SlideShare a Scribd company logo
1 of 22
Download to read offline
Security Analysis and Portfolio Management -  Investment-and_Risk
Investment 
 Investment is the employment of funds on assets with 
the aim of earning income or capital appreciation. 
 Financial Investment is the allocation of money to 
assets that are expected to yield some gain over a 
period of time. It is an exchange of financial claims 
such as stocks and bonds for money.
Speculation 
 It is about taking up the business risk in the hope of 
achieving short-term gain. 
 It involves buying and selling activities with the 
expectation of making a profit from price fluctuations.
Difference between Investor and 
Speculator 
Investmet Speculation 
 Plans for a longer time 
horizon and holding period 
ranges from 1 to few years. 
 Assumes moderate risk. 
 Likes to have moderate return 
for the limited risk. 
 Considers fundamental 
factors. 
 Uses his own funds and 
avoids borrowed funds. 
 Plans for a very short period and 
holding period varies from few 
days to months. 
 Willing to undertake high risk. 
 Like to have high returns for 
assuming high risk. 
 Considers inside information 
here says and market behaviour. 
 Uses borrowed funds to 
supplement his personal 
resources.
Investment Objectives 
 Maximizing the return 
 Minimizing the risk 
 Maintaining Liquidity 
 Hedging against inflation 
 Increasing safety 
 Saving tax
Stages of Investment Process 
Investment 
Process 
Investment 
Policy 
Investible 
Fund 
Objectives 
Knowledge 
Security 
Analysis 
Market 
Industry 
Company 
Valuation 
Intrinsic 
Value 
Future 
Value 
Portfolio 
Construction 
Diversification 
Selection and 
allocation 
Portfolio 
Evaluation 
Appraisal 
Revision
Risk 
 Risk is defined as variability in return or volatility in 
return. 
 Risk is the chance of the actual return being less than 
the expected return. It means any deviation from the 
expected return.
Types of Risk 
1. Systematic Risk: 
a. Market Risk 
b. Interest rate risk 
c. Purchasing power risk 
2. Unsystematic Risk: 
a. Business Risk 
b. Financial Risk
Systematic Risk 
 Systematic Risk affects the entire market. The entire 
market is moving in a direction either downwards or 
upwards. 
 Systematic risk is unavoidable and beyond the control 
of the corporation or investor. 
Example: Economic Conditions, Political Situations, 
Sociological Changes.
Market Risk 
 Market Risk: It is the portion of the variability of 
return that is caused by the alternating forces of the 
bull and bear phases. 
 Bull Market- The index moves from a low level to its 
peak. It is due to the rising investor confidence and 
expectations of further capital gains. 
 BearMarket- Index declines haltingly from the peak to 
a market low point for a significant period.
 Tangible Events – Real events such as earthquake, war, 
political uncertainty and fall in the value of currency. 
 Intangible Events – They are related to market 
psychology which are affected by real events. 
Reactions to real events become over reactions and 
push the market either upward or downward.
Interest Rate Risk 
It is the variation in the return caused by fluctuations in the 
market interest rate. 
It affects: 
1. Bond Return: 
- When interest rate rise, new issues will hit the market 
with higher interest rate resulting in less demand for old 
bonds. 
- When interest rate declines, new bonds will yield low 
returns making the old bonds worth more. 
- Demand for bond goes up when the stock market is 
depressed and the demand for government bond goes up 
when the govt issues attractive bonds than the private 
sector. 
2. Cost of Borrowing:
Purchasing Power Risk 
 It is the probable loss in the purchasing power of the 
returns to be received. Inflation is the reason for 
purchasing power risk. 
 Inflation- Persistent increase in price. 
- Demand Pull Inflation 
- Cost Push Inflation 
- Real Rate of Return
Real Rate of Return = {(1 + r)/(1+IR) } – 1 
Where IR = Inflation Rate r = return 
Investor gets a return of 12% on his investment and the 
inflation rate is 6.8% 
Real Rate of Return ={( 1+ 0.12)/(1+0.068)}-1 
= {1.12/1.068}-1 
RR = 1.0486-1=0.0486=4.86%
Unsystematic Risk 
 It is unique and peculiar to a firm or an industry. It stems 
from financial leverage, managerial inefficiency, 
technological change in the production process , 
availability of raw material, change in consumer 
preferences and labour problems. 
1. Business risk refers to the difference between 
revenue and EBIT 
2. Financial risk refers to the difference between EBIT 
and EBT. Financial risk is associated with capital 
structure of the company.
Business Risk 
Internal Business Risk 
Fluctuations in sales 
Research and Development 
Personnel Management 
Fixed Cost 
Single Product 
External Business 
Risk 
Social and Regulatory Factors 
Political Factors 
Business Cycles
Minimizing Risk Exposure 
 Protection against market risk – studying the past 
price behaviour of the stock. 
 Protection against Interest rate risk- Holding the 
investment to maturity, Buying TB and bonds of short 
maturity, investing in bonds with different maturity 
dates. 
 Protection against inflation- investment in short 
term securities and diversification in investment. 
 Protection against Business and Financial Risk- 
Analyzing the strengths , weakness, profitability and 
capital structure of the company.
Risk Measurement 
 Ex-post risk- Variance from mean value measures the 
ex-post risk using historical data. 
 Ex-ante risk- Variance is calculated with the help of 
probable returns. 
 Characteristic Regression Line (CRL): It is a simple 
linear regression model estimated for a particular 
stock against the market index return to measure it’s 
diversifiable and undiversifiable risks.
CRL formula 
Ri = αi + βi Rm + ei 
where 
Ri = Return of the ith stock, αi = Intercept, βi = Slope of the 
ith stock, Rm = Return of the market index, ei =The error 
term. 
β = n Σ XY – (ΣX)(ΣY) 
--------------------- , α = Ỳ - βX 
n Σ X2 - (ΣX)2
Beta and its intrepretation 
 Beta : It is the slope of the CRL. It describes the 
relationship between stock return and the index 
return. 
 Beta = 1=> 1% change in the market index return 
causes exactly 1 % change in the stock return. 
 Beta = 0.5 => The stock is less volatile compared to the 
market. 
 Beta = 2 => The stock return is more volatile. 
 Negative Beta indicates that the stock moves in the 
opposite direction to the market return.
Characteristic Regression Line 
Market Return 
Stock Return 
A 
l 
p 
h 
a 
Beta
Security Analysis and Portfolio Management -  Investment-and_Risk

