PORTFOLIO MANAGEMENT NOTES

1. What is Portfolio Management? Explain the key

concepts involved in PMS?
Portfolio management involves selecting and overseeing a
group of investments that meet the long-term financial
objectives and risk tolerance of a client, company, or
institution. Key concepts involved in portfolio management
include asset allocation, diversification, rebalancing, and tax
minimization.
 Asset allocation is the long-term mix of assets, such as
stocks, bonds, and cash equivalents, that are selected to
achieve the desired risk and return objectives
 Diversification involves spreading investments across
different asset classes to reduce risk
 Rebalancing involves periodically adjusting the portfolio
to maintain the desired asset allocation
 Tax minimization involves managing the portfolio to
minimize taxes
 Effective portfolio management requires a basic
understanding of these key concepts

2. What is Risk? Explain the various types of risk

investment ?
Risk refers to the degree of uncertainty and/or potential
financial loss inherent in an investment decision. In
general, as investment risks rise, so do the potential returns.
In simple terms, risk is the possibility of something bad
 happening. Risk can be managed through various strategies,
including diversification and hedging.
There are various types of investment risks that investors
should be aware of. In general, financial theory classifies
investment risks affecting asset values into two categories:
systematic risk and unsystematic risk. Systematic risk
affects the prices of all investments in the market, while
unsystematic risk is specific to a particular company or
industry. Some common types of investment risk include
market risk, liquidity risk, concentration risk, credit risk,
reinvestment risk, inflation risk, horizon risk, and more.

3. What is security analysis? Explain the need and

importance of security analysis.
Security analysis is the process of analysing tradeable
financial instruments, such as stocks, bonds, and mutual
funds, to determine their proper value.  It helps investors
make informed investment decisions by evaluating the
financial health of a company and assessing the risks and
potential returns associated with a particular security.
The need for security analysis arises from the fact that all
investments carry some degree of risk, and investors need to
understand the risks associated with their investments to make
informed decisions. Security analysis is important because it
helps investors identify undervalued or overvalued securities,
which can help them make profitable investment decisions.  It
also helps investors manage their risks by diversifying their
portfolios and selecting securities that align with their
investment goals and risk tolerance.
 4. Explain the key concepts behind efficient market
theory. Are EMH principals relevant to Indian
Market? Explain.
The efficient market theory is a concept in finance that
asserts that financial markets are highly efficient and that
prices of assets fully reflect all available information
The theory is offered in three different versions: weak, semi-
strong, and strong. The weak form suggests that today's stock
prices reflect all the data of past prices and that no form of
technical analysis can be effectively utilized to aid investors in
making trading decisions. The semi-strong form suggests that
all publicly available information is already reflected in stock
prices, and the strong form suggests that all information,
including insider information, is already reflected in stock
prices
The efficient market theory assumes that financial securities
are always priced correctly, implying that stocks are never
undervalued or overvalued. The theory is controversial, and
investors continue to attempt to outperform the market by
identifying mispricing in securities.
Efficient market principles are relevant to the Indian market,
and there have been several studies on the efficiency of the
Indian stock market. Some studies suggest that the Indian
market is inefficient in its weak form, while others suggest
that the market is efficient. Equity market efficiency suggests
that equity prices incorporate all relevant information when
that information is readily available and widely disseminated.
The efficient market hypothesis states that when new
information comes into the market, it is immediately reflected
in stock prices, and thus neither technical nor fundamental
analysis can consistently outperform the market
.

