                     (15 Marks)

(a) Advise him for Investment avenues available to him which will give a suitable return with maximum return?

(b) Explain the advantages and disadvantages by investing in the specific avenues.

OR

5.Give Short Notes on: (Any Three)                    (15 Marks)

i. Small Cap and Large cap

These terms refer to the market capitalization of a company, which is the total value of a company’s outstanding shares.
Market Capitalization = Share Price × Number of Outstanding Shares

1. Large Cap Stocks

Definition:

• Companies with large market capitalization, usually ₹20,000 crore and above (in India).

• Well-established, financially stable companies.

Examples:

• Reliance Industries, TCS, Infosys, HDFC Bank

Qualities:

• Stable and secure investments

• Lower risk, but also moderate returns

• Consistent dividend payers

• Suitable for long-term conservative investors

2. Small Cap Stocks

Definition:

• Companies with market capitalization below ₹5,000 crore.

• Smaller, often newer or niche firms with growth potential.

Examples:

• Tanla Platforms, Ujjivan Small Finance Bank, Route Mobile (as of recent classifications)

Qualities:

• High growth potential, but also high volatility

• More risky compared to large caps

• Can deliver higher returns, but may fluctuate sharply

• Suitable for aggressive investors with high risk tolerance

ii. NSDL and CDSL

A Depository is an institution that holds financial securities (like shares, bonds, mutual funds) in electronic form (demat) on behalf of investors.
It functions like a bank, but instead of holding money, it holds securities.

In India, there are two main depositories:

1. NSDL – National Securities Depository Limited

2. CDSL – Central Depository Services (India) Limited

1. NSDL – National Securities Depository Limited

• Established: 1996

• Headquarters: Mumbai, Maharashtra

• Promoted by: National Stock Exchange (NSE), along with UTI and IDBI

Features:

• NSDL was India’s first depository.

• It enables electronic settlement of trades and holds securities in demat form.

• Mainly works with institutional and high-net-worth investors, but also serves retail clients.

• Investors access NSDL services through Depository Participants (DPs) (similar to bank branches).

Examples of NSDL DPs:

• Zerodha, HDFC Securities, ICICI Direct, etc.

NSDL Demat Account Number Format:

• Starts with "IN", followed by 14 numeric digits (e.g., IN12345678901234)

2. CDSL – Central Depository Services (India) Limited

• Established: 1999

• Headquarters: Mumbai, Maharashtra

• Promoted by: Bombay Stock Exchange (BSE)

Features:

• CDSL is India’s second depository, but has become very popular among retail investors due to its ease of use and wide reach.

• Offers similar services as NSDL—electronic holding and transfer of securities.

• Offers features like e-CAS, e-voting, and online portfolio tracking.

Examples of CDSL DPs:

• Upstox, Angel One, Groww, etc.

CDSL Demat Account Number Format:

• 16-digit numeric number only (e.g., 1234567890123456)

Both NSDL and CDSL are safe, government-regulated depositories working under SEBI (Securities and Exchange Board of India).
They serve the same purpose—to facilitate smooth and secure holding and transfer of securities in dematerialized form.

The difference mainly lies in:

• Who promoted them (NSE vs BSE)

• Demat number format

• Market segment focus

iii. Portfolio Management Decision

Portfolio Management Decision refers to the process of selecting, managing, and monitoring a mix of investments to meet specific financial goals and risk preferences.

It includes a series of key decisions made by investors or portfolio managers to maximize returns while managing risk.

1. Asset Allocation Decision

• Choosing how to distribute the portfolio across asset classes like:

  • Equity (stocks)

  • Debt (bonds)

  • Real estate

  • Commodities (gold, etc.)

  • Cash equivalents

• This is the most critical decision, as it largely determines the risk-return profile of the portfolio.

2. Security Selection Decision

• Choosing specific securities within each asset class.

  • Example: Within equities – selecting TCS, Reliance, or Infosys.