More Related Content

What's hot

Markowitz - sharpes and CAPM
Markowitz - sharpes and CAPMMarkowitz - sharpes and CAPM
Markowitz - sharpes and CAPMDeepika S.R.
 
Portfolio selection, markowitz model
Portfolio selection, markowitz modelPortfolio selection, markowitz model
Portfolio selection, markowitz modelaarthi ramakrishnan
 
portfolio management PPT
portfolio management PPTportfolio management PPT
portfolio management PPTShruti Mohan
 
Portfolio revision
Portfolio revisionPortfolio revision
Portfolio revisionAshwini Das
 
Investment management
Investment managementInvestment management
Investment managementhadi Hedayati
 
Efficient market hypothesis
Efficient market hypothesisEfficient market hypothesis
Efficient market hypothesisKamlesh Pawar
 
Bond management strategies
Bond management strategiesBond management strategies
Bond management strategiesAmanpreet Singh
 
Portfolio analysis selection; portfolio theory, return portfolio risk, effici...
Portfolio analysis selection; portfolio theory, return portfolio risk, effici...Portfolio analysis selection; portfolio theory, return portfolio risk, effici...
Portfolio analysis selection; portfolio theory, return portfolio risk, effici...Ravi kumar
 
Introduction to portfolio management
Introduction to portfolio managementIntroduction to portfolio management
Introduction to portfolio managementVinay Singhania
 
Modigliani and miller approach
Modigliani and miller approachModigliani and miller approach
Modigliani and miller approachMeenuKhurana7
 
Risk and return measurement
Risk and return measurementRisk and return measurement
Risk and return measurementneelakshi81
 
Sharpe index model
Sharpe index modelSharpe index model
Sharpe index modelAshwini Das
 

What's hot (20)

Markowitz - sharpes and CAPM
Markowitz - sharpes and CAPMMarkowitz - sharpes and CAPM
Markowitz - sharpes and CAPM
 
Portfolio selection, markowitz model
Portfolio selection, markowitz modelPortfolio selection, markowitz model
Portfolio selection, markowitz model
 
Valuation of securities
Valuation of securitiesValuation of securities
Valuation of securities
 
Portfolio analysis
Portfolio analysisPortfolio analysis
Portfolio analysis
 
portfolio management PPT
portfolio management PPTportfolio management PPT
portfolio management PPT
 
Risk & return analysis
Risk & return analysisRisk & return analysis
Risk & return analysis
 