5. EIC Analysis is the foundation of Equity Research?

Explain .
EIC analysis, also known as the Economy-Industry-
Company approach, is a fundamental approach to equity
analysis that is widely used in equity research
The EIC approach involves analysing the economy at large,
delving into the industry, and then analysing the company's
financials. The EIC approach is considered the foundation
of equity research because it provides a comprehensive
understanding of the factors that can affect a company's
financial performance and stock price Fundamental analysts
use EIC analysis to study anything that can affect the
security's value, from macroeconomic factors such as the
state of the economy and industry conditions to
microeconomic factors like the effectiveness of the
company's management. By analyzing the economy,
industry, and company, analysts can arrive at a fair market
value for the stock and make informed investment
decisions.
6. Explain the major steps involved in company
analysis.
The major steps involved in company analysis include
understanding the purpose and context of analysis, data
collection, processing data, analysing/interpreting data, and
follow-up. Data collection involves gathering information
related to the company's profile, products, and services, as
well as its financial condition and competitive strategy.
Processing data involves organizing and summarizing the
collected data, while analysing/interpreting data involves
using the processed data to evaluate the company's financial
performance, profitability, and growth potential. Follow-up
involves monitoring the company's performance over time
and making adjustments to the investment strategy as needed.
 Systematic risk, also known as market risk, is the risk that
affects the entire market or a large percentage of the total
market. It is driven by external factors such as interest rate
risk, inflation risk, currency risk, and socio-political risk
Systematic risk cannot be easily mitigated through portfolio
diversification. On the other hand, unsystematic risk, also
known as specific risk or idiosyncratic risk, is the risk that
only impacts an industry or individual company. It is driven
by internal factors such as a change in management, a product
recall, or a lawsuit. Unsystematic risk can be mitigated
through portfolio diversification.
The relevance of systematic and unsystematic risk to the
return on an asset is that investors demand higher returns to
compensate for taking on systematic risk, while unsystematic
risk can be diversified away, and investors do not require
higher returns to compensate for it

7. What is CAPM? Explain the importance of CAPM in

asset pricing
The Capital Asset Pricing Model (CAPM) is a financial
model that describes the relationship between the expected
return and risk of investing in a security. CAPM is
important in asset pricing because it helps investors
calculate the expected rate of return for an asset or
investment by using the expected return on both the market
and a risk-free asset, and the asset's correlation or
 sensitivity to the market (beta). .CAPM establishes a linear
relationship between the required return on an investment
and risk, and it helps investors understand the returns they
can expect given the level of risk they assume. CAPM
concentrates on measuring systemic risk and its impact on
the value of an asset, and it helps factor in systemic risks to
estimate the fair value of an asset and understand the
relationship between risk and expected returns Despite its
reliance on a variety of assumptions, CAPM remains
widely used in investment management and asset valuation.
By using CAPM, investors can make informed investment
decisions and identify mispricing in securities asset pricing.

8. What is Country risk? How is it shaped by economic

and political events in a country?
Country risk refers to the uncertainty associated with
investing in a particular country, and more specifically, the
degree to which that uncertainty could lead to losses for
investors. Country risk is shaped by economic and political
events in a country, which can affect the securities of issuers
doing business in that country. Economic risk refers to the
performance of the economy, while political risk refers to
events that are exclusively political in nature. Political
instability, social unrest, and changes in government policies
can increase country risk and lead to losses for investors.
Economic events such as recessions, inflation, and currency
devaluations can also increase country risk and lead to losses
for investors. Country risk is critical to consider when
investing in less-developed nations, as factors such as political
instability can affect investments in a given country, and these
risks are elevated because of the great turmoil that can be
created in financial markets. Therefore, understanding country
risk and how it is shaped by economic and political events is
essential for investors to make informed investment decisions
and manage their risks effectively.
9. How systematic risk is key to earning above normal
return on asset?
Systematic risk is the risk that influences a large number of
assets, also known as market risk. It is the risk that cannot be
diversified away and is inherent in the entire market or a
whole market segment. Systematic risk is key to earning
above-normal returns on an asset because it is the only risk
that is rewarded with higher returns. The expected return on a
risky asset depends only on that asset's systematic risk, and
investors use beta to measure systematic risk. By taking on
systematic risk, investors can earn higher returns than the risk-
free rate of return, which compensates them for taking on the
additional risk.
10. An Ideal investment portfolio should have assets
having negative co relation among themselves. Please
explain this statement with suitable example.
An ideal investment portfolio should have assets that have a
negative correlation among themselves. Negative
correlation means that two assets move in opposite
directions from each other. In investing, owning negatively
correlated securities ensures that losses are limited as when
prices fall in one asset, they will rise to some degree in
another. For example, stocks and bonds are often negatively
correlated, meaning that when stocks go down, bonds tend
to go up. Negative correlation is important in the
construction of portfolios, as it defines the relationship
between assets and helps to reduce risk. However, having a
negatively correlated portfolio may mean sacrificing
potentially higher returns by not diversifying.
 11. Briefly explain the various forecasting method
employed for equity analysis.
There are various forecasting methods employed for equity
analysis. Financial analysts use four main types of forecasting
methods to predict future revenues, expenses, and capital
costs for a business. These methods include qualitative,
quantitative, time series, and causal methods
Time series analysis is a tool for forecasting the trend or even
future of the stock market. Stock analysts need to forecast
revenue and growth to project what expected earnings will be.
Forecasted revenue and growth projections are important
components of security analysis, often leading to a stock’s
future worth. To forecast stock market returns, linear,
nonlinear, artificial intelligence, frequency domain, and
hybrid methods are used Fundamental analysis and technical
analysis are two distinct schools of thought for predicting
stock price movements
12. What are the key factors responsible for
optimisation of portfolio return?
The key factors responsible for the optimization of portfolio
return include examining the portfolio and risk factors,
selecting the best portfolio out of the set of all portfolios
being considered, maximizing returns on investments while
reducing risks related to those investments, and choosing a
limited number of risk factors such as equity returns,
spreads, rates, sector returns, etc
The objective of portfolio optimization typically maximizes
factors such as expected return and minimizes costs like
financial risk. Factors being considered may range from
tangible (such as assets, liabilities, earnings, or other
fundamentals) to intangible (such as selective divestment.
 In portfolio optimization, statistical factors extracted from
the asset return series can be used. The risk-expected return
relationship of efficient portfolios is graphically represented
by a curve known as the efficient frontier.