• Based on analysis of:

  • Fundamentals (financials, earnings, ratios)

  • Technical charts

  • Sector performance

3. Timing Decision

• Deciding when to enter or exit an investment.

• Involves market timing and forecasting to:

  • Buy low and sell high

  • Avoid losses during downturns

4. Risk Management Decision

• Identifying, measuring, and managing portfolio risks.

• Includes:

  • Diversification

  • Hedging (e.g., using derivatives)

  • Setting stop-loss limits

  • Maintaining appropriate asset balance

5. Performance Evaluation Decision

• Assessing whether the portfolio is meeting its expected return and risk levels.

• Tools used:

• Sharpe Ratio

• Alpha, Beta

• Jensen’s Measure

• Benchmark comparison (e.g., NIFTY, SENSEX)

iv Technical Analysis

Definition:

Technical Analysis is a method used to forecast the future price movements of securities (like stocks, commodities, or currencies) by analyzing past market data, especially price and volume.

Instead of looking at company fundamentals (like earnings or balance sheets), technical analysis focuses on charts, patterns, and indicators to predict market trends.

To help traders and investors:

• Identify entry and exit points

• Spot trends (uptrend, downtrend, sideways)

• Understand market psychology and momentum

Tools in Technical Analysis:

1. Charts : 

Visual representation of price movements (Line chart, Bar chart, Candlestick chart)

2. Trends : General direction of price: Uptrend, Downtrend, Sideways 3. Support & Resistance : Support is a price level where demand is strong. Resistance is where supply overcomes demand. 4. Indicators : Tools like RSI (Relative Strength Index), MACD, Moving Averages, Bollinger Bands, etc. 5. Patterns : Formations like Head & Shoulders, Double Top/Bottom, Triangles, Flags used to predict moves 6. Volume Analysis : Studying the trading volume to confirm trends and strength of price movement

Types of Charts:

1. Line Chart – Simplest form, shows closing prices over time

2. Bar Chart – Shows open, high, low, and close (OHLC)

3. Candlestick Chart – Most popular; gives clear visual cues with colored bodies

Assumptions of Technical Analysis:

1. Market discounts everything – All known and unknown info is already reflected in prices.

2. Prices move in trends – Prices follow patterns and trends that tend to repeat.

3. History tends to repeat itself – Investor psychology creates repeating chart patterns.

Advantages:

• Quick decision-making

• Effective for short-term trading

• Identifies precise levels for buying/selling

Limitations:

• Not foolproof

• Subjective interpretation

• Can be misleading in highly volatile or manipulated markets

Technical analysis is an essential tool for traders and active investors. It doesn’t predict the future with certainty but helps in making informed and timely trading decisions based on patterns and probabilities.

v. The Random Walk Theory

Definition:

Random Walk Theory is a financial theory which suggests that stock prices move randomly, and cannot be predicted consistently.
It was popularized by economist Burton Malkiel in his famous book “A Random Walk Down Wall Street.”

According to this theory:

“The past movement or trend of a stock price cannot be used to predict its future movement.”

In simple terms: Markets are efficient, and price changes are like a “random walk” — they move unpredictably, like flipping a coin.

Assumptions of Random Walk Theory:

1. Stock prices fully reflect all available information.

2. New information is unpredictable, so price changes are too.

3. Technical analysis and fundamental analysis cannot consistently outperform the market.

4. Markets are efficient, so there’s no consistent way to beat them using trends or patterns.

Example:

Let’s say a stock rises 3% today. According to Random Walk Theory:

• It does not mean it will continue to rise tomorrow (trend).

• Nor does it mean it will fall (correction).

• It means: Tomorrow’s price move is completely independent of today’s.

Criticism of Random Walk Theory:

• Real markets show trends, momentum, and investor behavior.

• Some investors (like Warren Buffett) have beaten the market consistently.

• Behavioral finance shows that investors are not always rational, which can cause patterns.

Random Walk Theory supports the idea that the stock market is unpredictable and that trying to “time the market” or “beat the market” is futile.
It promotes passive investing strategies like index fund investing over stock picking or active trading.