Q1 What are the objectives of portfolio management?
Answer :
1. Security of the Principal Investment Portfolio management not only involves
keeping the investment contributes towards the purchasing power over intact but also growth of its the period. The motive of a financial portfolio management is to ensure that the investment is absolutely safe.
2. Consistency of returns Portfolio management also ensures to
provide the stability of returns by reinvesting the same earned returns good portfolios.
3. Risk reduction in profitable and Portfolio management is purposely designed to reduce the risk of loss of capital and/or income by investing in different types of securities available in a wide range of industries. The investors shall be aware of the fact that there is no such thing as a zero risk investment.
4. Capital growth Portfolio management guarantees the growth of capital by reinvesting in growth securities or by the purchase of growth securities.
5. Liquidity Portfolio management is planned in such a way that it facilitates to take maximum advantage of various good opportunities upcoming in the market. The portfolio should always ensure that there are enough funds available at short notice to take care of the investor’s liquidity requirements.
6. Marketability Portfolio management ensures the flexibility to the investment portfolio. A portfolio consists of such investment, which can be marketed and traded.
7. Favorable tax treatment Portfolio management is planned in such a way to increase the effective yield an investor gets from his surplus invested funds. By minimising the tax burden, yield can be effectively improved.
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Q2 What are the steps in Portfolio Management?
Answer:
Q3 Write short note on Factors affecting investment decisions in portfolio management.
Answer:
(i) Objectives of investment portfolio:
There can be many objectives of making an investment. The manager of a provident fund portfolio has to look for security (low risk) and may be satisfied with none too higher return. An aggressive investment company may, however, be willing to take a high risk in order to have high capital appreciation.
(ii) Selection of investment :
(a) What types of securities to buy or invest in? There is a wide variety of investments opportunities available i.e. debentures, convertible bonds, preference shares, equity shares, government securities and bonds, income units, capital units etc.
(b) What should be the proportion of investment in fixed interest/dividend securities and variable interest/dividend bearing securities?
(c) In case investments are to be made in the shares or debentures of companies, which particular industries show potential of growth?
(d) Once industries with high growth potential have been identified, the next step is to select the particular companies, in whose shares or securities investments are to be made.
(iii) Timing of purchase:
At what price the share is acquired for the portfolio depends entirely on the timing decision. It is obvious if a person wishes to make any gains, he should “buy cheap and sell dear” i.e. buy when the shares are selling at a low price and sell when they are at a high price.
Q4 Distinguish between Systematic Risk and Unsystematic Risk?
Answer:
Q4 What is Diversification?
Answer:
Diversification is a risk-management technique that mixes a wide variety of investments within a portfolio in order to minimize the impact that any one security will have on the overall performance of the portfolio. Diversification lowers the risk of your portfolio. Academics have complex formulas to demonstrate how this works, but we can explain it clearly with an example:
Suppose that you live on an island where the entire economy consists of only two companies: one sells umbrellas while the other sells sunscreen. If you invest your entire portfolio in the company that sells umbrellas, you'll have strong performance during the rainy season, but poor performance when it's sunny outside. The reverse occurs with the sunscreen company, the alternative investment; your portfolio will be high performance when the sun is out, but it will tank when the clouds roll in. Chances are you'd rather have constant, steady returns. The solution is to invest 50% in one company and 50% in the other. Because you have diversified your portfolio, you will get decent performance year round instead of having either excellent or terrible performance depending on the season. There are three main practices that can help you ensure the best diversification:
1. Spread your portfolio among multiple investment vehicles such as cash, stocks, bonds, mutual funds and perhaps even some real estate.
2. Vary the risk in your securities. You're not restricted to choosing only blue chip stocks. In fact, it would be wise to pick investments with varied risk levels; this will ensure that large losses are offset by other areas.
3. Vary your securities by industry. This will minimize the impact of industry-specific risks.
Diversification is the most important component in helping you reach your long-range financial goals while minimising your risk. At the same time, diversification is not an ironclad guarantee against loss. No matter how much diversification you employ, investing involves taking on some risk.
Another question that frequently baffles investors is how many stocks should be bought in order to reach optimal diversification. According to portfolio theorists, adding about 20 securities to your portfolio reduces almost all of the individual security risk involved. This assumes that you buy stocks of different sizes from various industries.
Q5 What do you mean by Risk Reduction?
Answer:
Risk reduction means actual risk (σ) of the portfolio is less than the weighted average risk of the securities that constitutes the portfolio. This is the point where one can say that diversification has resulted into risk reduction.
Q6 Write short notes on Capital Asset Pricing Model.
Answer:
The Capital Asset Pricing Model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already diversified portfolio, given that assets non- diversity able risk
Rj=Defined as the minimum expected return needed so that investor will purchase and hold asset.