13. Explain the different forms of co relation among

investment securities. How its characteristics affect
the final outcome of portfolio return?
Correlation is a statistical measure that indicates the degree to
which two securities move in relation to each other.
Correlations are used in advanced portfolio management,
computed as the correlation coefficient, which has a value that
must fall between -1.0 and +1.0. A highly correlated portfolio
is riskier, meaning that when one stock falls, it's likely that all
of them will fall by a similar amount. In investing, correlation
is most important in relation to a diversified portfolio.
Investors who wish to mitigate risk can do so by investing in
non-correlated assets.
The characteristics of investments, such as active trading,
trading methods, hours spent on researching investment, and
investment objectives, can affect the final outcome of
portfolio return. Low-correlation investing can be powerful in
reducing risk and increasing returns.

14. Portfolio risk is merely an aggregation of

individual risk of securities in portfolio. Explain this
statement with suitable example.
The statement "Portfolio risk is merely an aggregation of
individual risk of securities in the portfolio" means that the
risk of a portfolio is the sum of the risks of each security in
the portfolio. For example, if a portfolio consists of two
securities, one with a risk of 10% and the other with a risk of
20%, the portfolio risk would be the sum of the individual
risks, which is 30%. This concept is known as aggregate risk,
which occurs when concentration risk leads to an
accumulation of losses within a portfolio
The aggregation of correlated risk portfolios can be modelled
using various correlation structures such as copula, common
mixture, etc. Risk aggregation and diversification are
important concepts in finance and are used to manage
portfolio risk.

