Paper/Subject Code: 85502/Security Analysis and Portfolio Management
TYBBI SEM-6
Security Analysis and Portfolio Management
(QP November 2024 with Solutions)
N.B. 1) All questions are compulsory.
2) Figures to the right indicate full marks.
1. a) Rewrite the whole sentence with correct option: (answer any 8) 8 Marks
1. An activity involving high risk without expecting high returns is known as ________.
a) speculation
b) investment
c) gambling
d) any of the above
2. When profit after tax is 70 lakh and preference dividend is 12 lakh with number of equity shares 25 lakh then EPS is _______
a) 3.32
b) 2.32
c) 2.02
d) 2.52
3. A measure that compares the behaviour of returns of two securities with each other is known as _______.
a) coefficient of correlation
b) variance
c)coefficient of variance
d) range
4. If the risk-free rate is 3%, the beta of AMI is 1.2, and the rate of return of is the expected return on AMI as per the market portfolio is 12%, what CAPM will be %. ________
a) 12.8
b) 10.8
c) 13.8
d) 14.8
5. Single index model is based on ________ paring of securities.
a) Direct
b) Quick
c) Index
d) None of the above
6. An arbitrage opportunity exists if an investor can construct a _________ investment portfolio that will yield a guaranteed profit.
a) Small
b) Zero
c) Large
d) negative
7. Return on Capital employed is a _________ ratio.
a) unlevered
b) levered
c) solvency
d) liquidity
8. __________ institution is set by government of India for dealing with all matters relating to security market
a) IRDA
b) RBI
c)SEBI
d) ICICI
9. The objective of portfolio is to reduce _________ by diversification
a) Uncertainties
b) certainties'
c) ratio
d) balance sheet
10. The daily high price is represented on a candlestick chart by the _________.
a) real body
b) trend-line
c) channel
d) shadow
1. b) State whether following statements are true or false: (Answer any 7) 7 Marks
1. Returns and risk are inversely proportional to each other.
Ans: False
2. High financial leverage is the source of unsystematic risk.
Ans: True
3. Markowitz theory of portfolio management is most concerned with elimination of systematic risk.
Ans: False
4. Under dividend payout option cash dividends are paid to unit holders of mutual fund.
Ans: True
5. Public provident fund is a source of long time finance
Ans: True
6. Modern portfolio theory states that the risk can be reduced by diversification
Ans: True
7. If miss Priya purchased 300 shares of ABC ltd of rupees 70 each by paying brokerage of
Ans: True
8. Risk is less when returns are high and it is more when return is low
Ans: False
9. Technical analysis believes stock market moment is 10% psychological and 90% logical
Ans: False
10. The relationship between stock return and market index structure is called beta
Ans: True
Q.2 A. Explain concept of Investment and its objectives. 8 Marks
This document provides a comprehensive overview of the concept of investment, exploring its various facets and underlying objectives. It delves into the different types of investments, the motivations behind them, and the key goals that investors aim to achieve. By understanding these fundamental principles, individuals can make informed decisions and effectively manage their investment portfolios to reach their financial aspirations.
What is Investment?
Investment, in its simplest form, is the allocation of money or capital with the expectation of receiving future income or profit. It involves deploying resources today with the hope of generating a larger return in the future. This return can take various forms, such as interest, dividends, capital appreciation (an increase in the value of the asset), or a combination of these.
Investment is not limited to financial assets like stocks and bonds. It can also encompass tangible assets like real estate, commodities (e.g., gold, oil), and even intangible assets like education or starting a business. The key element is the expectation of future benefit or profit.
Types of Investments
Investments can be broadly categorized into several types, each with its own characteristics, risk profile, and potential return:
Stocks (Equities): Represent ownership in a company. Stockholders have a claim on a portion of the company's assets and earnings. Stocks are generally considered riskier than bonds but offer the potential for higher returns.
Bonds (Fixed Income): Represent a loan made by an investor to a borrower (typically a corporation or government). Bondholders receive periodic interest payments and the principal amount at maturity. Bonds are generally considered less risky than stocks.
Mutual Funds: A portfolio of stocks, bonds, or other assets managed by a professional fund manager. Mutual funds allow investors to diversify their investments across a wide range of securities.
Exchange-Traded Funds (ETFs): Similar to mutual funds but traded on stock exchanges like individual stocks. ETFs often track a specific index or sector.
Real Estate: Investment in land, buildings, or other property. Real estate can generate income through rent or appreciation in value.
Commodities: Raw materials such as gold, oil, and agricultural products. Commodities can be traded on exchanges or through futures contracts.
Derivatives: Contracts whose value is derived from an underlying asset, such as stocks, bonds, or commodities. Derivatives can be used for hedging (reducing risk) or speculation.
Alternative Investments: A broad category that includes investments such as hedge funds, private equity, and venture capital. Alternative investments are typically less liquid and more complex than traditional investments.
Objectives of Investment
The objectives of investment can vary widely depending on the individual investor's circumstances, risk tolerance, and financial goals. However, some common objectives include:
Capital Appreciation: This is the most common objective, aiming to increase the value of the investment over time. Investors seeking capital appreciation typically invest in assets that are expected to grow in value, such as stocks or real estate. The goal is to sell the asset at a higher price than the purchase price, realizing a profit.
Income Generation: Some investors prioritize generating a steady stream of income from their investments. This is particularly important for retirees or those seeking to supplement their current income. Income-generating investments include bonds, dividend-paying stocks, and rental properties.
Preservation of Capital: This objective focuses on protecting the principal amount of the investment from loss. Investors with a low risk tolerance often prioritize capital preservation. Investments that are considered relatively safe, such as government bonds or certificates of deposit (CDs), are often used to achieve this objective.
Tax Efficiency: Minimizing the impact of taxes on investment returns is another important objective. Investors can use various strategies to reduce their tax burden, such as investing in tax-advantaged accounts (e.g., 401(k)s, IRAs) or choosing investments that generate tax-exempt income (e.g., municipal bonds).
Inflation Hedging: Inflation erodes the purchasing power of money over time. Investors can use investments to hedge against inflation, meaning to maintain the real value of their assets. Assets that tend to perform well during periods of inflation include commodities, real estate, and inflation-indexed bonds.
Meeting Specific Financial Goals: Many investors have specific financial goals in mind, such as saving for retirement, buying a home, or funding their children's education. Investment strategies can be tailored to meet these specific goals, taking into account the time horizon, risk tolerance, and required rate of return.
Socially Responsible Investing (SRI): Some investors choose to invest in companies or funds that align with their ethical or social values. SRI involves considering environmental, social, and governance (ESG) factors when making investment decisions.