SML is the graphical representation of the results of the CAPM.
Advantages of CAPM
1. Considers only systematic risk.
2. Better method to calculate cost of equity.
3. Can be used as risk adjusted discounted rate (RADR)
Limitations of CAPM
1. Unreliable Beta.
2. Hard to get the market information.
Q7 What sort of investor normally views the variance (or Standard Deviation)of an individual security’s return as the security’s proper measure of risk?
Answer:
A rational risk-averse investor views the variance (or standard deviation) of her portfolio’s return as the proper risk of her portfolio. If for some reason or another the investor can hold only one security, the variance of that security’s return becomes the variance of the portfolio’s return. Hence, the variance of the security’s return is the security’s proper measure of risk.
While risk is broken into diversifiable and non-diversifiable segments, the market generally does not reward for diversifiable risk since the investor himself is expected to diversify the risk himself. However, if the investor does not diversify, he cannot be considered to be an efficient investor. The market, therefore, rewards an investor only for the non-diversifiable risk. Hence, the investor needs to know how much non- diversifiable risk he is taking. This is measured in terms of beta.
An investor therefore, views the beta of a security as a proper measure of risk, in evaluating how much the market reward him for the non-diversifiable risk that he is assuming in relation to a security. An investor who is evaluating the non -diversifiable element of risk, that is, extent of deviation of returns viz -a-viz the market therefore consider beta as a proper measure of risk.
Q8 What sort of investor rationally views the beta of a security as the security’s proper measure of risk? In answering the question, explain the concept of beta.
Answer:
If an individual holds a diversified portfolio, she still views the variance(or standard deviation) of her portfolios return as the measure of the risk of her portfolio. However, she is no longer interested in the variance of each individual security’s return. Rather she is interested in the contribution of each individual security to the variance of the portfolio.
Under the assumption of homogeneous expectations, all individuals hold the market portfolio. Thus, we measure risk as the contribution of an individual security to the variance of the market portfolio.
The contribution when standardized properly is the beta of the security. While a very few investors hold the market portfolio exactly, many hold reasonably diversified portfolio. These portfolios are close enough to the market portfolio so that the beta of a security is likely to be a reasonable measure of its risk.
In other words, beta of a stock measures the sensitivity of the stock with reference to a broad based market index like BSE Sensex. For example, a beta of 1.3 for a stock would indicate that this stock is 30 per cent riskier than the Sensex. Similarly, a beta of a 0.8 would indicate that the stock is 20 per cent (100 – 80) less risky than the Sensex. However, a beta of one would indicate that the stock is as risky as the stock market index.
Q9 Discuss the Random Walk Theory
Answer:
✓ Many investment managers and stock market analysts believe that stock market prices can never be predicted because they are not a result of any underlying factors but are mere
statistical ups and downs.
✓ This hypothesis is known as Random Walk hypothesis which states that the behavior of stock market prices is unpredictable and that there is no relationship between the present prices of the shares and their future prices.
✓ Proponents of this hypothesis argue that stock market prices are independent. A British statistician, M. G. Kendell, found that changes in security prices behave nearly as if they are
generated by a suitably designed roulette wheel for which each outcome is statistically independent of the past history.
✓ In other words, the fact that there are peaks and troughs in stock exchange prices is a mere statistical happening – successive peaks and troughs are unconnected.
✓ In the layman's language it may be said that prices on the stock exchange behave exactly the way a drunk would behave while walking in a blind lane, i.e., up and down, with an unsteady way going in any direction he likes, bending on the side once and on the other side the second time. The supporters of this theory put out a simple argument. It follows that:
✓ Prices of shares in stock market can never be predicted. The reason is that the price trends are not the result of any underlying factors, but that they represent a statistical expression of past data.
✓ There may be periodical ups or downs in share prices, but no connection can be established between two successive peaks (high price of stocks)and troughs (low price of stocks).
Q10 Discuss how the risk associated with securities is effected by Government Policy
Answer:
The risk from Government policy to securities can be impacted by any of the following factors.
(i) Licensing Policy
(ii) Restrictions on commodity and stock trading in exchanges
(iii) Changes in FDI and FII rules.
(iv) Export and import restrictions
(v) Restrictions on shareholding in different industry sectors
(vi) Changes in tax laws and corporate and Securities laws.
Corporate actions.
https://www.youtube.com/watch?v=V8wKtp4aeQQ&t=2195s
Private Equity-03 https://youtu.be/Wip9pwV7fZU
Derivatives https://youtu.be/iV2p9a-TUFU
Cash Recon https://youtu.be/F6H-wgwuDa8
Cash Dividend https://youtu.be/F6H-wgwuDa8
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