ACROPOLIS FACULTY OF MANAGEMENT & RESEARCH INDORE

MAJOR RESEARCH PROJECT

On

“SECURITY ANALYSIS AND PORTFOLIO

MANAGEMENT”

Submitted towards partial fulfillment of for the award

of Master of Business Administration (Full Time)

Under the Guidance of: Submitted By:

Dr Rajeshwari Gwal Stuti Mahajan

MBA III Sem [Batch 2020-2022]
Finance /HR

peci

Acropolis Faculty of Management & Research Indore

(Affiliated to Devi Ahilya Vishvavidyayala Indore)

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 CERTIFICATE

This is to certify that Stuti Mahajan, a student of MBA III Sem has undertaken a
major research project entitled “SECURITY ANALYSIS AND PORTFOLIO
MANAGEMENT” under my guidance and supervision for the partial fulfilment of
requirement of the degree MBA (Full Time) of Devi Ahilya Vishwavidyalaya, Indore for
year 2020-2022.

Dr Rajeshwari Gwal Dr Manish Mittal

MRP guide Principal

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 DECLARATION

I, Stuti Mahajan, hereby declare that the major research project work which is
being presented in the report entitled “SECURITY ANALYSIS AND PORTFOLIO
MANAGEMENT” is an original work done by me and is submitted to the Devi Ahilya
University, Indore in partial fulfillment of requirement for the award of Master of
Business Administration.

I further declare that no material of this report has been copied from any source
and this report has not been submitted to any other University or institution for the award
of any degree, diploma or certificate. The materials obtained (and used) from other
sources have been duly acknowledged in the project.

Place: Indore Stuti Mahajan

Date: 09-12-2021

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 ACKNOWLEDGEMENT

I am grateful to my MRP guide Dr Rajeshwari Gwal, Acropolis Faculty of

Management & Research Indore for his precious guidance throughout my major research
project. He has devoted his valuable time and motivated me at every step towards
completing this project. The study would not have been possible without his generous
guidance.

I am deeply indebted to Dr. Manish Mittal, Principal - Acropolis Faculty of

Management & Research Indore for his continuous support and blessings. His support
has rendered me great help towards this project.

I also express my sincere gratitude to my family members, friends and respondents

for their extended support throughout the project. Finally, I am thankful to all those who
have directly or indirectly contributed to this project.

Stuti Mahajan

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 INDEX
Chapter 1: - Introduction Page No.
 Objectives 07
 Research Methodology 08
 Limitations 08
 History of Stock Exchange 09
 Definition of Stock Exchange 10
 Nature and Functions of Stock Exchange 10
 Need for a Stock Exchange 12
 By-Laws 13
 Regulation of Stock Exchange 14
 Securities And Exchange Board Of India (SEBI) 16
 National Stock Exchange 19
 Bombay Stock Exchange 22

Chapter 2: - Security Analysis

 Fundamental Analysis 29
 Technical Analysis 42
 Efficient Market Hypothesis 50

Chapter 3: - Portfolio Management

 Portfolio Management 54
 Need for Portfolio Management 55
 Types of Portfolio Management 56
 Features of Portfolio Management 57
 Process of Portfolio Management Services 58
 Portfolio Selection 59
 Markowitz Model 60
 Capital Market Theory 62

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Chapter 4: - Portfolio Analysis
 Definition 65
 Expected return of a portfolio 66

Chapter 5: - Practical Study of Some Selected Scrips 67

Chapter 6: - Conclusions 76

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 Chapter 1

Introduction

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 OBJECTIVES

 To study and understand the portfolio management

concepts.
 To study and understand the security analysis concepts.
 To measure the risk and return of portfolio of companies.
 To select an optimum portfolio.

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 RESEARCH
METHODOLOGY

SECONDARY DATA:
 Data collected from various Books, Newspapers and
Internet.

LIMITATIONS
The major limitations of the project are:

 Detailed study of the topic was not possible due to the

limited size of the project.
 There was a constraint with regard to time allocated for
the research study.
 The availability of information in the form of annual
reports & price fluctuations of the companies was a big
constraint to the study.

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 HISTORY OF STOCK
EXCHANGE
The only stock exchanges operating in the 19th century were
those of Bombay set up in 1875 and Ahmedabad set up in 1894.
These were Efficient Market Hypothesis organized as voluntary
non-profit-making association of brokers to regulate and protect
their interests. Before the control on securities trading became
a central subject under the constitution in 1950, it was a state
subject and the Bombay securities contracts (control) Act of
1925 used to regulate trading in securities. Under this Act, The
Bombay Stock Exchange was recognized in 1927 and Ahmedabad
in 1937.

During the war boom, several stock exchanges were organized

even in Bombay, Ahmedabad and other centers, but they were
not recognized. Soon after it became a central subject, central
legislation was proposed and a committee headed by
A.D.Gorwala went into the bill for securities regulation. Based
on the committee's recommendations and public discussion, the
securities contracts (regulation) Act became law in 1956.

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 DEFINITION OF STOCK
EXCHANGE:
"Stock exchange means anybody or individuals whether
incorporated or not, constituted for the purpose of assisting,
regulating or controlling the business of buying, selling or
dealing in securities."

It is an association of member brokers for the purpose of self-

regulation and protecting the interests of its members.

It can operate only, if it is recognized by the Government under

the securities contracts (regulation) Act, 1956. The recognition
is granted under section 3 of the Act by the central government,
Ministry of Finance.

NATURE & FUNCTIONS

OF STOCK EXCHANGE
There is an extraordinary amount of ignorance and of prejudice
born out of ignorance with regard to nature and functions of
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Stock Exchange. As economic development proceeds, the scope
for acquisition and ownership of capital by private individuals
also grow. Along with it, the opportunity for Stock Exchange to
render the service of stimulating private savings and challenging
such savings into productive investment exists on a vastly great
scale. These are services, which the Stock Exchange alone can
render efficiently.

The Stock Exchanges in India have an important role to play in

the building of a real shareholders democracy. To protect the
interest of the investing public, the authorities of the Stock
Exchanges have been increasingly subjecting not only its
members to a high degree of discipline, but also those who use
its facilities-Joint Stock Companies and other bodies in whose
stocks and shares it deals.

The activities of the Stock Exchange are governed by a

recognized code of conduct apart from statutory regulations.
Investors both actual and potential are provided, through the
daily Stock Exchange quotations. The job of the Stock Exchange
and its members is to satisfy the need of market for investments
to bring the buyers and sellers of investments together, and to
make the 'Exchange' of Stock between them as simple and fair as
possible.