Factors Influencing Investment Objectives
Several factors influence an investor's objectives:
Age: Younger investors typically have a longer time horizon and can afford to take on more risk, focusing on capital appreciation. Older investors may prioritize income generation and capital preservation.
Risk Tolerance: An investor's willingness and ability to take on risk is a key determinant of their investment objectives. Risk-averse investors may prefer lower-risk investments, while risk-tolerant investors may be comfortable with higher-risk, higher-potential-return investments.
Financial Situation: An investor's income, expenses, and net worth will influence their investment objectives. Investors with a strong financial foundation may be able to take on more risk, while those with limited resources may need to prioritize capital preservation.
Time Horizon: The length of time an investor has to achieve their financial goals will also influence their investment objectives. Investors with a long time horizon can afford to take on more risk, while those with a short time horizon may need to focus on capital preservation and income generation.
Knowledge and Experience: An investor's level of knowledge and experience in the financial markets will also influence their investment decisions. Investors who are new to investing may want to start with simpler investments and gradually increase their exposure to more complex assets.
B. Explain the Role of Portfolio Manager. 7 Marks
This document outlines the multifaceted role of a portfolio manager. It covers their responsibilities in investment strategy, risk management, client communication, and regulatory compliance. It also touches upon the skills and qualifications necessary to succeed in this demanding but rewarding profession.
Core Responsibilities
A portfolio manager is responsible for making investment decisions on behalf of individuals or institutions. This involves constructing and managing investment portfolios to meet specific financial goals and risk tolerances. Their duties encompass a wide range of activities, including:
Investment Strategy and Asset Allocation
Defining Investment Objectives: The portfolio manager must first understand the client's investment objectives, time horizon, and risk tolerance. This involves in-depth discussions and analysis to create a suitable investment profile.
Developing Investment Strategies: Based on the client's profile, the portfolio manager develops an investment strategy that outlines the types of assets to be included in the portfolio, the allocation percentages, and the investment style (e.g., growth, value, income).
Asset Allocation: This is a crucial aspect of portfolio management. The portfolio manager determines the optimal mix of assets (e.g., stocks, bonds, real estate, commodities) to achieve the desired risk-return profile. This allocation is not static and needs to be adjusted based on market conditions and the client's evolving needs.
Security Selection: The portfolio manager researches and selects individual securities (e.g., stocks, bonds, mutual funds, ETFs) that align with the investment strategy and offer the potential for attractive returns. This involves fundamental analysis, technical analysis, and macroeconomic analysis.
Risk Management
Identifying and Assessing Risks: Portfolio managers must identify and assess various risks associated with investments, including market risk, credit risk, liquidity risk, and inflation risk.
Implementing Risk Mitigation Strategies: They employ various strategies to mitigate these risks, such as diversification, hedging, and stop-loss orders.
Monitoring Portfolio Risk: Continuously monitoring the portfolio's risk exposure is essential. The portfolio manager uses various risk metrics to track and manage risk levels.
Adjusting Portfolio Composition: Based on risk assessments, the portfolio manager may adjust the portfolio's composition to maintain the desired risk profile.
Portfolio Monitoring and Performance Evaluation
Tracking Portfolio Performance: Portfolio managers closely monitor the performance of their portfolios, comparing returns to benchmarks and analyzing the factors that contributed to the performance.
Analyzing Performance Attribution: This involves identifying the sources of portfolio returns, such as asset allocation, security selection, and market timing.
Rebalancing Portfolios: Over time, asset allocations can drift away from their target levels due to market fluctuations. Portfolio managers rebalance portfolios by selling overweighted assets and buying underweighted assets to maintain the desired allocation.
Reporting Performance to Clients: Regularly reporting portfolio performance to clients is crucial for transparency and accountability. These reports typically include information on returns, risk metrics, and portfolio composition.
Client Communication and Relationship Management
Communicating Investment Strategies: Portfolio managers must effectively communicate their investment strategies and decisions to clients in a clear and understandable manner.
Providing Market Updates: Keeping clients informed about market conditions and their potential impact on the portfolio is essential.
Addressing Client Concerns: Portfolio managers must be responsive to client inquiries and address any concerns they may have.
Building and Maintaining Client Relationships: Building strong relationships with clients is crucial for long-term success. This involves trust, transparency, and a commitment to meeting their financial goals.
Regulatory Compliance
Adhering to Regulations: Portfolio managers must comply with all applicable regulations, including those set forth by the Securities and Exchange Commission (SEC) and other regulatory bodies.
Maintaining Accurate Records: Maintaining accurate records of all transactions and communications is essential for compliance purposes.
Ensuring Ethical Conduct: Portfolio managers must adhere to the highest ethical standards and act in the best interests of their clients.
Skills and Qualifications
To succeed as a portfolio manager, individuals typically possess the following skills and qualifications:
Strong Analytical Skills: The ability to analyze financial data, assess risks, and make informed investment decisions is crucial.
Excellent Communication Skills: Portfolio managers must be able to communicate effectively with clients, colleagues, and other stakeholders.
In-depth Knowledge of Financial Markets: A thorough understanding of financial markets, investment instruments, and economic principles is essential.
Strong Decision-Making Skills: Portfolio managers must be able to make sound decisions under pressure and in uncertain market conditions.
Ethical Conduct: Integrity and ethical behavior are paramount in this profession.
Education and Certifications: A bachelor's degree in finance, economics, or a related field is typically required. Many portfolio managers also hold advanced degrees, such as an MBA or a Master's in Finance. Relevant certifications, such as the Chartered Financial Analyst (CFA) designation, are highly valued.
Experience: Several years of experience in the financial industry, particularly in investment analysis or portfolio management, are typically required.
Types of Portfolio Managers
Portfolio managers can specialize in different areas, including:
Equity Portfolio Managers: Focus on investing in stocks.
Fixed Income Portfolio Managers: Focus on investing in bonds and other fixed-income securities.
Balanced Portfolio Managers: Manage portfolios that include a mix of stocks, bonds, and other asset classes.
Private Wealth Managers: Manage portfolios for high-net-worth individuals and families.
Institutional Portfolio Managers: Manage portfolios for institutions such as pension funds, endowments, and insurance companies.
