V Semester B.B.A.

Degree Examination, March -

2021 BUSINESS ADMINISTRATION
Investment
Management

S
ECTION-A

Answer any five of the following sub-questions

1. a) What is economic analysis?

Ans . The performance of a company depends much on the performance of the

economy. If the economy is in boom, the industries and companies in general said
to be prosperous. On the other hand , if the economy is in recession, the
performance of the company will be generally poor. GDP and inflation growth are
reflected in stock price.

b) What is Portfolio Management?

Ans. Portfolio management guides the investors in a method of selecting best

available securities that will provide the expected rate of return for any given degree
of risk.
Portfolio management helps in deciding what assets to include in the portfolio.

c) What is an Optiomal portfolio?

Ans. Portfolio analysis is the determination of future risk and return in

holding various combinations of individual securities. A portfolio which has highest
return and lowest risk is termed as an optimal portfolio.
 d) Give the meaning of Risk?

Ans. Risk is a probability of threat injury liability loss or any other negative
assurance that is caused by internal or external factors. It is an uncertainity which
will occur in future.

e) Expand FCCB.

Ans. Foreign currency convertible bonds.

f) What are financial assets.

Ans. Financial assets are liquid assets such as stock equity or bank deposits
that assume Their value from a contractual claim or ownership on an underlying
asset.

g) Mention my four Mutual fund Companies in India.

Ans. ICICI Prudential Focused Bluechip Equity Fund.

Aditya Birla Sun Life Small & Midcap Fund.

Tata Equity PE Fund.

HDFC Monthly Income Plan

 S
ECTION -B

Answer any Three of the following questions

2. Briefly explain Markowitz model of Portfolio Management.

Ans. Markowitz showed that the variance of the rate of return was a meaningful
measure of portfolio risk under reasonable set of assumption, and he derived the
formula
for computing the variance of a portfolio. As the Harry Markowitz Model (HM
Model) is
based on the expected return (mean) and the standard deviation (variance) of
different
portfolios, it is called Mean-Variance Model. Through this model, the investor can
find
out the efficient set of portfolio by finding out the trade-off between risk return,
between
the limits of zero and infinity.

Assumption of Markowitz Model:

● The market is efficient, all investors react with full facts about all securities in
the market.

● Investors make decisions on the basis of expected utility maximization.

● By combining the assets, the security returns are correlated to each other.

● Investor combines his investments in such a way that he gets maximum return
and
surrounded by minimum risk.

● Investor is able to get higher return for each level of risk by determining the
efficient
set of securities

● The investor can reduce his risk if he adds investments in his portfolio.
 ● Once investors have determined the efficient set of portfolio, they select from
this efficient set of the portfolio corresponding to their preferences.

Limitations of Markowitz Model:

1) Large number of calculations: In this model, each time a change in the

existing
portfolio is to be made for which entire population of possible securities must be
reevaluated in order to maintain the desired risk-return balance. This requires a
larger number of mathematical calculations, because from a given set of securities,
a large number, or sometimes an infinite number of portfolios can be constructed.

2) Uneconomic transaction cost: The complex and numerous mathematical

computations give rise to large, and uneconomic costs as the help of computer is
required to find out the securities which lie on the efficient frontier. This could be
true even if portfolio managers reviewed their holdings less often than daily or
weekly.

3) Unsound academic approach: the purchasing investment managers are unable

to understand the conceptual mathematics involved, because the academic
approach to portfolio management is suspicious and unsound.

3. Distinguish between investment and speculation.

Ans . Difference between Investment and Speculation

1. Investment is all about value creation (e.g. manufacturing products and

providing services) while speculation is concerned about price movement. In the
latter, you profit purely from price differences. The price movement is mostly
influenced by the psychology of the market.

2. Investment is has lower risk but need more capital to generate more value while
speculation is challenging, has higher risk but requires less capital. This explains
why most people are speculating because its entry requirement (capital) is lower.
3. Investment is about getting what market offers you while speculation is about
trying to get more by doing more in believing that you can beat the market.

4. Investment is about doing least since you let the companies or industries work for
you by owning a piece of their businesses while speculation is about doing the most
(unconsciously) and it is more involving because you keep chasing the price
movement. You need to keep buying and selling to generate profit.