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 NEED FOR A STOCK
EXCHANGE
A stock exchange is where different financial instruments are
traded, including equities, commodities, and bonds. Exchanges
bring corporations and governments, together with investors.
Exchanges help provide liquidity in the market, meaning there
are enough buyers and sellers so that trades can be processed
efficiently without delays.

Exchanges also ensure that trading occurs in an orderly and fair

manner so important financial information can be transmitted to
investors and financial professionals. The exchange tracks the
flow of orders for each stock, and it's the flow of supply and
demand that establishes a stock's price. 

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 BY-LAWS
Besides the above act, the securities contracts (regulation) rules
were also made in 1957 to regulate certain matters of trading on
the stock exchanges. There are also by-laws of exchanges, which
are concerned with the following subjects:

Opening / closing of the stock exchanges, timing of trading,

regulation of blank transfers, regulation of badla or carryover
business, control of the settlement and other activities of the
stock exchange, fixation of margins, fixation of market prices or
making up prices, regulation of taravani business (jobbing), etc.,
regulation of brokers trading, Brokerage charges, trading rules
on the exchange, arbitration and settlement of disputes,
Settlement and clearing of the trading etc.

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 REGULATION OF
STOCK EXCHANGE
Indian Capital Markets are regulated and monitored by the
Ministry of Finance, The Securities and Exchange Board of India
and The Reserve Bank of India.

The Ministry of Finance regulates through the Department of

Economic Affairs - Capital Markets Division. The division is
responsible for formulating the policies related to the orderly
growth and development of the securities markets (i.e. share,
debt and derivatives) as well as protecting the interest of the
investors. 

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.
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The Reserve Bank of India (RBI) is governed by the Reserve Bank
of India Act, 1934. The RBI is responsible for implementing
monetary and credit policies, issuing currency notes, being
banker to the government, regulator of the banking system,
manager of foreign exchange, and regulator of payment &
settlement systems while continuously working towards the
development of Indian financial markets. The RBI regulates
financial markets and systems through different legislations.

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 SECURITIES AND
EXCHANGE BOARD OF
INDIA (SEBI)
The Securities and Exchange Board of India (SEBI) is the
regulatory body for securities and commodity market in India
under the jurisdiction of Ministry of Finance , Government of
India. It was established on 12 April 1988 and given Statutory
Powers on 30 January 1992 through the SEBI Act, 1992.

The Preamble of the Securities and Exchange Board of India

describes the basic functions of the Securities and Exchange
Board of India as "...to protect the interests of investors in
securities and to promote the development of, and to regulate
the securities market and for matters connected there with or
incidental there to".

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SEBI has to be responsive to the needs of three groups, which
constitute the market:

 issuers of securities
 investors
 market intermediaries

SEBI has three powers rolled into one body: quasi-legislative,

quasi-judicial and quasi-executive. It drafts regulations in its
legislative capacity, it conducts investigation and enforcement
action in its executive function, and it passes rulings and orders
in its judicial capacity. Though this makes it very powerful,
there is an appeal process to create accountability. There is a
Securities Appellate Tribunal which is a three-member tribunal
and is currently headed by Justice Tarun Agarwala, former Chief
Justice of the Meghalaya High Court.[8] A second appeal lies
directly to the Supreme Court. SEBI has taken a very proactive
role in streamlining disclosure requirements to international
standards.

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OBJECTIVES OF SEBI

The promulgation of the SEBI ordinance in the parliament gave

statutory status to, SEBI in 1992. According to the preamble of
the SEBI, the three main objectives are: -

 To protect the interests of the investors in securities

 To promote the development of securities market.
 To regulate the securities market.

FUNCTIONS OF SEBI

 Regulating the business in Stock Exchange and any other

securities market. Registering and regulating the working
of Stockbrokers, Sub-Brokers, Share Transfer Agents,
Bankers to the issue, Trustees to trust deeds, Registrars to
an issue, Merchant Bankers, Underwriters,
 Portfolio Managers, Investment Advisers and such other
Intermediaries who may be associated with securities
market in any manner.

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  Registering and regulating the working of collective
investment schemes including Mutual Funds.
 Promoting and regulating self-regulatory organizations.
 Prohibiting fraudulent and unfair trade practices in the
securities market. Promoting investor's education and
training of intermediaries in securities market. Prohibiting
Insiders Trading in securities.
 Regulating substantial acquisition of shares and take-over
of companies
 Calling for information, understanding inspection,
conducting enquiries and audits of the Stock Exchanges,
Intermediaries and Self-Regulatory organizations in the
securities market.

NATIONAL STOCK
EXCHANGE

The National Stock Exchange of India Limited (NSE) is the largest

financial exchange in the Indian market. It was established in
1992 on the recommendation of the High-Powered Study Group,

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which was founded by the Indian government to provide
solutions to simplify participation in the stock market and make
it more accessible to all interested parties. In 1994, the NSE
introduced electronic trading in the Indian stock exchange
market.

It has been set up to strengthen the move towards

professionalization of the capital market as well as provide
nationwide securities trading facilities to investors.

NSE is not an exchange in the traditional sense where brokers

own and manage the exchange. A two-tier administrative setup
involving a company board and a governing board of the
exchange is envisaged.

NSE is a national market for shares of Public Sector Units Bonds,

Debentures and Government securities since infrastructure and
trading facilities are provided.

NSE-NIFTY:

The NSE on April 22, 1996, launched a new equity Index. The
NSE-50. The new Index which replaces the existing NSE-100

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Index is expected to serve as an appropriate Index for the new
segment of futures and options.

The NSE-50 comprises 50 companies that represent 20 broad

Industry groups with an aggregate market capitalization of
around Rs.1,70,000 crs. All companies included in the Index
have a market capitalization in excess of Rs.500 crs each and
should have traded for 85% of trading days at an impact cost of
less than 1.5%.

The base period for the index is the close of prices on Nov3,
1995 which makes one year of completion of operation of NSE's
capital market segment. The base value of the Index has been
set at 1000.

NSE-MIDCAP INDEX:

The NSE midcap Index or the Junior Nifty comprises 50 stocks

that represents 21 board Industry groups and will provide proper
representation of the midcap segment of the Indian capital
Market. All stocks in the Index should have market capitalization
of greater than Rs.200 crs and should have traded 85% of the
trading days at an impact cost of less 2.5%.