OR
Q.2 C. Give below are the likely returns in case of shares of A Ltd. and B Ltd. in the various economic conditions. 15 Marks
|
Economic Conditions |
Probability |
Returns of AKHAROT Ltd (%) |
Returns of WALNUT Ltd (%) |
|
High growth |
0.25 |
6 |
9 |
|
Low growth |
0.25 |
18 |
12 |
|
Recession |
0.50 |
15 |
19 |
1. Which of the companies is risky investment?
2. Mr. Prakash has Rs 2000 and wants you to recommend one of the above two shares for investment.
Q.3. A. Differentiate between Fundamental analysis and Technical analysis. 8 Marks.
| Fundamental Analysis | Technical Analysis |
1. Definition | Fundamental analysis involves evaluating a company’s intrinsic value by analyzing its financial statements, economic factors, and industry performance. The goal is to assess the company’s long-term potential and the value of its stock or other securities based on its financial health, management, earnings, growth prospects, and macroeconomic factors. | Technical analysis focuses on analyzing historical price movements and market trends using charts, indicators, and statistical data. It assumes that historical price patterns and market trends repeat over time and that past price movements can provide insights into future price movements. |
2. Focus and Approach | Focuses on underlying factors affecting a company or economy, such as earnings, dividends, interest rates, economic conditions, industry trends, and overall financial health.
| Focuses on market sentiment and price movements. It assumes that all known information, including public perception and market psychology, is reflected in the price.
Approach: Analyzing price charts, volume, and technical indicators (such as moving averages, RSI, MACD, Bollinger Bands) to forecast future price trends. |
3. Time Horizon | Primarily used for long-term investment decisions. Investors using fundamental analysis believe that the true value of a company will be realized over time, even if the market temporarily undervalues or overvalues the company. | Primarily used for short-term trading and market timing. Technical analysts often focus on shorter time frames (from minutes to weeks) to identify patterns and trends that can be exploited for profit. |
4. Information Sources | Relies on financial statements (balance sheets, income statements, cash flow statements), earnings reports, company management, economic data (GDP, inflation, unemployment rates), industry reports, and other macroeconomic factors. | Relies on price charts, historical data, trading volume, and technical indicators. Key data includes trends, support/resistance levels, chart patterns (head and shoulders, double top/bottom), moving averages, and oscillators. |
5. Decision-Making Process | Investors look for stocks or securities that are undervalued (in the case of a buy) or overvalued (in the case of a sell). They assess the company’s future growth potential, earnings capacity, and ability to generate cash flow. | Traders aim to identify market trends and entry/exit points. The focus is on timing the market by studying patterns in price charts and applying various technical indicators to predict future price movements. |
6. Methodology | Uses qualitative and quantitative factors such as:
| Uses primarily quantitative data, such as:
|
7. Theoretical Basis | Based on the belief that market prices should eventually reflect the true value of a company or asset. It assumes that over time, the market will correct any mispricing, and the stock will trade closer to its intrinsic value. | Based on the belief that market prices move in trends, and these trends are driven by investor psychology and collective behavior. It assumes that historical price movements and patterns will continue to repeat, allowing predictions of future prices. |
8. Use in Investment Strategies | Primarily used by long-term investors, such as value investors, who want to hold onto stocks for an extended period. They aim to invest in undervalued securities with strong growth potential and stable financial performance. | Primarily used by short-term traders, such as day traders, swing traders, and momentum traders, who are looking to capitalize on market volatility and short-term price movements. |
9. Examples of Users | Warren Buffett, Benjamin Graham, and other value investors use fundamental analysis to assess whether a stock is undervalued or overvalued based on the company’s fundamentals. | Day traders, swing traders, and those using algorithmic trading strategies typically rely on technical analysis to make rapid investment decisions based on price charts and trends. |
B. Explain the forms of Market Hypothesis. 7 Marks
This document provides an overview of the Efficient Market Hypothesis (EMH), a cornerstone concept in financial economics. It explores the core idea behind the EMH, which posits that asset prices fully reflect all available information, and then delves into the three primary forms of the hypothesis: weak form, semi-strong form, and strong form. Each form is explained in detail, along with its implications for investors and the potential for achieving abnormal returns.
The Core Idea of the EMH
The Efficient Market Hypothesis (EMH) asserts that asset prices, such as stock prices, reflect all available information. This implies that it is impossible to consistently achieve abnormal or excess returns by using any information that the market already knows. In an efficient market, prices adjust rapidly to new information, making it difficult for investors to "beat the market" through strategies like technical analysis or fundamental analysis. The EMH doesn't claim that markets are perfect, but rather that any mispricing is random and unpredictable.
The Three Forms of the EMH
The EMH is typically discussed in terms of three forms, each representing a different level of market efficiency and the type of information reflected in asset prices:
1. Weak Form Efficiency
Definition: The weak form of the EMH states that current stock prices fully reflect all past market data, including historical prices and trading volumes.
Implications: If the market is weak-form efficient, technical analysis, which relies on identifying patterns in past price movements to predict future prices, is useless. Since past price data is already incorporated into current prices, analyzing historical trends will not provide any advantage in predicting future price changes.
Testability: The weak form is often tested using statistical techniques like autocorrelation tests and run tests to determine if there are predictable patterns in stock price movements. If these tests show that past prices can predict future prices, it would contradict the weak form of the EMH.
Example: Imagine an investor who believes they can predict future stock prices by analyzing charts of past price movements. According to the weak form of the EMH, this strategy will not be successful because the information contained in those charts is already reflected in the current stock price.
2. Semi-Strong Form Efficiency
Definition: The semi-strong form of the EMH asserts that current stock prices reflect all publicly available information, including financial statements, news articles, analyst reports, and economic data.
Implications: If the market is semi-strong form efficient, neither technical analysis nor fundamental analysis (analyzing financial statements and other public information) can consistently generate abnormal returns. Any publicly available information is already incorporated into the stock price.
Testability: The semi-strong form is often tested by examining how stock prices react to new public information, such as earnings announcements or dividend changes. If prices adjust rapidly and accurately to this information, it supports the semi-strong form. Event studies are commonly used to analyze these price reactions.
Example: Suppose a company announces unexpectedly high earnings. In a semi-strong efficient market, the stock price would immediately adjust to reflect this new information, making it impossible for investors to profit by quickly buying the stock after the announcement. The price adjustment happens so rapidly that no one can consistently trade on the information before it's fully reflected in the price.
3. Strong Form Efficiency
Definition: The strong form of the EMH states that current stock prices reflect all information, both public and private (insider) information.
Implications: If the market is strong-form efficient, no investor, even those with access to insider information, can consistently achieve abnormal returns. This is the most stringent form of the EMH.
Testability: Testing the strong form is difficult because it's hard to identify and track insider information. However, researchers often examine the performance of mutual fund managers or corporate insiders to see if they consistently outperform the market. Evidence of consistent outperformance by these groups would contradict the strong form of the EMH.