15. What is diversifiable and non-diversifiable risk?

What is the effect of diversification on return on
investment?
Diversifiable risk is the risk that can be eliminated by
diversifying a portfolio, while non-diversifiable risk is the risk
that cannot be eliminated by diversification. Non-diversifiable
risk is also known as systematic risk, which is intrinsic to the
market and affects all securities in the market. Diversifiable
risk is also known as unsystematic risk, which is unique to a
particular security or industry and can be eliminated by
diversifying a portfolio
Diversification can reduce the overall risk of a portfolio by
spreading investments across different financial instruments,
which can help to mitigate losses. However, diversifiable risk
is not remunerated, which means that holding more
diversifiable risk does not result in more returns. Therefore,
diversification can increase the risk-adjusted returns of a
portfolio, which means investors earn greater returns when
factoring in the risk they are taking.
 16. What is systematic and non-systematic risk?
How is it relevant to return on asset?
Systematic risk, also known as market risk or non-
diversifiable risk, is the risk that is inherent in the market and
affects all assets in the market. It cannot be avoided and is
relevant to the return on asset because it is a major
determinant of the expected return on an asset. Non-
systematic risk, also known as unsystematic risk or
diversifiable risk, is the risk that is unique to a specific
company or investment and can be eliminated by
diversification. Non-systematic risk is relevant to the return
on asset because it can be diversified away by holding a pool
of individual assets.
The expected return on an asset is determined by the
systematic risk of the asset, which is measured by beta. Beta
measures the sensitivity of an asset's return to changes in the
market return. The higher the beta, the higher the systematic
risk and the higher the expected return on the asset.
17. Explain the limitations of Markowitz theory.
How do these limitations make portfolio selection
theory unrealistic and unpopular in real life?
The limitations of Markowitz theory include overreliance on
historical data, irrelevant assumptions, and the use of mean-
variance instead of potential risks. The theory assumes that
portfolios can be assessed on variance rather than downside
risk, and it relies on the accuracy of underlying assumptions
and models. Additionally, the Markowitz model does not
account for irrationality of investors, the relation between risk
and expected return, and the treatment of information by
investors. These limitations make portfolio selection theory
unrealistic and unpopular in real life because they can make
the conclusions irrelevant to prevailing market conditions.
Furthermore, the theory does not eliminate a certain level of
risk, and investors must possess some risk appetite.
18. What is the capital market line? How is it
relevant to the construction of efficient portfolio?
The Capital Market Line (CML) is a straight line that
connects the risk-free asset and the market portfolio on the
efficient frontier. It is a graphical representation of all the
portfolios that optimally combine risk and return. The CML
is a theoretical concept that gives investors an idea of the
expected return for a portfolio with a given level of risk.
The CML is relevant to the construction of efficient
portfolios because it helps investors determine the optimal
portfolio that balances risk and return. The CML is used to
identify the optimal portfolio that maximizes returns for a
given level of risk. The optimal portfolio is the one that lies
on the CML and has the highest Sharpe ratio. The Sharpe
ratio measures the excess return per unit of risk. Therefore,
the CML is an important tool for constructing efficient
portfolios that maximize returns for a given level of risk.
19. What is efficient frontier? How is it important in
the management of investment portfolio?
The efficient frontier is a concept in modern portfolio theory
that refers to a set of investment portfolios that offer the
highest expected return for a specific level of risk. It is the
foundation for modern portfolio theory and helps investors
understand the potential risks and returns in their portfolios
and analyse how they can maximise expected returns based on
a specific level of risk.
The efficient frontier is constructed by plotting the expected
returns on a portfolio on the y-axis and the standard deviation
of returns on the x-axis. A portfolio is said to be efficient if
there is no other portfolio that offers higher returns for a lower
and equal amount of risk. The efficient frontier is important in
the management of investment portfolios because it helps
investors optimise the return versus risk paradigm and place a
portfolio among the efficient frontier line. Optimal portfolios
that comprise the efficient frontier usually exhibit a higher
degree of diversification. By using the efficient frontier,
investors can select investments that align with their risk
tolerance and investment goals.
20. Fundamental analysis is the most credible and
popular method of equity research. Explain.
Fundamental analysis is a method of equity research that
aims to determine the intrinsic value of a stock by
examining the underlying company's financial and
economic factors. This method is used to identify stocks
that are currently trading at prices higher or lower than their
real value. If the fair market value is higher than the market
price, the stock is deemed undervalued, and a buy
recommendation is given. Fundamental analysis uses a
company's revenues, earnings, future growth, return on
equity, profit margins, and other data to determine a
company's underlying value and potential for future growth.
This method is considered credible and popular because it
provides a long-term approach to investing and helps
investors make informed decisions based on a company's
financial health and future prospects
21. Higher the number of securities, lessor the risk
and even lessor the return on portfolio. Do you agree
with this statement? Explain with suitable example.
The statement “Higher the number of securities, lessor the risk
and even lessor the return on portfolio” is not entirely true.
While adding more securities to a portfolio can reduce the risk
associated with individual securities, it does not necessarily
reduce the overall risk of the portfolio. The risk of a portfolio
depends on the correlation between the securities in the
portfolio. If the securities in the portfolio are highly co
related, adding more securities will reduce the overall risk of
the portfolio. Similarly, adding more securities to a portfolio
does not necessarily reduce the return on portfolio. The return
on the portfolio depends on the expected risks of the
individual securities and the weightage of each security in the
portfolio.
For example, if an investor has a portfolio of two securities,
one with a high expected return and the other with a low
expected return, adding more securities with low expected
returns will reduce the overall return of the portfolio.
Therefore, this statement is not entirely true and depends on
the co relation between the securities in the portfolio and the
expected returns of the individual securities.