The base period for the index is Nov 4, 1996 which signifies two
years for completion of operations of the capital market

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segment of the operation. The base value of the Index has been
set at 1000. Average daily turn over of the present scenario
2,58,212 (Lacs) and number of average daily trades 2,160 (Lacs).
At present, there are 24 stock exchanges recognized under the
Securities Contract (Regulation) Act, 1956.

BOMBAY STOCK
EXCHANGE
The Bombay Stock Exchange (BSE) is Asia's oldest stock
exchange. Based in Mumbai, India, BSE was established in 1875
as the Native Share & Stockbrokers’ Association. Prior to that
brokers and traders would gather under banyan trees to conduct
transactions. 

BSE functions as the first-level regulator in the securities

market, providing monitoring and surveillance mechanisms that
are able to detect irregularities and manipulations in stock
prices. The Exchange also provides counter-party risk
management in all transactions that take place on its trading
platform through its clearing and settlement services. Shares of
more than 5,000 companies are traded on BSE. In addition to
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equity and debt, the Exchange allows for trading of mutual fund
units and derivatives.

Bombay Stock Exchange was recognized as an exchange under

the Securities Contracts (Regulation) Act in 1957. Its benchmark
index, the Sensitive Index (Sensex) was launched in 1986. In
1995, the BSE launched its fully automated trading platform
called BSE On-Line Trading system (BOLT) which fully replaced
the open outcry system.

BSE INDICES:

In order to enable the market participants, analysts etc., to

track the various ups and downs in the Indian stock market, the
Exchange introduced in 1986 an equity stock index called BSE-
SENSEX that subsequently became the barometer of the
moments of the share prices in the Indian stock market. It is a
"Market capitalization-weighted" index of 30 component stocks
representing a sample of large, well established and leading
companies. The base year of SENSEX is 1978-79. The SENSEX is
widely reported in both domestic and international markets
through print as well as electronic media.

SENSEX is calculated using a market capitalization weighted

method. As per this methodology, the level of the index reflects
the total market value of all 30 component stocks from different
23
industries related to particular base period. The total market
value of a company is determined by multiplying the price of its
stock by the number of shares outstanding. Statisticians call an
index of a set of combined variables (such as price and number
of shares) a composite Index. An Indexed number is used to
represent the results of this calculation in order to make the
value easier to work with and track over a time. It is much
easier to graph a chart based on Indexed values than one based
on actual values world over majority of the well-known Indices
are constructed using "Market capitalization weighted method".

In practice, the daily calculation of SENSEX is done by dividing

the aggregate market value of the 30 companies in the Index by
a number called the Index Divisor. The Divisor is the only link to
the original base period value of the SENSEX.

The Divisor keeps the Index comparable over a period and it is

the reference point for the entire Index maintenance
adjustments. SENSEX is widely used to describe the mood in the
Indian Stock markets. Base year average is changed as per the
formula:

Base year average is changed as per the formula

New base year average = old base year average *(new market
value/old market value
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 Chapter 2

SECURITY
ANALYSIS

25
Definition:

For making proper investment involving both risk and return, the
investor has to make study of the alternative avenues of the
investment-their risk and return characteristics and make a
proper projection or expectation of the risk and return of the
alternative investments under consideration. He must tune the
expectations to this preference of the risk and return for making
a proper investment choice. The process of analyzing the
individual securities and the market as a whole and estimating
the risk and return expected from each of the investments with
a view to identify undervalues securities for buying and
overvalues securities for selling is both an art and a science that
is what called security analysis.

Security:

The security has inclusive of shares, scripts, bonds, debenture

stock or any other marketable securities of like nature in or of
any debentures of a company or body corporate, the
government and semi government body etc.

26
In the strict sense of the word, a security is an instrument of
promissory note or a method of borrowing or lending or a source
of contributing to the funds need by a corporate body or non-
corporate body, private security for example is also a security as
it is a promissory note of an individual or firm and gives rise to
claim on money. But such private securities of private
companies or promissory notes of individuals, partnership, or
firm to the intent that their marketability is poor or nil, are not
part of the capital market and do not constitute part of the
security analysis.

Analysis of securities:

Security analysis in both traditional sense and modern sense

involves the projection of future dividend or ensuring flows,
forecast of the share price in the future and estimating the
intrinsic value of a security based on the forecast of earnings or
dividend.

Security analysis in traditional sense is essentially on analysis of

the fundamental value of shares and its forecast for the future
through the calculation of its intrinsic worth of share.

27
Modern security analysis relies on the fundamental analysis of
the security, leading to its intrinsic worth and also rise-return
analysis depending on the variability of the returns, covariance,
safety of funds and the projection of the future returns.

If the security analysis based on fundamental factors of the

company, then the forecast of the share price must take into
account inevitably the trends and the scenario in the economy,
in the industry to which the company belongs and finally the
strengths and weaknesses of the company itself. Its
management, promoters backward, financial results, projection
of expansion, term planning etc.

Approaches to Security Analysis:

 Fundamental Analysis
 Technical Analysis
 Efficient Market Hypothesis

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 FUNDAMENTAL ANALYSIS
It's a logical and systematic approach to estimating the future
dividends & share price as these two constitutes the return from
investing in shares. According to this approach, the share price
of a company is determined by the fundamental factors
affecting the Economy/ Industry/ Company such as Earnings Per
Share, DIP ratio, Competition, Market Share, Quality of
Management etc. it calculates the true worth of the share based
on it's present and future earning capacity and compares it with
the current market price to identify the mis-priced securities.

 Fundamental analysis involves a three-step examination,

which calls for:
 Understanding of the macro-economic environment and
developments.
 Analyzing the prospects of the 9ndustry to which the firm
belongs
 Assessing the projected performance of the company.

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MACRO ECONOMIC ANALYSIS:

The macro-economy is the overall economic environment in

which all firms operate. The key variables commonly used to
describe the state of the macro-economy are:

Growth Rate of Gross Domestic Product (GDP)

The Gross Domestic Product is measure of the total

production of final goods and services in the economy during a
specified period usually a year. The growth rate 0 GDP is the
most important indicator of the performance of the economy.
The higher the growth rate of GDP, other things being equal, the
more favorable it is for the stock market.

Industrial Growth Rate:

The stock market analysts focus more on the industrial sector.

They look at the overall industrial growth rate as well as the
growth rates of different industries.