Example: Even if an investor has access to confidential information about a company's upcoming merger, they would not be able to profit from this information in a strong-form efficient market. The stock price would already reflect the potential impact of the merger, even before it is publicly announced.
Real-World Relevance: The strong form of the EMH is generally considered to be the least likely to hold true in real-world markets. Insider trading regulations exist precisely because insider information can provide an unfair advantage.
OR
Q.3 The following information is available in respect of two listed companies namely Jay Ltd. and Vijay Ltd. 15 Marks
|
Particulars |
CASHEW LTD. |
KAJU LTD. |
|
Equity Share Capital (Rs 10) |
Rs 800 lacs |
Rs 1,000 lacs |
|
Reserves & Surpluses |
Rs. 60 lacs |
Rs.100 lacs |
|
12% Preference Share Capital |
Rs. 100 Lac |
Rs. 200 Lac |
|
Profit Before Tax |
Rs 400 lacs |
Rs 600 lacs |
|
Rate of Taxation |
30% |
30% |
|
Dividend per Share |
Rs. 3 |
Rs. 2 |
|
Market Price per Share |
Rs 150 |
Rs 120 |
|
Current Assets |
Rs 320 lacs |
Rs 360 lacs |
|
Current Liabilities |
Rs. 160 Lac |
Rs. 180 Lac |
|
Quick Assets |
Rs. 180 Lac |
Rs. 90 Lac |
You are required to calculate:
a. Earnings per Share
b. P/E Ratio
c. Dividend Payout Ratio
d. Return on Total Capital
e. Current Ratio.
f. Quick Ratio.
g. Also advise which company should be preferred for investing in.
Q.4 A. Explain factors conducive to Investment in India. 8 Marks
This document outlines the key factors that make India an attractive destination for both domestic and foreign investment. It covers aspects ranging from economic growth and demographic advantages to government policies and infrastructure development, highlighting the opportunities and potential returns that India offers to investors.
Economic Growth and Stability
India is one of the fastest-growing major economies in the world. Its robust GDP growth, driven by a large and growing consumer base, a skilled workforce, and increasing urbanization, makes it an attractive investment destination. The country's economic resilience, even amidst global economic uncertainties, further strengthens its appeal.
High GDP Growth: India's consistent GDP growth rate, often exceeding that of other major economies, signals strong economic momentum and potential for high returns on investment.
Growing Middle Class: The expanding middle class fuels consumption and demand across various sectors, creating opportunities for businesses to thrive.
Resilient Economy: India's economy has demonstrated resilience in the face of global economic downturns, making it a relatively stable investment destination.
Demographic Dividend
India's young and large population is a significant asset. A substantial portion of the population is of working age, providing a large and relatively inexpensive labor pool. This demographic advantage translates into a competitive edge for businesses operating in India.
Large Workforce: India has one of the largest workforces in the world, offering a readily available pool of skilled and unskilled labor.
Young Population: A youthful population implies a longer period of economic productivity and a higher potential for innovation and growth.
Competitive Labor Costs: Compared to developed economies, India offers competitive labor costs, reducing operational expenses for businesses.
Government Policies and Reforms
The Indian government has implemented various policies and reforms to attract investment and promote economic growth. These initiatives aim to simplify regulations, improve the business environment, and encourage foreign direct investment (FDI).
"Make in India" Initiative: This initiative encourages domestic manufacturing and attracts foreign companies to set up production facilities in India.
Liberalized FDI Policy: The government has relaxed FDI norms in several sectors, allowing for higher levels of foreign investment and greater foreign participation.
Tax Reforms: The introduction of the Goods and Services Tax (GST) has streamlined the tax system, reducing complexity and improving efficiency.
Incentives and Subsidies: The government offers various incentives and subsidies to encourage investment in specific sectors and regions.
Focus on Ease of Doing Business: The government is actively working to improve the ease of doing business by simplifying regulations, reducing bureaucratic hurdles, and promoting transparency.
Infrastructure Development
India is investing heavily in infrastructure development, including transportation, energy, and communication networks. These investments are crucial for supporting economic growth and improving connectivity.
Transportation Infrastructure: The government is focused on expanding and upgrading roads, railways, ports, and airports to improve connectivity and reduce transportation costs.
Energy Sector: Investments in renewable energy, power generation, and distribution are aimed at meeting the growing energy demand and ensuring energy security.
Digital Infrastructure: The expansion of internet access and the development of digital infrastructure are transforming the economy and creating new opportunities for businesses.
Industrial Corridors: The development of industrial corridors aims to create integrated manufacturing hubs with world-class infrastructure and connectivity.
Growing Consumer Market
India's large and growing consumer market is a major attraction for investors. The increasing disposable incomes, changing lifestyles, and rising aspirations of the population are driving demand across various sectors.
Large Consumer Base: India has one of the largest consumer bases in the world, offering a vast market for goods and services.
Rising Disposable Incomes: Increasing disposable incomes are driving consumer spending and creating opportunities for businesses to cater to the growing demand.
Urbanization: Rapid urbanization is leading to increased consumption and demand for housing, infrastructure, and services in urban areas.
E-commerce Growth: The rapid growth of e-commerce is transforming the retail landscape and creating new opportunities for businesses to reach consumers.
Skilled Workforce and Education
India has a large pool of skilled professionals and a well-established education system. The country's engineering, technology, and management graduates are highly sought after by companies around the world.
Large Talent Pool: India has a large and diverse talent pool, including engineers, scientists, managers, and skilled technicians.
Quality Education System: The country has a well-established education system, including universities, engineering colleges, and management institutes.
Focus on Skill Development: The government is investing in skill development programs to enhance the employability of the workforce and meet the evolving needs of industries.
Sector-Specific Opportunities
India offers diverse investment opportunities across various sectors, including manufacturing, technology, healthcare, and financial services. Each sector has its unique growth drivers and potential for high returns.
Manufacturing: The "Make in India" initiative and government incentives are driving growth in the manufacturing sector, particularly in industries such as automobiles, electronics, and pharmaceuticals.
Technology: India's IT and software services industry is a global leader, and the country is also emerging as a hub for innovation and startups.
Healthcare: The healthcare sector is growing rapidly, driven by increasing healthcare awareness, rising incomes, and the growing prevalence of chronic diseases.
Financial Services: India's financial services sector is expanding, with opportunities in banking, insurance, asset management, and fintech.
Renewable Energy: India has ambitious renewable energy targets, creating significant investment opportunities in solar, wind, and other renewable energy sources.