22. Diversification results in decrease in return. Do

you agree with this statement? Explain.
The statement diversification results in decrease in return is
not entirely true. Diversification is an investment strategy that
aims to reduce the risk by allocating investment across
various financial instruments, industries and other categories.
The goal of diversification is to reduce a risk within a
portfolio but it does not necessarily minimise returns. By
reducing risk an investor is willing to take less profit in
exchange for the preservation of capital. Studies and
mathematical models have shown that maintaining a well-
diversified portfolio of 25-30 stocks yields the most cost-
effective level of risk reduction. Investing in more securities
generates further diversification benefits, at a drastically
smaller rate. Diversification can also be achieved by buying
investment in different countries, industries, sizes of
companies, or term-lengths for income generating
investments.
While diversification might minimise returns, it is important
to consider risks over returns, especially for investors who
rely on their portfolio to cover living expenses. Therefore,
diversification is an important investment strategy that can
help investors reduce risk without necessarily decreasing
returns.
23. Strong form efficient market is just an academic
concept with no practical meaning. Do you agree with
this concept? Explain with suitable example.
The concept of strong form efficient market is not just an
academic concept, but it has practical implications as well.
Strong form efficiency is the most stringent version of the
efficient market hypothesis (EMH) investment theory, stating
that all information in a market, whether public or private, is
accounted for in a stock's price.This means that if the
information is revealed to the public after the product has
been released, the stock price of the company will not be
affected by the insider and public information revealed.
For example, if a company releases a new product and the
information about the product is not available to the public,
but only to the insiders, then the stock price of the company
will reflect the insider information. However, if the
information is revealed to the public after the product has
been released, the stock price of the company will not be
affected by the insider and public information revealed, as per
the strong form efficiency theory.Therefore, strong form
efficiency is not just an academic concept, but it has practical
implications as well. It is important for investors to
understand the concept of strong form efficiency as it helps
them to make informed investment decisions.
24. If weak form efficiency is correct, there is no
reason for technical analyst to be in business. Please
explain this statement with suitable example.
The statement "If weak form efficiency is correct, there is no
reason for technical analyst to be in business" is partially true.
Weak form efficiency implies that past movements in the
price of the security and the data on the volume of trades do
not affect the future price movements of the stock
Therefore, technical analysis, which is based on the past price
movements and volume of trades, cannot be used to predict
future price movements. However, it is important to note that
weak form efficiency is just one of the three degrees of
efficient market hypothesis (EMH). The other two degrees are
semi-strong form efficiency and strong form efficiency. Semi-
strong form efficiency implies that all publicly available
information is already reflected in the stock price, and strong
form efficiency implies that all information, including insider
information, is already reflected in the stock price.
Therefore, while technical analysis may not be effective in
predicting future price movements in a weak form efficient
market, it may still be useful in a semi-strong or strong form
efficient market. For example, if a company releases a
positive earnings report, the stock price of the company may
increase in a semi-strong form efficient market, as the
information is already reflected in the stock price. However,
in a weak form efficient market, the stock price may not be
affected by the positive earnings report, as the information is
already reflected in the past price movements and volume of
trades.
In conclusion, while weak form efficiency may limit the
effectiveness of technical analysis, it is important to consider
the other degrees of efficient market hypothesis and the type
of market before making a conclusion about the usefulness of
technical analysis.
25. If Efficient Market hypothesis (EMH) is correct,
the concept of active fund is wrong and hence only
passive funds can perform in market. Please explain
this statement.
The Efficient Market Hypothesis (EMH) argues that markets
are efficient, leaving no room to make excess profits by
investing since everything is already fairly priced. The EMH
states that share prices reflect all information and consistent
alpha generation is impossible
Therefore, if the EMH is correct, the concept of active fund
management, which aims to outperform the market by
selecting individual stocks, is wrong, and only passive funds,
such as index funds, can perform in the market
Passive funds aim to replicate the performance of a market
index, such as the S&P 500, rather than trying to outperform
the market by selecting individual stocks. This is because the
EMH hypothesizes that stocks trade at their fair market value
on exchanges, and it is pointless to search for undervalued or
overvalued stocks. However, it is important to note that the
EMH is highly controversial and often disputed. Opponents of
the EMH believe that it is possible to beat the market and that
stocks can deviate from their fair market values.
Therefore, the concept of active fund management may still
be relevant for investors who believe that they can outperform
the market by selecting individual stocks. In conclusion, if the
EMH is correct, the concept of active fund management is
wrong, and only passive funds can perform in the market.
However, the EMH is highly controversial, and the concept of
active fund management may still be relevant for investors
who believe that they can outperform the market by selecting
individual stocks.
26. Equity research is about trying to find an
investment opportunity in a mis-priced stock. Kindly
explain this statement with suitable example.
Equity research is the process of analysing a company's
financials, performing ratio analysis, forecasting the financials
in excel, and exploring scenarios to make a BUY/SELL stock
investment recommendation. The end goal of equity research
is to determine the intrinsic value of a stock and find
investment opportunities in mispriced stocks. Fundamental
analysis is a method of measuring a stock's intrinsic value,
and equity research analysts use this method to determine the
fair market value of a stock. Analysts typically study the
overall state of the economy, the strength of the specific
industry, and the financial performance of the company
issuing the stock to arrive at a fair market value for the stock.
Equity research analysts search for mispriced stocks and their
subsequent trading makes the market efficient and causes
prices to reflect intrinsic values.
For example, if an equity research analyst determines that a
stock is undervalued based on the company's financial
performance and future growth prospects, they may
recommend a BUY rating on the stock. This recommendation
may cause other investors to buy the stock, which will
increase the demand for the stock and cause the price to
increase, reflecting the stock's intrinsic value.
In conclusion, equity research is about finding investment
opportunities in mispriced stocks by analysing a company's
financials and determining the intrinsic value of a stock.
Equity research analysts use fundamental analysis to
determine the fair market value of a stock, and their
subsequent trading makes the market efficient and causes
prices to reflect intrinsic values.