The higher the growth rate of the industrial sector, other

things being equal, the more favorable it is for the stock
market.

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Agriculture and Monsoons:

Agriculture accounts for about a quarter of the Indian

economy and has important linkages, direct and indirect, with
industry. Hence, the increase or decrease of agricultural
production has a significant bearing on industrial production and
corporate performance.

A spell of good monsoons imparts dynamism to the

industrial sector and buoyancy to the stock market. Likewise, a
streak of bad monsoons casts its shadow over the industrial
sector and the stockarket.

Sentiments:

The sentiments of consumers and businessmen can have an

important bearing on economic performance. Higher consumer
confidence leads to higher expenditure on high business items.
Higher business confidence gets translated into greater business
investment that has a stimulating effect on the economy. Thus,
sentiments influence consumption and investment decisions and
have a bearing on the aggregate demand for goods and services.
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INDUSTRY ANALYSIS

The objective of this analysis is to assess the prospects of

various industrial groupings. Admittedly, it is almost impossible
to forecast exactly which industrial groupings will appreciate
the most. Yet careful analysis can suggest which industries have
a brighter future than others and which industries are plagued
with problems that are likely to persist for a while.

PROFIT POTENTIAL AND INDUSTRIES: PORTER MODEL

Michael Porter has argued that the profit potential of an

industry depends on the combined strength of the following
five basic competitive forces:

 Threat of new entrants

 Rivalry among the existing firms
 Pressure from substitute products
 Bargaining power of buyers
 Bargaining power of sellers

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COMPANY ANALYSIS

Company analysis is the final stage of the fundamental analysis,

which is to be done to decide the company in which the investor
should invest. The Economy Analysis provides the investor a
broad outline of the prospects of growth in the economy. The
Industry Analysis helps the investor to select the industry in
which the investment would be rewarding. Company Analysis
deals with estimation of the Risks and Returns associated with
individual shares.

The stock price has been found on depend on the intrinsic

value of the company's share to the extent of about 50% as per
many research studies. Graharm and Dodd in their book on '
security analysis' have defined the intrinsic value as "that value
which is justified by the fact of assets, earning and dividends".
These facts are reflected in the earning potential if the
company. The analyst has to project the expected future
earnings per share and discount them to the present time, which
gives the intrinsic value of share. Another method to use is
taking the expected earnings per share and multiplying it by the
industry average price earning multiple.

By this method, the analyst estimates the intrinsic value or

fair value of share and compare it with the market price to

33
know whether the stock is overvalued or undervalued. The
investment decision is to buy undervalued stock and sell
overvalued stock.

A. Financial analysis:

Share price depends partly on its intrinsic worth for which

financial analysis for a company is necessary to help the investor
to decide whether to buy or not the shares of the company. The
soundness and intrinsic worth of a company is known only such
analysis. An investor needs to know the performance of the
company, its intrinsic worth as indicated by some parameters
like book value, EPS, PIE multiple etc. and conclude whether
the share is rightly priced for purchase or not. This, in short is
short importance of financial analysis of a company to the
investor.

Financial analysis is analysis of financial statement of a

company to assess its financial health and soundness of its
management. "Financial statement analysis" involves a study of
the financial statement of the company to ascertain its
prevailing state of affairs and the reasons thereof. Such a study
would enable the public and investors to ascertain whether one

34
company is more profitable than the other and also to state the
cause and factors that are probably responsible for this.

Method or Devices of Financial analysis

The term 'financial statement' as used in modern business refers

to the balance sheet, or the statement of financial position of
the company at a point of time and income and expenditure
statement, or the profit and loss statement over a period.

Interpret the financial statement; it is necessary to analyze

them with the object of formation of opinion with respect to the
financial condition of the company. The following methods of
analysis are generally used.

1. Comparative statement.

2. Trend analysis

3. Common-size statement

4. Found flow analysis

5. Cash flow analysis

6. Ratio analysis

The salient features of each of the above steps are discussed

below:

35
1. Comparative statement:

The comparative financial statements are statements of

the financial position at different periods of time. Any
statements prepared in a comparative from will be covered in
comparative statements. From practical point of view,
generally, two financial statements (balance sheet and income
statement) are prepared in comparative from for financial
analysis purpose. Not only the comparison of the figures of two
periods but also be relationship between balance sheet and
income statement enables on depth study of financial position
and operative results.

The comparative statement may show:

(1) Absolute figures (Rupee amounts)

(2) Changes in absolute figures i.e., increase or decrease

in absolute figures.

(3) Absolute data in terms of percentage.

(4) Increase or decrease in terms of percentages.

36
2. Trend Analysis:

The financial statement may be analyzed by computing

trends of series of information. This method determines the
direction upward or downwards and involves the computation of
the percentage relationship that each statement item bears to
the same item in base year. The information for a number of
years is taken up and one year, generally the first year, is taken
as a base year. The figures of the base year are taken as 100 and
trend ratio for other years are calculated on the basis of base
year.

These tend in the case of GPM or sales turnover are useful

to indicate the extent of improvement or deterioration over a
period in the aspects considered. The trends in dividends, EPS,
asset growth, or sales growth are some examples of the trends
used to study the operational performance of the companies.

Procedure for calculating trends:

(I) One year is taken as a base year generally, the first or the
last is taken as base year.

(II) The figures of base year are taken as 100.

(III) Trend percentages are calculated in relation to base year.

If a figure in other year is less than the figure in base year the

37
trend percentage will be less than 100 and it will be more than
the 100 it figure is more than the base year figures. Each year's
figure is divided by the base years figure.

3. Common-size statement:

The common-size statements, balance sheet and income

statement are shown in analytical percentage. The figures are
shown as percentages of total assets, total liabilities and total
sales. The total assets are taken as 100 and different assets are
expressed as a percentage of the total. Similarly, various
liabilities are taken as a part of total liabilities. These
statements are also known as component percentage or 100
percent statements because every individual item is stated as a
percentage of the total 100. The shortcomings in comparative
statements and trend percentages where changes in terms could
not be compared with the totals have been covered up. The
analysis can assess the figures in relation to total values.

The common size statement may be prepared in the following

ways:

(i) The total of assets or liabilities are taken as 100

38
(ii) The individual assets are expressed as a percentage of total
assets, i.e., 100 and
different liabilities are calculated in relation to total liabilities.
For example, if total assets are RS.5 lakhs and inventory value is
Rs.50,000, then it will be 10% of total assets i.e. (50,000 x
100) / (5,00,000)

4. Fund flow analysis:

The operation of business involves the conversion of cash

into non-cash assets, which are recovered into cash form. The
statement showing sources and uses of funds of funds is properly
known as 'Funds Flow Statement'.