Portfolio revision
Portfolio revisionPortfolio revision
Portfolio revision
 
Single index model
Single index model Single index model
Single index model
 
Investment management
Investment managementInvestment management
Investment management
 
Efficient market hypothesis
Efficient market hypothesisEfficient market hypothesis
Efficient market hypothesis
 
Bond management strategies
Bond management strategiesBond management strategies
Bond management strategies
 
Security Analysis And Portfolio Managment
Security Analysis And Portfolio ManagmentSecurity Analysis And Portfolio Managment
Security Analysis And Portfolio Managment
 
Portfolio analysis selection; portfolio theory, return portfolio risk, effici...
Portfolio analysis selection; portfolio theory, return portfolio risk, effici...Portfolio analysis selection; portfolio theory, return portfolio risk, effici...
Portfolio analysis selection; portfolio theory, return portfolio risk, effici...
 
Introduction to portfolio management
Introduction to portfolio managementIntroduction to portfolio management
Introduction to portfolio management
 
Modigliani and miller approach
Modigliani and miller approachModigliani and miller approach
Modigliani and miller approach
 
Capital structure-theories
Capital structure-theoriesCapital structure-theories
Capital structure-theories
 
Classification of risk
Classification of riskClassification of risk
Classification of risk
 
Markowitz model
Markowitz modelMarkowitz model
Markowitz model
 
Risk and return measurement
Risk and return measurementRisk and return measurement
Risk and return measurement
 
Sharpe index model
Sharpe index modelSharpe index model
Sharpe index model
 

Similar to Security Analysis and Portfolio Management - Investment-and_Risk

riskandreturnmeasurement.pdf
riskandreturnmeasurement.pdfriskandreturnmeasurement.pdf
riskandreturnmeasurement.pdfYashwanth Rm
 
Risk & Return Policy_Parakramesh Jaroli_MBA_FM
Risk & Return Policy_Parakramesh Jaroli_MBA_FMRisk & Return Policy_Parakramesh Jaroli_MBA_FM
Risk & Return Policy_Parakramesh Jaroli_MBA_FMParakramesh Jaroli
 
Measuring risk in investments
Measuring risk in investmentsMeasuring risk in investments
Measuring risk in investmentsBabasab Patil
 
Return and risks ppt @ bec doms on finance
Return  and risks ppt @ bec doms on financeReturn  and risks ppt @ bec doms on finance
Return and risks ppt @ bec doms on financeBabasab Patil
 
IAPM Assignment.pptx
IAPM Assignment.pptxIAPM Assignment.pptx
IAPM Assignment.pptxpreetiroy20
 
Portfolio management
Portfolio managementPortfolio management
Portfolio managementSahim Khan
 
Risk and return analysis on equity share
Risk and return analysis on equity shareRisk and return analysis on equity share
Risk and return analysis on equity shareramanbn
 
Risk returns analysis
Risk returns analysisRisk returns analysis
Risk returns analysisJoseph Ukpong
 
FIN6033-CORP FIN-LECTURE 6A.ppt
FIN6033-CORP FIN-LECTURE 6A.pptFIN6033-CORP FIN-LECTURE 6A.ppt
FIN6033-CORP FIN-LECTURE 6A.ppthass6
 
risk and return assigment.pdf
risk and return assigment.pdfrisk and return assigment.pdf
risk and return assigment.pdfHabtamuGaroma3
 

Similar to Security Analysis and Portfolio Management - Investment-and_Risk (20)

riskandreturnmeasurement.pdf
riskandreturnmeasurement.pdfriskandreturnmeasurement.pdf
riskandreturnmeasurement.pdf
 
Sa ii
Sa iiSa ii
Sa ii
 
risk and return.pptx
risk and return.pptxrisk and return.pptx
risk and return.pptx
 
Risk Management
Risk ManagementRisk Management
Risk Management
 
Presentation.pptx
Presentation.pptxPresentation.pptx
Presentation.pptx
 
Risk & Return Policy_Parakramesh Jaroli_MBA_FM
Risk & Return Policy_Parakramesh Jaroli_MBA_FMRisk & Return Policy_Parakramesh Jaroli_MBA_FM
Risk & Return Policy_Parakramesh Jaroli_MBA_FM
 
Measuring risk in investments
Measuring risk in investmentsMeasuring risk in investments
Measuring risk in investments
 
IPM
IPMIPM
IPM
 
Return and risks ppt @ bec doms on finance
Return  and risks ppt @ bec doms on financeReturn  and risks ppt @ bec doms on finance
Return and risks ppt @ bec doms on finance
 