Strategic Location
India's strategic location in South Asia makes it a gateway to other emerging markets in the region. Its proximity to major trade routes and its access to the Indian Ocean give it a competitive advantage in international trade and commerce.
Access to Regional Markets: India's location provides access to other emerging markets in South Asia, Southeast Asia, and the Middle East.
Proximity to Trade Routes: India is strategically located along major trade routes, facilitating international trade and commerce.
Geopolitical Importance: India's growing geopolitical importance makes it a key player in regional and global affairs.
B. What are the different types of Risks. 7 Marks
Risk refers to the uncertainty of returns and the possibility of financial loss in investments. Various types of risks affect investment decisions and portfolio performance. These risks are broadly classified into Systematic Risks (affecting the entire market) and Unsystematic Risks (specific to a company or industry).
1. Systematic Risks (Market Risks) – Non-Diversifiable Risks
Systematic risks cannot be eliminated through diversification as they impact the entire economy or market.
a) Market Risk
Definition: The risk of investments declining due to overall market fluctuations.
Causes: Economic downturns, interest rate changes, political instability, global crises.
Example: Stock market crashes (e.g., 2008 financial crisis).
b) Interest Rate Risk
Definition: The risk of investment value changing due to fluctuations in interest rates.
Impact:
- When interest rates rise, bond prices fall.
- When interest rates fall, bond prices rise.
Example: Investors in fixed-income securities (bonds) are heavily affected by changing interest rates.
c) Inflation Risk (Purchasing Power Risk)
Definition: The risk of money losing value over time due to rising inflation.
Impact: Reduces the real rate of return on investments.
Example: If inflation is 7% and an investment earns 5%, the real return is negative (-2%).
d) Currency Exchange Rate Risk (Forex Risk)
Definition: Risk arising from changes in foreign exchange rates, affecting international investments.
Impact: Investors holding foreign assets may face gains or losses due to currency fluctuations.
Example: If an Indian investor buys US stocks and the Indian Rupee depreciates, the investment value decreases.
e) Political & Regulatory Risk
Definition: Risk arising from government policies, regulations, taxation changes, or political instability.
Example:
- New tax laws affecting company profits.
- Trade restrictions impacting international businesses.
2. Unsystematic Risks (Specific Risks) – Diversifiable Risks
These risks can be reduced through diversification as they are specific to a company, industry, or sector.
a) Business Risk
Definition: The risk of a company failing due to poor management decisions, competition, or operational inefficiencies.
Example: A company facing losses due to mismanagement or declining demand for its product.
b) Financial Risk
Definition: The risk arising from excessive debt financing, affecting a company’s ability to meet financial obligations.
Impact: Companies with high debt-to-equity ratios are more vulnerable to financial crises.
Example: A company defaulting on its loan due to poor cash flow management.
c) Liquidity Risk
Definition: The risk of not being able to sell an asset quickly without significant loss.
Types:
- Asset Liquidity Risk – Difficulty selling assets like real estate.
- Funding Liquidity Risk – Difficulty raising funds for business operations.
Example: Real estate investments often have high liquidity risk compared to stocks.
d) Credit Risk (Default Risk)
Definition: The risk that a borrower fails to repay a loan or bond interest.
Impact: Affects lenders, bond investors, and credit markets.
Example:
- A company defaults on its corporate bonds.
- A borrower fails to repay a bank loan.
e) Operational Risk
Definition: The risk of losses due to internal failures such as human errors, fraud, or technology breakdowns.
Example:
- Cyberattacks on banks.
- Employee fraud in financial institutions.
3. Other Types of Risks
a) Reinvestment Risk
Definition: The risk that future cash flows from investments (like bonds) may be reinvested at lower interest rates.
Example: If an investor holds a 10-year bond at 8% interest, but after maturity, new bonds offer only 5%, reinvestment leads to lower returns.
b) Volatility Risk
Definition: The risk arising from sharp fluctuations in asset prices.
Example: Cryptocurrencies like Bitcoin experience extreme price swings.
c) Event Risk
Definition: The risk that sudden, unexpected events (natural disasters, wars, scandals, or corporate takeovers) will impact the investment market.
Example: COVID-19 pandemic caused global market crashes.
d) Commodity Price Risk
Definition: The risk that fluctuations in commodity prices (oil, gold, wheat, etc.) will affect investments.
Example:
- Rising crude oil prices increase costs for airline companies.
- Falling gold prices reduce returns for gold investors.
OR
Q.4 C. From the following data evaluate the performance of the funds & the market using Sharpe's Treynor's & Jenson's Index. For evaluation of portfolio Risk-free rate is 8%. 8 Marks
|
|
Equity Fund |
Debt Fund |
Balanced Fund |
Market |
|
Return |
18% |
10% |
12% |
10% |
|
Standard Deviation |
0.5 |
0.2 |
0.3 |
0.2 |
|
Beta |
2 |
1 |
1.5 |
1 |
Q. 4 D. A Government of India bond of Rs. 1,000 each has a coupon rate of 7.5%p.a. & maturity period is 25 yrs. If the current market price is Rs. 1,050. Find the YTM of the bond.
Q.5 A. Calculate Beta and expected returns for Anjeer Ltd. Return on government securities is 8%. Return in earlier years is: 8 Marks
Home | Anjeer Ltd | Market Return |
1 | 10% | 12% |
2 | 12% | 14% |
3 | 15% | 20% |
4 | 18% | 21% |
Q.5 B. Calculate the degree of operating leverage, degree of financial leverage and the degree of combined leverage for the following firms and interpret the results: 7 Marks
|
Firm |
ALMOND |
BADAM |
|
Output(Units) |
6,00,000 |
150,000 |
|
Fixed Cost (Rs.) |
72,000 |
140,000 |
|
Variable Cost Per Unit (Rs.) |
0.20 |
1.50 |
|
Interest on Borrowed Capital (Rs.) |
40,000 |
80,000 |
|
Selling Price Per Unit(Rs.) |
0.60 |
5.00 |
|
Tax rate (%) |
40 |
40 |
Q.5 Give short notes on (Any 3)
1. Elliott wave Theory .
This document provides a comprehensive overview of the Elliott Wave Theory, a form of technical analysis used to forecast price movements in financial markets. It explores the theory's core principles, including wave patterns, Fibonacci relationships, and guidelines for wave identification. This document aims to equip readers with a foundational understanding of the Elliott Wave Theory and its application in trading and investment strategies.