The changes representing the 'sources of funds' in the

business may be issue of debentures, increase in net worth,
addition to funds, reserves and surplus, relation of earnings.

Changes showing the 'uses of funds' include:

a) Addition to assets - Fixed and Current

b) Addition to investments.

c) Decreasing in liabilities by paying off loans and

creditors.

39
 d) Decrease in net worth by incurring of loans, withdrawal
of funds from business and payment of dividends.

5. Cash Flow analysis:

Cash flow is used for only cash inflow and outflow. The cash
flows are prepared from cash budgets and operation of the
company. In cash flows only cash and bank balance are involved
and hence it is a narrower term than the concept of funds flows.
The cash flow statement explains how the dividends are paid;
how fixed assets are financed. The analysis had to know the real
cash flow position of company, its liquidity and solvency, which
are reflected in the cash flow position and the statements
thereof.

6. Ratio analysis:

The ratio is one of the most powerful tools of financial analysis.

It is the process of establishing and· interpreting various ratios
(quantitative relationship between figures and groups of
figures). It is with the help of ratios that the financial
statements can be analyzed more clearly, and decisions made
from such analysis.

40
Ratio analysis will be meaningful to establish relationship
regarding financial performance, operational efficiency, and
profit margins with respect to companies over a period and as
between companies within the same industry group.

The ratios are conveniently classified as follows:

a) Balance sheet ratios or position statement ratios.

(I) Current ratio

(II) Liquid ratio (Acid test ratio)

(III) Debt to equity ratio

(IV) Asset to equity ratio

(V) Capital gearing ratio

(VI) Ratio of current asses to fixed assets etc.

b) Profit & loss Ale ratios or revenue/income statement

ratios:

(I) Gross profit ratio

(II) Operating ratio

(III) Net profit ratio

(IV) Expense ratio

41
 (V) Operating profit ratio

(VI) Interest coverage

c) Composite ratios/ mixed or inter statement ratios:

(I) Return on total resources

(II) Return on equity

(III) Turnover of fixed assets

(IV) Turnover of debtors

(V) Return on shareholders’ funds

(VI) Return on total resources

TECHNICAL ANALYSIS
Technical analysis involves a study of market-generated
data like prices and volumes to determine the future direction
of price movement. Technical analysis analyses internal market
data with the help of charts and graphs. Subscribing to the
'castles in the air' approach, they view the investment game as
an exercise in anticipating the behavior of market participants.
They look at charts to understand what the market participants

42
have been doing and believe that this provides a basis for
predicting future behavior.

Definition:

" The technical approach to investing is essentially a reflection

of the idea that prices move in trends which are determined by
the changing attitudes of investors toward a variety of
economic, monetary, political and psychological forces. The art
of technical analysis- for it is an art - is to identify trend
changes at an early stage and to maintain an investment posture
until the weight of the evidence indicates that the trend has
been reversed."

-Martin J. Pring

Charting techniques in technical analysis:

Technical analysis uses a variety of charting techniques.

The most popular ones are:

 The Dow theory,

 Bar and line charts,
 The point and figure chart,
 The moving averages line and
 The relative strength lines.

43
The Dow theory

" The market is always considered as having three movements,

all going at the same time. The first is the narrow movement
from day to day. The second is the short swing, running from
two weeks to a month or more; the third is the main movement,
covering at least four years in its duration."

Charles
H.DOW

The Dow Theory refers to three movements as:

(a) Daily fluctuations that are random day-to-day wiggles.

(b) Secondary movements or corrections that may last for a

few weeks to some months;

(c) Primary trends representing bull and bear phases of the

market.

Bar and line charts

The bar chart is one of the simplest and commonly used tools of
technical analysis, depicts the daily price range along with the
closing price. It also shows the daily volume of transactions. A
line chart shows the line connecting successive closing prices.
44
Point and figure chart:

On a point and figure chart only significant price changes

are recorded. It eliminates the time scale and small changes and
condenses the recording of price changes.

Moving average analysis:

A moving average is calculated by considering the most recent

'n' observations. To identify trends technical analysis use moving
averages analysis.

Relative strength analysis:

The relative strength analysis assumes that the prices of some

securities rise rapidly during the bull phase but fall slowly during

the bear phase in relation to the market. Technical analysts

measure relative strength in different ways. a simple approach

calculates rates of return and classifies securities that have

superior historical returns as having relative strength. More

commonly, technical analysts look at certain ratios to judge

whether a security or, for that matter, an industry has relative

strength.
45
TECHNICAL INDICATORS:

In addition to charts, which form the mainstay of technical

analysis, technicians also use certain indicators to gauge the

overall market situation. They are:

 Breadth indicators

 Market sentiment indicators

BREADTH INDICATORS:

1. The Advance-Decline line:

The advance decline line is also referred as the breadth of

the market. Its measurement involves two steps:

46
 a. Calculate the number of net advances/ declines daily

basis.

b. Obtain the breadth of the market by cumulating daily net

advances/ declines.

2. New Highs and Lows:

A supplementary measure to accompany breadth of the market

is the high-low differential or index. The theory is that an

expanding number of stocks attaining new highs and a dwindling

number of new lows will generally accompany a raising market.

The reverse holds true for a declining market.

MARKET SENTIMENT INDICATORS:

1. Short-Interest Ratio:

The short interest in a security is simply the number of shares

that have been sold short but yet bought back.

The short interest ratio is defined as follows:

47
2. PUT I CALL RATIO:

Another indicator monitored by contrary technical analysis is the

put / call ratio. Speculators buy calls when they are bullish and

buy puts when they are bearish. Since speculators are often

wrong, some technical analysts consider the put / call ratio as a

useful indicator. The put / call ratio is defined as:

3. Mutual-Fund Liquidity:

If mutual fund liquidity is low, it means that mutual funds are

bullish. So, constrains argue that the market is at, or near, a

peak and hence is likely to decline. Thus, low mutual fund

liquidity is considered as a bearish indicator.

48
Conversely when the mutual fund liquidity is high, it means that

mutual funds are bearish. So, constrains believe that the market

is at, or near, a bottom and hence is poised to rise. Thus, high

mutual fund liquidity is considered as a bullish indication.