5. Investment is over long term while speculation is of shorter term. For the former,
the success rate is highest by maximizing the holding period of a position while for
the latter; the success rate will peak if the position is kept open for the shortest time
possible. This also explains why people like to speculate because it provides
“shortcuts” to wealth.

6. Investment is about simplicity while speculation is about complexity (timing

market, predicting market direction, stock picking…). That’s why most people fail
when speculating. It gives a false sense of simplicity.

7. Investment = growing system (like a living organic creature) while speculation =

zero- sum game (one person’s gain is another person’s loss). The former will grow
over time while the latter remains constant or shrinking over time.
 4. Briefly explain ADR's.

Ans. The term American depositary receipt (ADR) refers to a negotiable certificate
issued by a U.S. depositary bank representing a specified number of shares—
usually one share—of foreign company's stock. The ADR trades on U.S. stock
markets as any domestic shares would. ADRs offer U.S. investors a way to
purchase stock in overseas companies that would not otherwise be available.
Foreign firms also benefit, as ADRs enable them to attract American investors and
capital without the hassle and expense of listing on U.S. stock exchanges.

Type #1 – Sponsored ADR

The bank issues the Sponsored ADRs on behalf of the foreign company where there
exists the legal arrangement between the two parties. In this case, the transactions
with the investors will be handled by the bank while the cost of issuing ADRs and
control of ADR will be of foreign company.

These ADRs are registered with the Securities and Exchange Commission (SEC)
(except sponsored ADRs lowest level) and are traded on the major stock exchanges
of the US.

Type #2 – Unsponsored ADR

Unsponsored ADRs are the shares that are traded on the over-the-counter market
(OTC). A bank issues unsponsored ADR according to demand in the market where
a foreign company under consideration has no
participation or formal or legal agreement with a depository bank. Such ADRs are
never included for the voting rights
Pros

● Easy to track and trade

● Available through U.S. brokers

● Denominated in dollars

● Offer portfolio diversification

Cons

● Could face double taxation

● Limited selection of companies

● Unsponsored ADRs may not be SEC-compliant

● Investor's may incur currency conversion fees

5. Explain various characteristics of Investment.

Ans. 1. Return: Return refers to expected rate of return from an investment. Return
is animportant characteristic of investment. Return is the major factor which
influences the pattern of investment that is made by the investor. Investor always
prefers high rate of return for his investment. Returns could be in the form of
dividend, interest, capital gain etc. Returns depend upon the factors such as nature
of the investment, the maturity period, stability of earnings etc.

2. Risk: If an investor is risk averse , he can invest in bank deposits, government

securities, life insurance, provident fund, PPF, debentures etc. If an investor
is a risk taker he can choose the equity shares, precious metals, real estate and
mutual funds etc. Higher risk will lead to higher return. But in practice higher risk
may always not guarantee higher return.
3. Safety: Safety is another feature which an investor desires for his investments.
Safety implies the certainty of return of capital without loss of money or time.
Every investor expects to get back his capital on maturity without loss and without
delay. In other words safety refers to the protection of investor’s principal amount
and expected rate of return.

4. Liquidity: An investor which is easily saleable or marketable without loss of

money without loss of time is said to be possess liquidity. Liquidity means that
investment is easily realizable, saleable or marketable. When the liquidity is high,
then the return may be low.

5. Marketability: Marketability refers to buying and selling of securities in

market.
Marketability means transferability or saleabilityof an asset. Securities
are listed in a stock market which are more easily marketable than which are not
listed. Public Limited Companies shares are more easily transferable than those of
private limited companies.

6. Capital Growth: Capital Growth refers to appreciation of investment. Capital

growth has today become an important characteristic of investment. Growth of
investment depends upon the industry growth.

7. Stability of Income: It refers to constant return from an investment . Another

major characteristic feature of the investment is the stability of income. Stability of
income must look for different path just as security of principal. Every investor
always considers stability of monetary income.

8. Tax shelter: An investor can avail tax exemptions by investing in the

government
securities, PF, PPF, Indira Vikas Patras, Insurance and selected
mutual funds.

