SECURITY ANALYSIS AND

PORTFOLIO MANAGEMENT
UNIT 1
INVESTMENT
• DEFINITION
• Investment is the dedication of an asset to attain an increase in value over
a period of time. Investment requires a sacrifice of some present asset,
such as time, money, or effort. In finance, the purpose of investing is to
generate a return from the invested asset.
•
Different types of investments
FINANCIAL
INVESTMENT

Financial investment refers

to putting aside a fixed
amount of money and
expecting some kind of gain
out of it within a stipulated
time frame.
ECONOMICAL
INVESTMENT

The concept of economic

investment means addition to
the capital stock of the
society. The capital stock of
the society is the goods
which are used in the
production of other goods.
INVESTMENT
PROCESS

Step 1- Understanding the client

Step 2- Asset allocation decision
Step 3- Portfolio strategy selection
Step 4- Asset selection decision
Step 5- Evaluating portfolio
performance
• Step 1: Determine Your Investment
Objectives and Risk Profile
• Step 2- Asset allocation decision
• This step involves decision on how to allocate the investment
across different asset classes, i.e. fixed income securities,
equity, real estate etc. It also involves decision of whether to
invest in domestic assets or in foreign assets. The investor will
make this decision after considering the macroeconomic
conditions and overall market status.
• Step 3- Portfolio strategy selection
• Third step in the investment process is to select the proper strategy of portfolio
creation. Choosing the right strategy for portfolio creation is very important as it
forms the basis of selecting the assets that will be added in the portfolio
management process.
• There are two types of portfolio strategy.
• Active Management Process
• Passive Management Process
• Step 4- Asset selection decision
• The investor needs to select the assets to be placed in the
portfolio management process in the fourth step. Within each
asset class, there are different sub asset-classes. For example, in
equity, which stocks should be chosen? Within the fixed
income securities class, which bonds should be chosen?
• Also, the investment objectives should conform to the
investment policies because otherwise the main purpose of
investment management process would become meaningless.
• Step 5- Evaluating portfolio performance
• This is the final step in the investment process which
evaluates the portfolio management performance. This
is an important investing process step as it measures
the performance of the investment with respect to a
benchmark, in both absolute and relative terms. The
investor would determine whether his objectives are
being achieved or not.
CHARACTERISTICS OF INVESTMENT
OBJECTIVES OF INVESTMENT
Investment Vs. Speculation
CATEGORY OF INVESTMENT
Risk and Return on investment
• The risk-return tradeoff is an investment principle that
indicates that the higher the risk, the higher the potential
reward. To calculate an appropriate risk-return tradeoff,
investors must consider many factors, including overall risk
tolerance, the potential to replace lost funds and more.
Factors Influencing Risk
• 5 key factors that can affect your investment risk tolerance
• Your investment time frame.
• Your risk capital.
• Your investment experience.
• Your investment objectives.
• The actual investment you're considering.
Measuring Risk and Return
• How can you measure the risk?
• The five measures include the alpha, beta, R-squared,
standard deviation, and Sharpe ratio. Risk measures can be
used individually or together to perform a risk assessment.
When comparing two potential investments, it is wise to
compare like for like to determine which investment holds the
most risk.
• What is return and how is it measured?
• Return on investment (ROI) is calculated by dividing the profit
earned on an investment by the cost of that investment. For
instance, an investment with a profit of $100 and a cost of $100
would have a ROI of 1, or 100% when expressed as a
percentage.
Valuation of Equity
• The main purpose of equity valuation is to estimate a value for a
firm or its security
• There are a number of different methods of value a company
with one of the primary ways being the comparable approach.
Dividend model

• The Dividend Discount Model (DDM) is a quantitative method of

valuing a company's stock price based on the assumption that the
current fair price of a stock equals the sum of all of the company's
future dividends. The primary difference in the valuation methods lies
in how the cash flows are discounted.
Price/Earnings Approach.
UNIT 2
STOCK MARKET
• The stock market broadly refers to the collection of exchanges and
other venues where the buying, selling, and issuance of shares of
publicly held companies take place. Such financial activities are
conducted through institutionalized formal exchanges or via over-
the-counter (OTC) marketplaces that operate under a defined set of
regulations.
Financial Market
• A financial market is a market in which people trade
financial securities and derivatives at low transaction costs.
Some of the securities include stocks and bonds, raw
materials and precious metals, which are known in the
financial markets as commodities.
Types of financial markets
• Stock Markets.
• Over-the-Counter Markets.
• Money Markets.
• Derivatives Markets.
• Forex Market.
• Commodities Markets.
• Cryptocurrency Markets.
Participants in financial Market
• Insurance Companies.
• Finance Companies.
• Banks.
• Merchant Banks.
• Companies/Firms.
• The Individual.
• Government.
• Regulators.
Regulatory Environment,
• A regulated market is a market over which government bodies
or, less commonly, industry or labor groups, exert a level of
oversight and control. Market regulation is often controlled by
the government and involves determining who can enter the
market and the prices they may charge.
PRIMARY MARKET
• The primary market is where securities are created. It's in
this market that firms sell (float) new stocks and bonds to
the public for the first time. An initial public offering, or
IPO, is an example of a primary market.
Methods of floating new issues
Security Analysis And Portfolio Management
• Offer through prospectus.
• Bought out deals/offer for sale.
• Private placement.
• Right issue.
• Book building.
Role of primary market
Stock Exchanges in India
• numerous stock exchanges in India that were formed during the early
1990s. As of now, the most important stock exchanges in India are the
Bombay Stock Exchange(BSE) and the National Stock
Exchange(NSE). In this article, we will understand in detail the
various stock exchanges registered with The Securities & Exchange
Board of India.
REGULATION OF STOCK EXCHANGE