RANDOM WALK THEORY:

Fundamental analysis tries to evaluate the intrinsic value of the

securities by studying the various fundamental factors about

Economy, Industry and company and based on this information,

it categories the securities as wither undervalued or overhauled.

Technical analysis believes that the past behavior of stock prices

gives an indication of the future behavior and that the stock

price movement is quite orderly and random. But a new theory

known as Random Walk Theory, asserts that share price

movements represent random walk rather than an orderly

movement.

According to this theory, any change in the stock prices is the

result of information about certain changes in the economy,

49
industry, and company. Each price change is independent of

other price changes as each change is caused by a new piece of

information. These changes in stock's prices reveals the fact

that all the information on changes in the economy, industry

and company performance is fully reflected in the stock prices

i.e., the investors will have full knowledge about the securities.

Thus, the Random Walk Theory is based on the hypothesis that

the Stock Markets are efficient. Hence, later it is known as

Efficient Market Hypothesis.

EFFICIENT MARKET HYPOTHESIS

This theory presupposes that the stock Markets are so

competitive and efficient in processing all the available

information about the securities that there is "immediate price

50
adjustment" to the changes in the economy, industry and

company. The Efficient Market Hypothesis model is actually

concerned with the speed with which information is

incorporated into the security prices.

The Efficient Market Hypothesis has three Sub-hypothesis: -

Weakly Efficient: -

This form of Efficient Market Hypothesis states that the current

prices already fully reflect all the information contained in the

past price movements and any new price change is the result of

a new piece of information and is not related! Independent of

historical data. This form is a direct repudiation of technical

analysis.

Semi-Strongly Efficient: -

This form of Efficient Market Hypothesis states that the stock

prices not only reflect all historical information but also reflect

51
all publicly available information about the company as soon as

it is received. So, it repudiates the fundamental analysis by

implying that there is no time gap for the fundamental analyst

in which he can trade for superior gains, as there is an

immediate price adjustment.

Strongly Efficient: -

This form of Efficient Market Hypothesis states that the market -

cannot be beaten by using both publicly available information as

well as private or insider information.

But even though the Efficient Market Hypothesis repudiates

both Fundamental and Technical analysis, the market is

efficient precisely because of the organized and systematic

efforts of thousands of analysts undertaking Fundamental and

Technical analysis. Thus, the paradox of Efficient Market

52
Hypothesis is that both the analysis is required to make the

market efficient and thereby validate the hypothesis.

53
 Chapter 3

PORTFOLIO
MANAGEMENT

Portfolio means a collection of investments all owned by the

same individual or organization. Portfolio may be defined as a
54
bundle of securities. These investments often include stocks,
which are investments in individual businesses; bonds, which are
investments in debt that are designed to earn interest; and
mutual funds, which are essentially pools of money from many
investors that are invested by professionals or according to
indices.

Portfolio Management:
Portfolio Management is the art and science of making decisions
about investment mix and policy, matching investments to
objectives, asset allocation for individuals and institutions, and
balancing risk against performance. The art of selecting the
right investment policy for the individuals in terms of minimum
risk and maximum return is called as portfolio management. It
also refers to managing an individual’s investments in the form
of bonds, shares, cash, mutual funds, etc. so that he earns the
maximum profits within the specific time frame. Portfolio
management refers to managing money of an individual under
the expert guidance of portfolio managers. It is done by
analyzing the strengths, weaknesses, opportunities and threats
in different investment alternatives to have a risk return trade

55
off. Understanding the dynamics of market is the essence of
Portfolio Management. This means Portfolio Management
basically deals with three critical questions of investment
planning.

1. Where to Invest?

2. When to Invest?

3. How much to Invest?

Need for Portfolio Management:

Portfolio management presents the best investment plan to the
individuals as per their income, budget, age and ability to
undertake risks. Portfolio management minimizes the risks
involved in investing and also increases the chance of making
profits. Portfolio managers understand the client’s financial
needs and suggest the best and unique investment policy for
them with minimum risks involved. Portfolio management
enables the portfolio managers to provide customized
investment solutions to clients as per their needs and
requirements.

56
Types of Portfolio Management:
Portfolio Management is further of the following types –

a) Active Portfolio Management: As the name suggests, in an

active portfolio management service, the portfolio managers are
actively involved in buying and selling of securities to ensure
maximum profits to individuals. The aim of active portfolio
management is to outperform the benchmark. (For example,
BSESENSEX, NSE-NIFTY50, etc.).

b) Passive Portfolio Management: In a passive portfolio

management, the portfolio manager deals with a fixed portfolio
designed to match the current market scenario. Discretionary
Portfolio management services an individual authorizes a
portfolio manager to take care of his/her financial needs on
his/her behalf. The individual issues money to the portfolio
manager who in turn takes care of all his investment needs,
paper work, documentation, filing and so on. In discretionary
portfolio management, the Portfolio Analysis Page 3 portfolio
manager has full rights to take decisions on his client’s behalf.
In nondiscretionary portfolio management services, the portfolio
manager can merely advise the client what is good and bad for
him but the client reserves full right to take his own decisions.

57
Features of portfolio management
Allocation of Assets

This is the base for portfolio management where assets with low
correlation with each other are mixed in a certain way so that
the risk and return profile of the investor are Investors who have
huge risk appetite can settle for a more volatile group of assets
while the risk-averse investors can go for subtle or stable
investment classes.

Diversification of Investment

Since, it is not possible for any investor, portfolio manager to

predict how one single asset class will behave or return over a
longer period of time due to various ambiguities in the market
and the volatility, diversification is necessary. It is to divide the
amount invested, in different asset classes, which are least
correlated with each other.

58
Investment/Asset Rebalancing

Since markets are not same every year; the asset allocation
needs to be rebalanced according to the market prediction for
the similar period. Another scenario is over the period of time,
the ratio of asset classes in the portfolio changes on its own due
to the returns accumulated. For example, in the beginning, you
invested 60% in shares and 40% in FDs but with the passage of
time, the ratio changed to 75:25 ratio which has put your
investment at risk. The portfolio manager keeps an eye on the
portfolio and whenever he or she feels that the portfolio has
crossed the level of the risk appetite of the investor, they
rebalance it accordingly.

Process of Portfolio Management

Services
The detailed process which justifies the portfolio management
services meaning is enumerated below:

 The first step is to identify the objectives or the motto

behind an investor’s investment.
 The funds available to him which he can invest.