27. Product life cycle is an important indicator of

benchmarking the current and future performance of
a stock. Please explain this statement.
The product life cycle is a model that describes the stages a
product goes through during its lifespan, from development to
decline. The stages of the product life cycle are development,
introduction, growth, maturity, and decline. The product life
cycle is an important indicator of benchmarking the current
and future performance of a stock because it can help
investors to understand where a company's product is in its
life cycle and how it may affect the company's financial
performance.
For example, a company's stock price may increase during the
growth stage of the product life cycle, as the company's sales
and revenue are increasing. However, the stock price may
decrease during the decline stage of the product life cycle, as
the company's sales and revenue are decreasing.
Therefore, by understanding the product life cycle of a
company's product, investors can make informed investment
decisions and benchmark the current and future performance
of a stock. Investors can use the product life cycle to identify
potential investment opportunities in companies that are in the
growth stage of the product life cycle and avoid companies
that are in the decline stage of the product life cycle.In
conclusion, the product life cycle is an important indicator of
benchmarking the current and future performance of a stock.
By understanding the product life cycle of a company's
product, investors can make informed investment decisions
and identify potential investment opportunities.
28. The volatility in stock market is about constant
flow of either positive or negative information about
the company. Please explain this statement with
suitable example.
Volatility in the stock market refers to the rate of fluctuations
in the trading price of securities for a specific return. The
volatility of a stock is affected by a constant flow of either
positive or negative information about the company, which
can cause the stock price to fluctuate.
For example, if a company releases a positive earnings report,
the stock price of the company may increase, reflecting the
positive news. However, if a company experiences a negative
event, such as a product recall or a lawsuit, the stock price of
the company may decrease, reflecting the negative news.
Volatility is often associated with big swings in either
direction, and it is often a sign of fear and uncertainty in the
stock market. However, it is important to note that volatility is
a normal part of investing and is to be expected in a portfolio.
In conclusion, the volatility in the stock market is affected by
a constant flow of either positive or negative information
about the company, which can cause the stock price to
fluctuate. While volatility can be a sign of trouble, it is a
normal part of investing and is to be expected in a portfolio.
 29. Differentiate the fund management philosophy in
Mutual Funds and PMS with suitable example.
Mutual funds and Portfolio Management Services (PMS) are
two different types of investment vehicles with different fund
management philosophies
Mutual funds are professionally managed investment vehicles
that pool money from multiple investors to invest in a
diversified portfolio of stocks, bonds, or other securities. The
fund manager of a mutual fund is responsible for making
investment decisions on behalf of the investors in the fund.
On the other hand, PMS is a professional service offered to an
investor by experienced portfolio managers, where the
portfolio is managed on a discretionary basis. PMS investors
have separately managed accounts, which means that the
portfolio manager can make investment decisions on behalf of
the investor based on their investment objectives and risk
tolerance. The main difference between mutual funds and
PMS is that mutual fund investors are invested in a pooled
vehicle, while PMS investors have separately managed
accounts. Mutual funds are more suitable for investors who
want to invest in a diversified portfolio of securities with a
small ticket size, while PMS is more suitable for seasoned
investors with a large enough ticket size who want a
personalized investment portfolio managed by a professional
manager.
In conclusion, mutual funds and PMS are two different types
of investment vehicles with different fund management
philosophies. Mutual funds are professionally managed
investment vehicles that pool money from multiple investors
to invest in a diversified portfolio of securities, while PMS is
a professional service offered to an investor by experienced
portfolio managers, where the portfolio is managed on a
discretionary basis. Mutual funds are more suitable for
investors who want to invest in a diversified portfolio of
securities with a small ticket size, while PMS is more suitable
for seasoned investors with a large enough ticket size who
want a personalized investment portfolio managed by a
professional manager.
30. The valuation of a company and the key
assumptions/principle behind it have a major role in
pricing of stock in market.
The valuation of a company and the key
assumptions/principles behind it have a major role in pricing
of stock in the market. Stock valuation is the process of
calculating theoretical values of companies and their stocks,
and the main use of these methods is to predict future market
prices or potential market prices. The valuation of a company
is based on various factors such as the company's financial
performance, future growth prospects, industry trends, and
market conditions. The valuation of a company is important
because it helps investors to determine whether a stock is
overvalued or undervalued.
For example, if a company has a high valuation based on its
financial performance and future growth prospects, the stock
price of the company may increase, reflecting the positive
news. However, if a company has a low valuation based on its
financial performance and future growth prospects, the stock
price of the company may decrease, reflecting the negative
news. The key assumptions and principles behind the
valuation of a company include the company's future cash
flows, the riskiness of the company's common stock, and the
risk-free rate of interest. The valuation of a company is based
on these assumptions and estimates the value of a company's
stock based on these assumptions