• Securities & Exchange Board of India (SEBI)

• The Securities and Exchange Board of India (SEBI) is the regulatory authority established
under the SEBI Act 1992 and is the principal regulator for Stock Exchanges in India.
SEBI’s primary functions include protecting investor interests, promoting and regulating
the Indian securities markets. All financial intermediaries permitted by their respective
regulators to participate in the Indian securities markets are governed by SEBI regulations,
whether domestic or foreign. Foreign Portfolio Investors are required to register with DDPs
in order to participate in the Indian securities markets.
• National Stock Exchange (NSE)
• In the role of a securities market participant, NSE is required to set
out and implement rules and regulations to govern the securities
market. These rules and regulations extend to member registration,
securities listing, transaction monitoring, compliance by members
to SEBI / RBI regulations, investor protection etc. NSE has a set of
Rules and Regulations specifically applicable to each of its trading
segments. NSE as an entity regulated by SEBI undergoes regular
inspections by them to ensure compliance.
Trading system in stock exchanges.
• Trading system in the organized stock exchange is the floor
trading under which trading took place through an open
outcry system on the trading floor. In-floor trading buyers
and sellers transact business face to face using a variety of
signals.
UNIT 3
Economic analysis:
• An economic analysis is a process in which business owners gain
a clear picture of the existing economic climate, as it relates to
their company's ability to thrive. Economists, statisticians, and
mathematicians often carry out this analysis on behalf of for-profit
and nonprofit businesses.
Macro economics
• Macroeconomics is a branch of economics that deals with how
an economy functions on a large scale. It differs from
microeconomics, which deals with how individual economic
players, such as consumers and firms, make decisions.
 Key Macroeconomic Factors.
• Interest rates.
• Inflation.
• Fiscal policy.
• Gross domestic product (GDP)
• National income.
• Employment.
• Economic growth rate.
• Industrial production.
Industry analysis:
• Industry analysis is a tool that facilitates a company's
understanding of its position relative to other companies that
produce similar products or services. Understanding the forces at
work in the overall industry is an important component of
effective strategic planning.
Industry Life Cycle Analysis.
• What Is Industry Life Cycle Analysis?
• Industry life cycle analysis is part of the fundamental analysis of a
company involving the examination of the stage an industry is in
at a given point in time. There are four stages in an industry life
cycle: expansion, peak, contraction, trough.
STAGE OF INDUSTRIAL LIFECYCLE
• 5 Main Stages of Product Life Cycle
• (i) Introduction
• (ii) Growth Stage
• (iii) Maturity Stage
• (iv) Saturation Stage
• (v) Decline Stage
Analyzing the Structure of an industry
• Understand the company.
• Study the financial reports of the company.
• Check the debt.
• Find the company's competitors.
• Analyse the future prospects.
• Review all the aspects time to time.
Analysis the characteristic of an industry
• An industry analysis consists of three major elements:
the underlying forces at work in the industry; the
overall attractiveness of the industry; and the critical
factors that determine a company's success within the
industry.
Profit Potential of Industries
• The relative bargaining power between an industry's
competitors and its suppliers helps shape the profit
potential of the industry. If suppliers have greater
leverage over the competitors than the competitors
have over the suppliers, then suppliers can increase
their prices over time.
Company Analysis
• Company analysis is a process carried out by investors to
evaluate securities, collecting info related to the company's
profile, products and services as well as profitability. It is
also referred as fundamental analysis.
Analyse the financial statement
• Financial statement analysis evaluates a company's performance
or value through a company's balance sheet, income statement, or
statement of cash flows. By using a number of techniques such as
horizontal, vertical, or ratio analysis, investors may develop a
more nuanced picture of a company's financial profile
How do you analyze financial statements of a
company?
• Identify the industry economic characteristics.
• Identify company strategies.
• Assess the quality of the firm's financial statements.
• Analyze current profitability and risk.
• Prepare forecasted financial statements.
• Value the firm.
Market Share Approach