59
  Finding asset which will match the objectives of the
investor.
 Preparing a full investment policy according to the analysis
of the investor.
 Monitoring the portfolio continuously.
 Rebalancing it over and over again when the required ratio
of asset allocation changes.
 Discuss with the client/investor about the analysis of his
invest from time to time and how to optimize the returns.
 Based on the performance of the portfolio and updated
objectives of the investor, the portfolio manager must
rebalance the portfolio.

PORTFOLIO SELECTION
Portfolio analysis provides the input for the next phase in
portfolio management, which is portfolio selection. The proper
goal of portfolio construction is to get high returns at a given
level of risk. The inputs from portfolio analysis can be used to
identify the set of efficient portfolios. From this set of
portfolios, the optimal portfolio has to be selected for
investment.

60
MARKOWITZ MODEL
Harry M. Markowitz is credited with introducing new concept of
risk measurement and their application to the selection of
portfolios. He started with the idea of risk aversion of investors
and their desire to maximize expected return with the least
risk.
Markowitz used mathematical programming and statistical
analysis in order to arrange for the optimum allocation of assets
within portfolio. To reach this objective, Markowitz generated
portfolios within a reward-risk context. In other words, he
considered the variance in the expected returns from
investments and their relationship to each other in constructing
portfolios. In essence, Markowitz's model is a theoretical
framework for the analysis of risk return choices. Decisions are
based on the concept of efficient portfolios.

A portfolio is efficient when it is expected to yield the

highest return for the level of risk accepted or, alternatively,
the smallest portfolio risk or a specified level of expected
return. To build an efficient portfolio an expected return level is
chosen, and assets are substituted until the portfolio
combination with the smallest variance at the return level is

61
found. As this process is repeated for other expected returns,
set of efficient portfolios is generated.

Assumptions

The Markowitz model is based on several assumptions

regarding investor behavior:

i) Investors consider each investment alternative as being

represented by a probability distribution of expected returns
over some holding period.

ii) Investors maximize one period-expected utility and possess

utility curve, which demonstrates diminishing marginal utility of
wealth.

iii) Individuals estimate risk based on the variability of

expected returns.

iv) Investors base decisions solely on expected return and

variance (or standard deviation) of returns only.

v) For a given risk level, investors prefer high returns to lower

returns. Similarly, for a given level of expected return, investor
prefer less risk to more risk.

Under these assumptions, a single asset or portfolio of

assets is considered to be "efficient" if no other asset or

62
portfolio of assets offers higher expected return with the same
(or lower) risk or lower risk with the same (or higher) expected
return.

MARKOWITZ DIVERSIFICATION

Markowitz postulated that diversification should not only aim at

reducing the risk of a security by reducing its variability or
standard deviation but by reducing the covariance or interactive
risk of two or more securities in a portfolio.

As by combination of different securities, it is theoretically

possible to have a range of risk varying from zero to infinity.
Markowitz theory of portfolio diversification attached
importance to standard deviation to reduce it to zero, if
possible.

CAPITAL MARKET THEORY

The CAPM was developed in mid-1960, the model has generally
been attributed to William Sharpe, but John Linter and Jan
Mossin made similar independent derivations. Consequently, the
model is often referred to as Sharpe-Linter-Mossin (SLM) Capital
Asset Pricing Model. The CAPM explains the relationship that
should exist between securities expected returns and their risks
in terms of the means and standard deviations about security

63
returns. Because of this focus on the mean and standard
deviation the CAPM is a direct extension of the portfolio models
developed by Markowitz and Sharpe.

Capital Market Theory is an extension of the portfolio theory of

Markowitz. This is an economic model describes how securities
are priced in the marketplace. The portfolio theory explains
how rational investors should build efficient portfolio based on
their risk return preferences. Capital Asset Pricing Model (CAPM)
incorporates a relationship, explaining how assets should be
priced in the capital market.

64
 Chapter 4

PORTFOLIO
ANALYSIS

65
Definition:
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. Portfolio analysis conducted at regular intervals helps
the investor to make changes in the portfolio allocation and
change them according to the changing market and different
circumstances. The analysis also helps in proper resource / asset
allocation to different elements in the portfolio.

Individual securities in a portfolio are associated with certain

number of Risk & Returns. Once a set of securities, that are to
be invested in, are identified based on Risk-Return
characteristics, portfolio analysis is to be done as next step as
the Risk & Return of the portfolio is not a simple aggregation of
Risk & Returns of individual securities but, somewhat less or
more than that. Portfolio analysis considers the determination
of future Risk & Return in holding various blends of individual
securities so that right combinations giving higher returns at
lower risk, called Efficient Portfolios, can be identified so as to

66
select an optimum one out of these efficient portfolios can be
selected in the next step.

Expected Return of a Portfolio:

It is the weighted average of the expected returns of the

individual securities held in the portfolio. These weights are the
proportions of total investable funds in each security.

RP = Expected return of portfolio

N = No. of Securities in Portfolio

XI= Proportion of Investment in Security i.

Ri = Expected Return on security i

67
 Chapter 5

PRACTICAL STUDY
OF SOME
SELECTED SCRIPS

68
Risk and return analysis for two different portfolios mentioned
below:

Portfolio A Portfolio B
NTPC Limited Britannia Industries Limited
Cipla Limited Kotak Mahindra Bank Limited
Wipro Limited Reliance Industries Limited

CALCULATION OF RETUN AND RISK:

69
 Portfolio -A
Company Name: NTPC Limited
Date Closing Price X-X' (X-X')2
2021-11-29 126.5 -0.13 0.0169
2021-11-30 127.25 0.62 0.3844
2021-12-01 127.7 1.07 1.1449
2021-12-02 128.7 2.07 4.2849
2021-12-03 127 0.37 0.1369
2021-12-06 124.35 -2.28 5.1984
2021-12-07 125.35 -1.28 1.6384
2021-12-08 127.25 0.62 0.3844
2021-12-09 126.05 -0.58 0.3364
2021-12-10 126.15 -0.48 0.2304

 Expected Return: 1266.3/10 = 126.63

 ∑(X-X') 2 = 13.756
 Risk = 3.7089

70
 Portfolio -A
Company Name: Cipla Limited
Date Closing Price X-X' (X-X')2
2021-11-29
965 48.17 2320.3489
2021-11-30
971.3 54.47 2966.9809
2021-12-01
928.15 11.32 128.1424
2021-12-02
921.25 4.42 19.5364
2021-12-03
912.05 -4.78 22.8484
2021-12-06
894.95 -21.88 478.7344
2021-12-07
889.25 -27.58 760.6564
2021-12-08
897.95 -18.88 356.4544
2021-12-09
894.5 -22.33 498.6289
2021-12-10
893.9 -22.93 525.7849