6. Explain Securities Trading procedure.

Ans. 1. Selection of a broker: The first step is to select a registered broker prior to
purchase /saleof securities that assist investors to execute trade transactions in
secondary markets. These brokers can be an individual, corporate body or a
partnership firm.
2. Opening a DEMAT account with depository: Individual investors need to
open a DEMAT or Dematerialised account provided by Depository Participants
(DP) who act as agents or intermediaries between depositors and investors. DPs
include SEBI, banks, sub-brokers, etc.

3. Placing the order: Post-opening a demat account, investors can place an order
by, specifying the number of securities and the company /script name at an expected
price either through a DP or personally through an email, phone, etc.

4. Executing the order: The order is placed by a broker for buying or selling the
securities. Broker prepares a contract note that contains the name and price of
securities, name of parties and brokerage or commission charged by them and duly
signed by the broker.

5. Settlement: Settlement is carried out either through cash or carry forward basis
under either
two or both types of settlements :

● On the spot settlement, which occurs in T+2 basis where T stands for
transaction date and '2' are the number of days.

● Forward settlement, that can take place on some future date, which can be
T4-5 or T + 7.
 S
ECTION -C
Answer any Three of the following questions.

7. Explain the capital market instruments.

Ans. A capital market is a financial market in which investors buy and sell financial
securities, such as stocks and bonds. These transactions take place through various
exchanges. The primary function of the capital market is to bring together investors
who buy securities with those who sell them.
The term capital market includes the stock market, bond market, and related
markets. The term is frequently used with reference to banks and banking in both a
narrow and broad sense.

Capital Market Instruments

1. Corporate Bonds – Investment-Grade

Corporate bonds are simply businesses borrowing money in exchange for a ‘bond’
at a set rate of interest. These usually come in short-term bonds with a maturity of
five years or less; intermediate bonds, with a maturity between 5 to 12 years; and
long-term bonds with a maturity of over 12 years.

2. Corporate Bonds – Junk bonds

Junk bonds offer a high yield – much higher than other types. Yet they also offer the
highest level of risk. This is because the companies that issue these bonds are either
small or unreliable. In other words, the likelihood of receiving the initial investment
back is not high.

3. Foreign Bonds
Foreign bonds are issued in the domestic country by a foreign entity in local
currency. For instance, an Indian firm may want to raise some capital in the US as it
is unable to raise it in the Indian capital markets. In turn, it may issue $1 million in
foreign bonds – all in US dollars. The debt is therefore repayable in US dollars.

4. Municipal Bonds

A municipal bond differs from a government bond in the fact that they are issued by
local government or one of its agencies – rather than the central/federal government.
These are generally safe bonds but present a greater risk than treasury bonds.

5. Treasury Bonds

Government bonds, or ‘treasury bonds’, as they are commonly referred to in the US,
are issued by central government over a set period of time – usually greater than 10
years. They earn a small amount of interest – below the market average, due to the
low risk associated with such.

6. Equity Shares

These shares are the prime source of finance for a public limited or joint-stock
company. When individuals or institutions purchase them, shareholders have the
right to vote and also benefit from dividends when such an organization makes
profits. Shareholders, in such cases, are regarded as the owners of a company since
they hold its shares.

7. Preference Shares

These are the secondary sources of finance for a public limited company. As the
name suggests, holders of such shares enjoy exclusive rights or preferential
treatment by that company in specific aspects. They are likely to receive their
dividend before equity shareholders. However, they do not typically have any
voting rights.

8. Foreign Exchange Instruments:

Foreign exchange instruments are financial instruments represented on the foreign

market. It mainly consists of currency agreements and derivatives. Based on
currency agreements, they can be broken into three categories i.e spot, outright
forwards and currency swap.
 8. What is technical analysis? Explain.

Ans. Technical analysis is a method of evaluating securities by analyzing the

statistics generated by market activity, such as past prices and volume. Technical
analysts do not attempt to measure a security's intrinsic value, but instead use charts
and other tools to identify patterns that can suggest future activity.

assumptions:

1. The market discounts everything.

2. Price moves in trends.

3. History tends to repeat itself.

1. The Market Discounts Everything: A major criticism of technical analysis is

that it only considers price movement, ignoring the fundamental factors of the
company. However, technical analysis assumes that, at any given time, a stock's
price reflects everything that has or could affect the company - including
fundamental factors. Technical analysts believe that the company's fundamentals,
along with broader economic factors and market psychology, are all priced into the
stock, removing the need to actually consider these factors separately. This only
leaves the analysis of price movement, which technical theory views as a product of
the supply
and demand for a particular stock in the market.