31. If risk free rate = 10%, market rate = 15%. Beta

is 1.2. What would be the return from this
investment?
To calculate the return from this investment, we need to use
the Capital Asset Pricing Model (CAPM) formula, which is:
Expected Return = Risk-Free Rate + Beta x (Market Rate -
Risk-Free Rate)
Given that the risk-free rate is 10%, the market rate is 15%,
and the beta is 1.2, we can calculate the expected return as
follows
:Expected Return = 10% + 1.2 x (15% - 10%) = 16%
Therefore, the return from this investment is expected to be
16%.
It is important to note that this is an expected return and not a
guaranteed return. The actual return may be higher or lower
than the expected return, depending on various factors such as
market conditions, company performance, and other economic
factors
32. Santosh wants to decide between two mutual
funds X and Y. From the financial reports he is able
to calculate the average returns and standard
deviation for the funds. The current risk free rate of
interest is 7%. Using the sharpe index, compare the
performance of X & Y funds.
 X Y
Average Return R 19% 17%
Standard deviation 21 16

To compare the performance of mutual funds X and Y using

the Sharpe index, we need to calculate the Sharpe ratio for
each fund. The Sharpe ratio is a measure of risk-adjusted
return that takes into account the risk-free rate of return, the
average return of the fund, and the standard deviation of the
fund's returns
The formula for the Sharpe ratio is:
Sharpe Ratio = (Average Return - Risk-Free Rate) /
Standard Deviation
Given that the risk-free rate of interest is 7%, and the
average return and standard deviation for funds X and Y are
as follows:
X: Average Return = 19%, Standard Deviation = 21
Y: Average Return = 17%, Standard Deviation = 16
We can calculate the Sharpe ratio for each fund as follows:
Sharpe Ratio for Fund X = (19% - 7%) / 21 = 0.571
Sharpe Ratio for Fund Y = (17% - 7%) / 16 = 0.625
Therefore, the Sharpe ratio for Fund Y is higher than that of
Fund X, indicating that Fund Y has a better risk-adjusted
return than Fund X. In other words, Fund Y provides a
higher return for the amount of risk taken compared to
Fund X.
 In conclusion, using the Sharpe index, we can compare the
performance of mutual funds X and Y. The Sharpe ratio for
Fund Y is higher than that of Fund X, indicating that Fund
Y has a better risk-adjusted return than Fund X.