Introduction to Elliott Wave Theory
The Elliott Wave Theory, developed by Ralph Nelson Elliott in the 1930s, proposes that market prices move in specific patterns called "waves." These patterns reflect the collective psychology of investors, which oscillates between optimism and pessimism. Elliott identified two main types of waves:
Motive Waves: These waves move in the direction of the main trend and consist of five sub-waves.
Corrective Waves: These waves move against the main trend and consist of three sub-waves.
According to Elliott, these patterns repeat themselves on different time scales, creating a fractal structure in the market. This means that a single wave can be part of a larger wave, which in turn is part of an even larger wave, and so on.
The Basic Elliott Wave Pattern
The most fundamental Elliott Wave pattern is the 5-3 wave cycle. This cycle consists of five motive waves followed by three corrective waves.
Waves 1, 3, and 5: These are motive waves that move in the direction of the main trend. Wave 3 is typically the longest and strongest wave.
Waves 2 and 4: These are corrective waves that move against the main trend. Wave 2 cannot retrace more than 100% of wave 1, and wave 4 cannot overlap wave 1.
Waves A, B, and C: These are corrective waves that move against the main trend after the completion of the five motive waves. Wave A moves in the direction of the correction, wave B is a counter-trend rally, and wave C completes the correction.
Rules and Guidelines
Elliott Wave Theory has several rules and guidelines that help analysts identify and interpret wave patterns. These include:
Wave 2 cannot retrace more than 100% of wave 1. This rule ensures that the initial impulse of wave 1 is not completely negated.
Wave 3 is usually the longest and strongest wave. This wave represents the peak of the trend and is often characterized by high volume and momentum.
Wave 4 cannot overlap wave 1. This rule helps to maintain the integrity of the wave structure and prevent ambiguity in wave counts.
Wave 5 can be shorter than wave 3, but it must exceed the end of wave 3. This rule ensures that the trend continues to make progress, even if wave 5 is not as strong as wave 3.
Alternation: If wave 2 is a sharp correction, wave 4 is likely to be a sideways correction, and vice versa. This guideline suggests that the market tends to alternate between different types of corrections.
Equality: Waves within a pattern often have relationships in terms of time and price. For example, wave 5 may be equal in length to wave 1, or wave C may be equal in length to wave A.
Fibonacci Relationships
Elliott Wave Theory incorporates Fibonacci ratios to identify potential support and resistance levels, as well as to project the length of future waves. Some common Fibonacci ratios used in Elliott Wave analysis include:
0.382: A common retracement level for wave 2 and wave B.
0.50: A common retracement level in general.
0.618: A common retracement level for wave 4 and wave B. Also, a common ratio for projecting the length of wave 3.
1.618: A common ratio for projecting the length of wave 5.
2.618: Another common ratio for projecting the length of wave 5.
By applying these Fibonacci ratios to wave patterns, analysts can identify potential turning points in the market.
Corrective Wave Patterns
While motive waves are relatively straightforward, corrective waves can be more complex and varied. Elliott identified several types of corrective wave patterns, including:
Zigzags: A sharp, three-wave correction (A-B-C) where wave B is shorter than wave A.
Flats: A sideways, three-wave correction (A-B-C) where waves A, B, and C are roughly equal in length.
Triangles: A converging, five-wave correction that typically occurs as wave 4.
Combinations: Complex corrections that combine two or more simple corrective patterns.
Identifying the type of corrective wave pattern is crucial for anticipating the next move in the market.
Applying Elliott Wave Theory
To apply Elliott Wave Theory effectively, analysts should follow these steps:
Identify the trend: Determine the overall direction of the market.
Count the waves: Identify potential wave patterns and label them accordingly.
Apply rules and guidelines: Ensure that the wave counts adhere to the rules and guidelines of Elliott Wave Theory.
Use Fibonacci ratios: Identify potential support and resistance levels and project the length of future waves.
Consider alternative scenarios: Be prepared to adjust the wave counts if the market does not behave as expected.
Limitations of Elliott Wave Theory
While Elliott Wave Theory can be a valuable tool for technical analysis, it also has some limitations:
Subjectivity: Wave counting can be subjective, and different analysts may interpret the same chart in different ways.
Complexity: Elliott Wave Theory can be complex and time-consuming to learn and apply.
Not always accurate: Elliott Wave Theory is not always accurate, and market prices can deviate from expected wave patterns.
Hindsight bias: It is often easier to identify wave patterns in hindsight than in real-time.
2. Assumptions of CAPM Model.
The Capital Asset Pricing Model (CAPM) is a widely used financial model that calculates the expected rate of return for an asset or investment. It simplifies the complex world of investment by making several assumptions about investor behavior, market efficiency, and the distribution of returns. While these assumptions are not always perfectly met in the real world, they provide a framework for understanding the relationship between risk and return. This document outlines the key assumptions underlying the CAPM model.
Investor Assumptions
The CAPM relies on several assumptions about investor behavior:
Investors are Rational and Risk-Averse: CAPM assumes that investors are rational, meaning they make decisions that maximize their expected utility. They are also risk-averse, implying that they prefer less risk for a given level of expected return. This risk aversion drives investors to demand a higher return for taking on more risk.
Investors Aim to Maximize Expected Utility: Investors make decisions based on maximizing their expected utility, which is a function of the expected return and risk (variance or standard deviation) of their portfolios. They seek to achieve the highest possible return for a given level of risk or the lowest possible risk for a given level of return.
Investors Have Homogeneous Expectations: All investors have the same expectations regarding asset returns, variances, and covariances. This means they analyze the same information and arrive at the same conclusions about the future performance of assets. This assumption simplifies the model by eliminating differences in opinion and subjective assessments.
Investors are Price Takers: Individual investors are small relative to the overall market and cannot influence asset prices. They accept market prices as given and make investment decisions accordingly. This assumption ensures that no single investor can distort the market equilibrium.
Investors Have a Single-Period Investment Horizon: All investors have the same investment horizon, typically assumed to be a single period. This simplifies the analysis by eliminating the complexities of multi-period investment decisions and the need to consider future reinvestment opportunities.
Market Assumptions
The CAPM also relies on several assumptions about the market:
Perfectly Competitive and Efficient Markets: The market is perfectly competitive, meaning there are many buyers and sellers, no transaction costs, and information is freely available to all participants. The market is also efficient, meaning that asset prices fully reflect all available information. This implies that it is impossible to consistently achieve above-average returns through active trading strategies.
All Assets are Publicly Traded: All assets, including human capital, are publicly traded and can be bought and sold in the market. This assumption allows investors to diversify their portfolios across a wide range of assets and reduces the impact of non-tradable assets on portfolio decisions.