2. Price Moves in Trends: In technical analysis, price movements are believed to

follow trends. This means that after a trend has been established, the future price
movement is more likely to be in the same direction as the trend than to be against
it. Most technical trading strategies are based on this assumption.

3. History Tends To Repeat Itself : Another important idea in technical analysis is

that history tends to repeat itself, mainly in terms of price movement. The repetitive
nature of price movements is attributed to market psychology; in other words,
market participants tend to provide a consistent reaction to similar market stimuli
over time.

Technical analysis is based on mainly which are mostly seen in different types
as follows:

1. Line chart

2. Bar chart

3. Candlestick chart

9. Explain in detail different types of Risks.

Ans. Risk is a probability of threat injury liability loss or any other negative
assurance that is caused by internal or external factors. It is an uncertainity which
will occur in future.

Types of risk

Systematic risk:

The systematic risk is caused by factors external to the particular company

and uncontrollable by the company. The systematic risk affects the market as a
whole.

Sources of risk

● Interest rate risk:

Interest rate risk is the variation in the single period rates of return
caused by the fluctuations in the market interest rate. Most commonly the interest
rate
risk affects the debt securities like bond, debentures.

● Market risk:

Jack clark francis has defined market risk as that portion of total
variability of return caused by the alternating forces of bull and bear market. This is
a
type of systematic risk that affects share .market price of shares move up and down
consistently for some period of time.
 ● Purchasing power risk:

Another type of systematic risk is the purchasing power risk.it refers to the
variation in investor return caused by inflation.

Unsystematic risk:

In case of unsystematic risk the factors are specific, unique and related to
the particular industry or company.

Business risk:

Every company operates with in a particular operating environment,

operating environment comprises both internal environment within the firm and
external environment outside the firm. Business risk is thus a function of the
operating conditions faced by a company and is the variability in operating income
caused by the operating conditions of the company.

Financial risk:

It refers to the variability of the income to the equity capital due to the
debt capital. Financial risk in a company is associated with the capital structure of
the company. The debt in the capital structure creates fixed payments in the form of
interest this creates more variability in the earning per share available to equity
share holders .this variability of return is called financial risk and it is a type of
unsystematic risk.

Credit Risk/ Default Risk:

The credit risk deals with the probability of meeting a

default. The chances that the borrower will not pay can stem from a variety of
factors.The borrower’s credit rating might have fallen suddenly and he became
default prone and its extreme form it may lead to insolvency. In such cases, the
investor may get no return or negative returns.

Other Risk:

In addition to above major risks there are many more risks particularly
associated with the investment in foreign securities. These risks are monetary value
risk, political environment risk and inability of foreign government to meet its
indebtedness. The investor,who buys foreign bonds or securities of foreign
corporations, should weigh carefully the possibility of additional risk associated
with foreign investments against his expected return.

● Individual and Group Risks

● Financial & Non Financial Risks

● Pure & Speculative Risk

● Static & Dynamic Risks

● Quantifiable & Non-quantifiable

10. Discuss various investment Avenues.

Ans. Equity

Equity as an asset class is gaining traction but it is not everyone’s cup of tea. It is
probably the most volatile asset class with no guaranteed returns. Investment in
equity is not just restricted to stock selection, but timing of entry and exit is very
important. However, in the longer run, stock markets can be the best performing
asset class with much superior alpha.

Mutual Funds
A mutual fund is a professionally managed investment fund that pools money from
many investors to purchase securities. They can put their money into one or more
kinds of securities. Mutual Funds can put their money into stocks, debt or both and
even in gold. They can be actively managed or passive funds.

In active funds, the fund manager plays a vital role in choosing scrips to generate
return, while passive funds or exchange traded funds (ETFs) invest the money based
on the underlying benchmarked indices. Equity schemes are categorized according
to market-capitalization or the sectors in which they invest.