• Market share is the percent of total sales in an industry generated by a

particular company. Market share is calculated by taking the
company's sales over the period and dividing it by the total sales of the
industry over the same period. This metric is used to give a general
idea of the size of a company in relation to its market and its
competitors. The market leader in an industry is the company with the
largest market share.
Market share example
Profit margin
• Profit margin is one of the commonly used profitability
ratios to gauge the degree to which a company or a business
activity makes money. It represents what percentage of sales
has turned into profits.
Forecasting Earnings
• A cash flow forecast estimates the amount of money you
expect to flow in and out of your business, including
projected income and expenses. A forecast is usually done
over a 12 month period but could also cover a shorter period,
such as a month.
Graham and Dodds investor ratios
• The Graham & Dodds Price to Earnings Ratio, commonly
known as CAPE or Shiller P/E, is a valuation measure usually
applied to stocks or equity markets. It is defined as price
divided by the average of ten years of earnings.
UNIT 4
Technical Analysis
• Technical analysis is a trading discipline employed to
evaluate investments and identify trading opportunities in
price trends and patterns seen on charts. Technical analysts
believe past trading activity and price changes of a security
can be valuable indicators of the security's future price
movements.
charting method
MARKET INDICATOR
Trends
Trend reversal
Reversal patterns
Moving average
• Moving average is a simple, technical analysis tool.
Moving averages are usually calculated to identify the
trend direction of a stock or to determine its support and
resistance levels. It is a trend-following—or lagging—
indicator because it is based on past prices.
exponential moving average
oscillator
market indicators
forecasting individual stock performance
• Forecasting stock performance
• Forecasting performance measures can be classified into two types: directional and
size. The bias is the primary measure that evaluates the direction of the error and
hence the degree by which a forecasting model yields forecasts which either over or
under estimate the actual values.
Random Walk Efficient Market theory.
UNIT 5
Portfolio management
• Portfolio management is the selection, prioritisation and control of an organisation's
programmes and projects, in line with its strategic objectives and capacity to
deliver. The goal is to balance the implementation of change initiatives and the
maintenance of business-as-usual, while optimising return on investment.
Portfolio construction
Portfolio analysis
• Portfolio Analysis is the process of reviewing or assessing the
elements of the entire portfolio of securities or products in a
business. The review is done for careful analysis of risk and
return.
Effects of combining securities
• Reduction of portfolio Risk through diversification: The
process of combining securities in a portfolio is known as
diversification. The aim of diversification is to reduce
total risk without sacrificing portfolio return.
Combining individual securities
Markowitzs Mean-Variance model
Portfolio selection
• Portfolio selection aims to assess a combination of
securities from a large quantity of available alternatives.
It aims to maximize the investment returns of investors.
According to Markowitz , investors must make a trade-off
between return maximization and risk minimization.
Risk and investor Preferences
• Risk preference refers to the attitude people hold towards
risks, which is a key factor in studies on investors' decision-
making behavior. Standard financial theory assumes that
investors are rational and believes that when making
investment decisions they tend to have invariant risk
preferences-risk averse.
Constructing the portfolio
Significance of beta in the Portfolio
Capital Asset Pricing Model
• The goal of the CAPM formula is to evaluate whether a stock
is fairly valued when its risk and the time value of money are
compared to its expected return.
Portfolio Revision
• The process of addition of more assets in an existing portfolio
or changing the ratio of funds invested is called as portfolio
revision. The sale and purchase of assets in an existing
portfolio over a certain period of time to maximize returns
and minimize risk is called as Portfolio revision.
Portfolio Evaluation
• Portfolio evaluating refers to the evaluation of the performance
of the investment portfolio. It is essentially the process of
comparing the return earned on a portfolio with the return
earned on one or more other portfolio or on a benchmark
portfolio.
Mutual Funds
• A mutual fund is a pool of money managed by a professional
Fund Manager. It is a trust that collects money from a
number of investors who share a common investment
objective and invests the same in equities, bonds, money
market instruments and/or other securities.
Types of mutual fund
• Money Market Funds.
• Fixed Income Funds.
• Equity Funds.
• Balanced Funds.
• Index Funds.
• Specialty Funds.
Regulatory Environment
• A regulated environment is basically any controlled
environment. Rules state which conditions must be met
by a company to produce valid results or goods of a
guaranteed level of quality.
Regulatory Environment
• The regulatory environment exists to set the guard rails for our industry, to prevent
those not blessed with an overabundance of scruples from engaging in unfair or
unsavory business practices, and to protect consumers using the goods and services
in question.