Unlimited Borrowing and Lending at the Risk-Free Rate: Investors can borrow or lend unlimited amounts of money at the risk-free rate of interest. This allows investors to adjust the risk and return of their portfolios by leveraging or deleveraging their investments.
No Taxes: There are no taxes on investment returns. This simplifies the model by eliminating the need to consider the impact of taxes on investment decisions.
No Transaction Costs: There are no transaction costs associated with buying or selling assets. This simplifies the model by eliminating the need to consider the impact of transaction costs on investment decisions.
Implications of the Assumptions
The assumptions of the CAPM have several important implications:
Market Portfolio: All investors will hold the same portfolio of risky assets, known as the market portfolio. This portfolio is a value-weighted portfolio of all assets in the market.
Capital Market Line (CML): The CML represents the efficient frontier of portfolios that combine the market portfolio with the risk-free asset. It shows the highest possible expected return for a given level of risk.
Security Market Line (SML): The SML represents the relationship between the expected return of an individual asset and its beta, which is a measure of its systematic risk. The SML is a graphical representation of the CAPM equation.
Beta as a Measure of Risk: Beta is the only relevant measure of risk for an individual asset. It measures the asset's sensitivity to movements in the market portfolio. Assets with higher betas are more volatile and have higher expected returns.
Limitations of the Assumptions
While the CAPM is a useful tool for understanding the relationship between risk and return, it is important to recognize that its assumptions are not always perfectly met in the real world. Some of the limitations of the assumptions include:
Investor Irrationality: Investors are not always rational and may be influenced by emotions, biases, and heuristics.
Heterogeneous Expectations: Investors often have different expectations about asset returns, variances, and covariances.
Market Inefficiencies: Markets are not always perfectly efficient, and opportunities for arbitrage may exist.
Transaction Costs and Taxes: Transaction costs and taxes can significantly impact investment decisions.
Limited Borrowing and Lending: Investors may not be able to borrow or lend unlimited amounts of money at the risk-free rate.
3. Assumptions of Technical Analysis.
Technical analysis is a method of evaluating investments and identifying trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. Unlike fundamental analysis, which attempts to evaluate a security's intrinsic value based on economic and financial factors, technical analysis focuses on the historical performance of the security itself. This approach relies on a set of core assumptions that underpin its methodologies and predictive capabilities. This document outlines and explains these key assumptions.
1. The Market Discounts Everything
This is the cornerstone of technical analysis. It posits that all known information, including past, present, and even anticipated future events, is already reflected in the price of an asset. This includes fundamental data like earnings reports, economic indicators, political events, and even psychological factors influencing investor sentiment.
Explanation:
Efficiency: The market is assumed to be relatively efficient in processing and incorporating information. As new information becomes available, buyers and sellers react, and their collective actions immediately adjust the price to a new equilibrium.
No Need for Fundamental Analysis (in this context): Because the price already reflects all relevant information, technical analysts believe that studying financial statements or economic reports is redundant. The price chart itself provides all the necessary data.
Focus on Price Action: This assumption justifies the technical analyst's focus on price charts and trading volume. These are considered the ultimate indicators of market sentiment and future price movements.
Implications:
Technical analysts believe they can identify trading opportunities by studying price patterns and trends, without needing to understand the underlying reasons for those patterns.
It allows for a purely data-driven approach to trading, minimizing reliance on subjective interpretations of news or economic data.
2. Price Moves in Trends
This assumption states that prices tend to move in trends, which can be upward (uptrend), downward (downtrend), or sideways (ranging). These trends are not random fluctuations but rather represent sustained periods of buying or selling pressure.
Explanation:
Investor Psychology: Trends are often driven by investor psychology. For example, an uptrend might be fueled by increasing optimism and buying pressure, while a downtrend could be caused by fear and selling pressure.
Momentum: Once a trend is established, it tends to persist due to momentum. Buyers are more likely to buy when prices are rising, and sellers are more likely to sell when prices are falling.
Identification and Exploitation: Technical analysts aim to identify these trends early and trade in the direction of the trend to profit from its continuation.
Implications:
Trend following is a core strategy in technical analysis.
Tools like trendlines, moving averages, and other indicators are used to identify and confirm trends.
The assumption acknowledges that trends do not last forever and will eventually reverse.
3. History Tends to Repeat Itself
This assumption is rooted in the belief that human psychology is relatively constant over time. Therefore, certain price patterns and market behaviors tend to repeat themselves.
Explanation:
Human Emotions: Market participants are driven by emotions like fear, greed, and hope. These emotions influence buying and selling decisions, leading to predictable patterns in price movements.
Chart Patterns: Technical analysts study historical chart patterns, such as head and shoulders, double tops, and triangles, believing that these patterns can predict future price movements based on their past performance.
Market Cycles: The assumption also acknowledges the existence of market cycles, such as bull and bear markets, which tend to repeat over time.
Implications:
Technical analysts use historical data to identify potential trading opportunities.
Chart patterns and indicators are used to anticipate future price movements based on past performance.
This assumption highlights the importance of studying market history and understanding how similar situations have played out in the past.
Additional Considerations
While the above three assumptions are the most fundamental, several other implicit assumptions underpin technical analysis:
Liquidity: Technical analysis works best in liquid markets where there is sufficient trading volume to create meaningful price patterns. Illiquid markets can be easily manipulated and may not exhibit reliable trends.
Data Integrity: The accuracy and reliability of the price and volume data are crucial. Errors or inconsistencies in the data can lead to inaccurate analysis and poor trading decisions.
Subjectivity: While technical analysis aims to be objective, there is still an element of subjectivity involved in interpreting charts and patterns. Different analysts may draw different conclusions from the same data.
Risk Management: Technical analysis is not a foolproof method. It is essential to use risk management techniques, such as stop-loss orders, to limit potential losses.
4. Portfolio Revision.
This document outlines a proposed revision to my current investment portfolio. It details the rationale behind the suggested changes, including a review of current holdings, market conditions, and personal financial goals. The aim is to optimize the portfolio for long-term growth, risk management, and alignment with evolving investment objectives.
Current Portfolio Overview
My current portfolio is diversified across various asset classes, including stocks, bonds, and real estate. A significant portion is allocated to domestic equities, with a smaller allocation to international equities and fixed income. The portfolio also includes a small allocation to real estate through REITs.
Asset Allocation
Domestic Equities: 60%
International Equities: 20%
Fixed Income: 15%
Real Estate (REITs): 5%
Performance Review
Over the past year, the portfolio has achieved a return of X%. While this is a positive return, it has underperformed the benchmark index of Y%. A deeper analysis reveals that the underperformance is primarily attributable to the concentration in domestic equities and the underperformance of specific holdings within that asset class.