Debt Mutual Funds are more suited for the investors who want steady returns with
lower risks. They are less volatile as the corpus is put into fixed interest generating
securities like corporate bonds, government securities, treasury bills, commercial
paper and other money market instruments. However, debt mutual funds are neither
risk free, nor they assure returns.
Bonds or Debentures

Debentures or bonds are long-term investment options with a fixed stream of cash
flows depending on the quoted rate of interest. They are considered relatively less
risky. An amount of risk involved in debentures or bonds is dependent upon who
the issuer is. They include Government securities, savings bonds, public sector unit
bonds etc.

Bank Fixed Deposits (FDs)

FD in banks is considered as one of the safest and traditional choices of investing in
the nation. It is different from deposits in savings accounts. They provide a fixed
rate of interest on the principal amount over a predetermined duration. Bank FD
provides a higher rate of interest than savings accounts. However, The interest rate
earned is added to one’s income and is taxed as per one’s income slab.

Public Provident Fund (PPF)

The Public Provident Fund is one the popular investment products, with a longer
maturity tenure of 15 years. The impact of compounding of tax-free interest is hefty,
especially in the later years. It is a safe investment as the interest earned (reviewed
every quarter by the government) and the principal invested is backed by sovereign
guarantee.

National Pension System (NPS)

The National Pension System is a long term retirement – focused investment

product managed by the Pension Fund Regulatory and Development Authority
(PFRDA). It is a mix of equity, fixed deposits, corporate bonds, liquid funds and
government funds, among others.

Real Estate

Buying property is one of the most popular investment alternatives in the country.
However, a property for self consumption should never be considered as an
investment. Investment in real estate is not just limited to housing as the segments
like office, commercial real estate, warehousing, student housing, data centers,
shared spaces is also gaining traction amongst the investors.

Gold
It is the most traditional form of investment amongst Indians, but possessing gold in
the form of jewelry has concerns related to safety and high cost in the form of
‘making charges’. However, buying gold coins or biscuits is still an option but gold
ETF could be ranked as a more viable one. Investment in gold papers via ETFs is
more safe and cost effective.

Life Insurance

Insurance plans sold as life insurance shall not be considered as investment options
as they provide risk coverage in case of any mishap. However, many Indians
consider insurance as an investment. Life insurance is an instrument for the security
of life. The main objective of other investment avenues is to earn a return but the
primary objective of life insurance is to secure our families against unfortunate
events.

11. Following is the expected returns from the securities of two companies P
ltd & Q ltd. Under different conditions. Securities of the companies are
quoted at Rs. 100 each.
Condition Probabi Returns of P Returns of Q
lity Ltd. Ltd.
Inflation 0.4 50 75
Deflation 0.3 60 65
Normal 0.3 55 45
Which of the two companies are risky?

Ans. P LTD

Expected return

CONDITION RETURN (R) PROBABILITY (P× R)

(P)
INFLATION 50 0.4 20
DEFLATION 60 0.3 18
NORMAL 55 0.3 16.5
Σ (P×R)=54.5

(Ŕ) Expected rate of return Σ (P×R)= 54.5

Standard Deviation

CONDITION R P P×R (R-Ŕ) (R-Ŕ) ² P(R-Ŕ) ²

INFLATION 50 0.4 20 -4.5 20.25 8.1

DEFLATION 60 0.3 18 5.5 30.25 9.07
NORMAL 55 0.3 16.5 0.5 0.25 0.075
Σ P(R-Ŕ) ²= 17.245

Standard Deviation = √ Σ P(R-Ŕ) ²

= √ 17.245
= 4.152

Q LTD

Expected return

CONDITION RETURN (R) PROBABILITY ( P×R)

(P)
INFLATION 75 0.4 30
DEFLATION 65 0.3 19.5
NORMAL 45 0.3 13.5
Σ (P×R)= 63
(Ŕ) Expected rate of return Σ (P×R)= 63
Standard Deviation

CONDITION R P P×R (R-Ŕ) (R-Ŕ) ² P(R-Ŕ) ²

INFLATION 75 0.4 30 12 144 57.6

DEFLATION 65 0.3 19.5 2 4 1.2
NORMAL 45 0.3 13.5 -18 324 97.2
Σ P(R-Ŕ) ²= 156

Standard deviation = √ Σ P(R-Ŕ) ²

= √ 156
= 12.48