 Expected Return: 9168.3/10 = 916.83

 ∑(X-X') 2 = 8078.116
 Risk = 89.878

71
 Portfolio -A
Company Name: Wipro Limited
Date Closing Price X-X' (X-X')2
2021-11-29
630.6 -6.425 41.280625
2021-11-30
637.25 0.225 0.050625
2021-12-01
634.8 -2.225 4.950625
2021-12-02
646.8 9.775 95.550625
2021-12-03
640.75 3.725 13.875625
2021-12-06
624.5 -12.525 156.875625
2021-12-07
632.4 -4.625 21.390625
2021-12-08
641.7 4.675 21.855625
2021-12-09
643.2 6.175 38.130625
2021-12-10
638.25 1.225 1.500625

 Expected Return: 6370.25/10 = 637.02

 ∑(X-X') 2 = 395.46
 Risk = 19.88

72
 Portfolio -B
Company Name: Britannia Industries Limited
Date Closing Price X-X' (X-X')2
2021-11-29
3528.6 -25.81 666.1561
2021-11-30
3545.5 -8.91 79.3881
2021-12-01
3535.25 -19.16 367.1056
2021-12-02
3578.5 24.09 580.3281
2021-12-03
3553.75 -0.66 0.4356
2021-12-06
3496.2 -58.21 3388.404
2021-12-07
3474.2 -80.21 6433.644
2021-12-08
3575.75 21.34 455.3956
2021-12-09
3623.9 69.49 4828.86
2021-12-10
3632.45 78.04 6090.242

 Expected Return: 35544.1/10 = 3554.41

 ∑(X-X') 2 = 22889.959
 Risk = 151.29

73
 Portfolio -B
Company Name: Kotak Mahindra Bank Limited
Date Closing Price X-X' (X-X')2
2021-11-29 2019.6 82.68 6835.982
2021-11-30 1961.9 24.98 624.0004
2021-12-01 1953.35 16.43 269.9449
2021-12-02 1964.25 27.33 746.9289
2021-12-03 1914.2 -22.72 516.1984
2021-12-06 1885.2 -51.72 2674.958
2021-12-07 1937.15 0.23 0.0529
2021-12-08 1920.45 -16.47 271.2609
2021-12-09 1916.35 -20.57 423.1249
2021-12-10 1896.75 -40.17 1613.629

 Expected Return: 19369.2/10 = 1936.92

 ∑(X-X') 2 = 13976.081
 Risk = 118.22

74
 Company Name: Reliance Industries Limited
Date Closing Price X-X' (X-X')2
2021-11-29
2441.5 13.2 174.372025
2021-11-30
2405.4 -22.9 524.181025
2021-12-01
2467 38.7 1498.077025
2021-12-02
2482.85 54.55 2976.248025
2021-12-03
2408.25 -20.05 401.802025
2021-12-06
2362.6 -65.7 4315.833025
2021-12-07
2381.85 -46.45 2157.138025
2021-12-08
2418.1 -10.2 103.938025
2021-12-09
2456.45 28.15 792.704025
2021-12-10
2458.95 30.65 939.729025

Portfolio -B

 Expected Return: 24282.95/10 = 2428.29

 ∑(X-X') 2 = 13884.02
 Risk = 117.83

75
 Portfolio -A

The risk and return of each company in portfolio-A is:

S. No. Company Name Return Risk

1 NTPC Limited 126.63 3.708908195
2 Cipla Limited 916.83 89.87833999
3 Wipro Limited 637.025 19.88620753

Portfolio -B

The risk and return of each company in portfolio-B is:

S. No. Company Name Return Risk

1 Britannia Industries Limited 3554.41 151.2942795
2 Kotak Mahindra Bank Limited 1936.92 118.2204762
3 Reliance Industries Limited 2428.295 117.830481

76
 INTERPERATION
From the above figures, in total there is a high return on
portfolio B companies when compared with portfolio A
companies. But at the same time if we compare the risk, risk is
less for companies in portfolio A when compared with portfolio
B companies. As per the Markowitz an efficient portfolio is one
with “Minimum risk, maximum profit” therefore, it is advisable
for an investor to work out his portfolio in such a way where he
can optimize his returns by evaluating and revising his portfolio
on a continuous basis.

77
 Chapter 6

CONCLUSIONS

78
 CONCLUSIONS
Portfolio is collection of different securities and assets by
which we can satisfy the basic objective: Maximize yield
minimize risk. Further' we have to remember some important
investing rules.

Investing rules to be remembered.

 Don't speculate unless it's full-time job

 Beware of barbers, beauticians, waiters-of anyone -bringing
gifts of inside information or tips.
 Before buying a security, it’s better to find out everything
one can about the company, its management and
competitors, its earnings and possibilities for growth.
 Don't try to buy at the bottom and sell at the top. This
can't be done-except by liars.
 Learn how to take your losses and cleanly. Don't expect to
be right all the time. If you have made a mistake, cut your
losses as quickly as possible
 Don't buy too many different securities. Better have only a
few investments that can be watched.
 Make a periodic reappraisal of all your investments to see
whether changing developments have altered prospects.

79
 Study your tax position to known when you sell to greatest
advantages.
 Always keep a good part of your capital in a cash reserve.
Never invest all your funds.
 Don't try to be jack-off-all-investments. Stick to field you
had known best.
 Purchasing stocks, you do not understand if you can't
explain it to a ten-year-old, just don't invest in it.
 Over diversifying: This is the most oversold, overused,
logic-defying concept among stockbrokers and registered
investment advisors.
 Not recognizing difference between value and price: This
goes along with the failure to compute the intrinsic value
of a stock, which are simply the discounted future earnings
of the business enterprise.
 Failure to understand Mr. Market: Just because the market
has put a price on a business does not mean it is worth it.
Only an individual can determine the value of an
investment and then determine if the market price is
rational.
 Failure to understand the impact of taxes: Also known as
the sorrows of compounding, just as compounding works to

80
 the investor's long-term advantage, the burden of taxes
because pf excessive trading works against building wealth
 Too much focus on the market whether or not an individual
investment has merit and value has nothing to do with that
the overall market is doing

81