Rationale for Revision
Several factors necessitate a revision of the current portfolio:
Market Conditions: The current market environment is characterized by heightened volatility, rising interest rates, and inflationary pressures. These factors pose challenges to traditional investment strategies and require a more dynamic and adaptive approach.
Economic Outlook: The economic outlook is uncertain, with potential for slower growth or even a recession. This necessitates a more conservative approach to risk management and a focus on defensive sectors.
Personal Financial Goals: My personal financial goals have evolved over time. I am now prioritizing long-term capital preservation and income generation, rather than aggressive growth.
Diversification: The current portfolio is heavily weighted towards domestic equities, which increases its vulnerability to domestic market fluctuations. A more diversified portfolio, with greater exposure to international markets and alternative assets, would help to mitigate this risk.
Proposed Revisions
Based on the above rationale, I propose the following revisions to the portfolio:
1. Reduce Domestic Equity Allocation
I propose reducing the allocation to domestic equities from 60% to 50%. This will help to reduce the portfolio's concentration risk and increase its diversification.
Action: Sell a portion of existing domestic equity holdings.
2. Increase International Equity Allocation
I propose increasing the allocation to international equities from 20% to 30%. This will provide greater exposure to global growth opportunities and reduce the portfolio's reliance on the domestic market.
Action: Purchase international equity ETFs or mutual funds, focusing on developed and emerging markets.
3. Increase Fixed Income Allocation
I propose increasing the allocation to fixed income from 15% to 20%. This will provide a more stable source of income and help to cushion the portfolio against market downturns.
Action: Purchase high-quality corporate bonds or bond ETFs with varying maturities.
4. Consider Alternative Investments
I propose exploring alternative investments, such as private equity or hedge funds, to further diversify the portfolio and potentially enhance returns. However, this will require careful due diligence and a thorough understanding of the risks involved.
Action: Research and evaluate potential alternative investment opportunities. Start with a small allocation (e.g., 5%) if suitable options are identified.
5. Rebalance Regularly
I propose rebalancing the portfolio on a regular basis (e.g., annually or semi-annually) to maintain the desired asset allocation and ensure that the portfolio remains aligned with my investment goals.
Action: Implement a rebalancing strategy and schedule.
Specific Investment Recommendations
Within each asset class, I have identified specific investment recommendations:
Domestic Equities
Reduce exposure to growth stocks: Shift towards value stocks and dividend-paying stocks, which tend to be more resilient in volatile markets.
Focus on defensive sectors: Increase exposure to sectors such as healthcare, consumer staples, and utilities, which are less sensitive to economic cycles.
Consider ETFs: Utilize low-cost ETFs to gain broad exposure to the domestic equity market.
International Equities
Diversify across developed and emerging markets: Allocate to both developed markets (e.g., Europe, Japan) and emerging markets (e.g., China, India) to capture global growth opportunities.
Consider currency hedging: Evaluate the potential benefits of currency hedging to mitigate the impact of currency fluctuations on returns.
Utilize ETFs or mutual funds: Invest in international equity ETFs or mutual funds that provide diversified exposure to specific regions or countries.
Fixed Income
Focus on high-quality corporate bonds: Invest in corporate bonds with strong credit ratings to minimize credit risk.
Consider a laddered bond portfolio: Construct a laddered bond portfolio with varying maturities to manage interest rate risk.
Utilize bond ETFs: Invest in bond ETFs that provide diversified exposure to the fixed income market.
Alternative Investments (Potential)
Private Equity: Consider investing in private equity funds that focus on specific sectors or industries.
Hedge Funds: Explore hedge fund strategies that aim to generate absolute returns, regardless of market conditions.
Real Estate: Maintain current REIT allocation or explore direct real estate investments.
Risk Management
The proposed revisions are designed to enhance risk management by:
Diversifying the portfolio across asset classes and geographies.
Reducing exposure to high-growth, high-volatility stocks.
Increasing exposure to defensive sectors and fixed income.
Considering alternative investments with low correlation to traditional assets.
Rebalancing the portfolio regularly to maintain the desired asset allocation.
Implementation Plan
The proposed revisions will be implemented in a phased approach over the next few months. This will allow for a gradual transition and minimize the impact on transaction costs.
Review and approve the proposed revisions.
Develop a detailed implementation plan, including specific investment selections and trading strategies.
Execute the trades in a timely and efficient manner.
Monitor the portfolio's performance and make adjustments as needed.
Rebalance the portfolio on a regular basis.
5. Investment V/S Speculation.
| Investment | Speculation |
Objective | To generate steady, long-term returns with a focus on wealth accumulation and income generation (e.g., dividends, interest). | To earn a quick profit from short-term price fluctuations in an asset, often with high risks involved. |
Time Horizon | Typically medium to long-term (years or decades). | Usually short-term (ranging from days to months). |
Risk | Generally lower risk, as investments are made in stable and reliable assets. The risk is minimized by diversifying the portfolio. | High risk, as speculation often involves volatile assets with unpredictable price movements (e.g., stocks, commodities, cryptocurrencies). |
Return Expectation | Returns are expected over a long period, often as capital appreciation and income (interest, dividends, rents). | Returns are expected to come quickly, often through capital gains based on market movements. |
Approach | Based on fundamental analysis of the asset, focusing on the financial health, growth potential, and long-term stability of the asset. | Based on technical analysis or market sentiment, relying on trends, market conditions, and speculation on future price movements. |
Example | Buying stocks of established companies, purchasing real estate for rental income, investing in government bonds. | Trading volatile stocks, commodities, or currencies in hopes of short-term price movements. |
Level of Knowledge Required | Requires knowledge of the asset, financial fundamentals, and long-term trends. Investors often make decisions based on research, financial reports, and economic indicators. | Requires understanding of market timing, chart analysis, and trends, with a greater focus on short-term price movements and speculation. |
Volatility Exposure | Investments tend to be in relatively stable assets with lower volatility, although some assets like stocks can experience fluctuations. | Speculation often involves high volatility, and investors are exposed to price swings and market sentiment. |
Capital Preservation | The focus is on preserving capital over the long term while achieving modest growth. | The focus is on gaining high returns, often at the expense of capital preservation. Speculators are more willing to risk their capital for a larger potential payoff. |
Example of Asset Types | Stocks of blue-chip companies, bonds, real estate, mutual funds, etc. | Penny stocks, options, derivatives, cryptocurrencies, etc. |
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