Risk Analysis
Risk Analysis Risk Analysis
Risk Analysis
 
IAPM Assignment.pptx
IAPM Assignment.pptxIAPM Assignment.pptx
IAPM Assignment.pptx
 
Concept of risk
Concept of riskConcept of risk
Concept of risk
 
Portfolio management
Portfolio managementPortfolio management
Portfolio management
 
Risk and return analysis on equity share
Risk and return analysis on equity shareRisk and return analysis on equity share
Risk and return analysis on equity share
 
Risk returns analysis
Risk returns analysisRisk returns analysis
Risk returns analysis
 
Fm unit-2-part-1 (1)
Fm unit-2-part-1 (1)Fm unit-2-part-1 (1)
Fm unit-2-part-1 (1)
 
Security analysis (fm)
Security analysis (fm)Security analysis (fm)
Security analysis (fm)
 
FIN6033-CORP FIN-LECTURE 6A.ppt
FIN6033-CORP FIN-LECTURE 6A.pptFIN6033-CORP FIN-LECTURE 6A.ppt
FIN6033-CORP FIN-LECTURE 6A.ppt
 
8. risk
8. risk8. risk
8. risk
 
risk and return assigment.pdf
risk and return assigment.pdfrisk and return assigment.pdf
risk and return assigment.pdf
 

More from umaganesh

Indian contract act 1872
Indian contract act 1872Indian contract act 1872
Indian contract act 1872umaganesh
 
Service process
Service processService process
Service processumaganesh
 
Security Analysis - Bond-Return_and_Valuation
Security Analysis -  Bond-Return_and_ValuationSecurity Analysis -  Bond-Return_and_Valuation
Security Analysis - Bond-Return_and_Valuationumaganesh
 
E commerce adoption by insurance companies in india
E commerce adoption by insurance companies in indiaE commerce adoption by insurance companies in india
E commerce adoption by insurance companies in indiaumaganesh
 
Fundamental analysis
Fundamental analysis Fundamental analysis
Fundamental analysis umaganesh
 
Stock return and_valuation
Stock return and_valuationStock return and_valuation
Stock return and_valuationumaganesh
 

More from umaganesh (6)

Indian contract act 1872
Indian contract act 1872Indian contract act 1872
Indian contract act 1872
 
Service process
Service processService process
Service process
 
Security Analysis - Bond-Return_and_Valuation
Security Analysis -  Bond-Return_and_ValuationSecurity Analysis -  Bond-Return_and_Valuation
Security Analysis - Bond-Return_and_Valuation
 
E commerce adoption by insurance companies in india
E commerce adoption by insurance companies in indiaE commerce adoption by insurance companies in india
E commerce adoption by insurance companies in india
 
Fundamental analysis
Fundamental analysis Fundamental analysis
Fundamental analysis
 
Stock return and_valuation
Stock return and_valuationStock return and_valuation
Stock return and_valuation
 

Recently uploaded

RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGeckoRWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGeckoCoinGecko
 
What Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AIWhat Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AI360factors
 
20240315 _E-Invoicing Digiteal. .pptx
20240315 _E-Invoicing Digiteal.    .pptx20240315 _E-Invoicing Digiteal.    .pptx
20240315 _E-Invoicing Digiteal. .pptxFinTech Belgium
 
Stock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdfStock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdfMichael Silva
 
Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Guillaume Ⓥ Sarlat
 
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismTaipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismBrian Lin
 
Work and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB fundingWork and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB fundingHenry Tapper
 
Hungarys economy made by Robert Miklos
Hungarys economy   made by Robert MiklosHungarys economy   made by Robert Miklos
Hungarys economy made by Robert Miklosbeduinpower135
 
2024.03 Strategic Resources Presentation
2024.03 Strategic Resources Presentation2024.03 Strategic Resources Presentation
2024.03 Strategic Resources PresentationAdnet Communications
 
Buy and Sell Urban Tots unlisted shares.pptx
Buy and Sell Urban Tots unlisted shares.pptxBuy and Sell Urban Tots unlisted shares.pptx
Buy and Sell Urban Tots unlisted shares.pptxPrecize Formely Leadoff
 
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.KumarJayaraman3
 
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an EntrepreneurIntroduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an Entrepreneurabcisahunter
 
Stock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdfStock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdfMichael Silva
 
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdfLundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdfAdnet Communications
 
Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]Commonwealth
 
MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.Arifa Saeed
 
Remembering my Totem _Unity is Strength_ growing in Bophuthatswana_Matthews B...
Remembering my Totem _Unity is Strength_ growing in Bophuthatswana_Matthews B...Remembering my Totem _Unity is Strength_ growing in Bophuthatswana_Matthews B...
Remembering my Totem _Unity is Strength_ growing in Bophuthatswana_Matthews B...Matthews Bantsijang
 
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
20240314 Calibre March 2024 Investor Presentation (FINAL).pdfAdnet Communications
 

Recently uploaded (20)

RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGeckoRWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
 
What Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AIWhat Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AI
 
20240315 _E-Invoicing Digiteal. .pptx
20240315 _E-Invoicing Digiteal.    .pptx20240315 _E-Invoicing Digiteal.    .pptx
20240315 _E-Invoicing Digiteal. .pptx
 
Effects & Policies Of Bank Consolidation
Effects & Policies Of Bank ConsolidationEffects & Policies Of Bank Consolidation
Effects & Policies Of Bank Consolidation
 
Commercial Bank Economic Capsule - March 2024
Commercial Bank Economic Capsule - March 2024Commercial Bank Economic Capsule - March 2024
Commercial Bank Economic Capsule - March 2024
 
Stock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdfStock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdf
 
Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024
 
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismTaipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
 
Work and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB fundingWork and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB funding
 
Hungarys economy made by Robert Miklos
Hungarys economy   made by Robert MiklosHungarys economy   made by Robert Miklos
Hungarys economy made by Robert Miklos
 
2024.03 Strategic Resources Presentation
2024.03 Strategic Resources Presentation2024.03 Strategic Resources Presentation
2024.03 Strategic Resources Presentation
 
Buy and Sell Urban Tots unlisted shares.pptx
Buy and Sell Urban Tots unlisted shares.pptxBuy and Sell Urban Tots unlisted shares.pptx
Buy and Sell Urban Tots unlisted shares.pptx
 
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
 
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an EntrepreneurIntroduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
 
Stock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdfStock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdf
 
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdfLundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
 
Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]
 
MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.
 
Remembering my Totem _Unity is Strength_ growing in Bophuthatswana_Matthews B...
Remembering my Totem _Unity is Strength_ growing in Bophuthatswana_Matthews B...Remembering my Totem _Unity is Strength_ growing in Bophuthatswana_Matthews B...
Remembering my Totem _Unity is Strength_ growing in Bophuthatswana_Matthews B...
 
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
 

Security Analysis and Portfolio Management - Investment-and_Risk

  • 2. Investment  Investment is the employment of funds on assets with the aim of earning income or capital appreciation.  Financial Investment is the allocation of money to assets that are expected to yield some gain over a period of time. It is an exchange of financial claims such as stocks and bonds for money.
  • 3. Speculation  It is about taking up the business risk in the hope of achieving short-term gain.  It involves buying and selling activities with the expectation of making a profit from price fluctuations.
  • 4. Difference between Investor and Speculator Investmet Speculation  Plans for a longer time horizon and holding period ranges from 1 to few years.  Assumes moderate risk.  Likes to have moderate return for the limited risk.  Considers fundamental factors.  Uses his own funds and avoids borrowed funds.  Plans for a very short period and holding period varies from few days to months.  Willing to undertake high risk.  Like to have high returns for assuming high risk.  Considers inside information here says and market behaviour.  Uses borrowed funds to supplement his personal resources.
  • 5. Investment Objectives  Maximizing the return  Minimizing the risk  Maintaining Liquidity  Hedging against inflation  Increasing safety  Saving tax
  • 6. Stages of Investment Process Investment Process Investment Policy Investible Fund Objectives Knowledge Security Analysis Market Industry Company Valuation Intrinsic Value Future Value Portfolio Construction Diversification Selection and allocation Portfolio Evaluation Appraisal Revision
  • 7. Risk  Risk is defined as variability in return or volatility in return.  Risk is the chance of the actual return being less than the expected return. It means any deviation from the expected return.
  • 8. Types of Risk 1. Systematic Risk: a. Market Risk b. Interest rate risk c. Purchasing power risk 2. Unsystematic Risk: a. Business Risk b. Financial Risk
  • 9. Systematic Risk  Systematic Risk affects the entire market. The entire market is moving in a direction either downwards or upwards.  Systematic risk is unavoidable and beyond the control of the corporation or investor. Example: Economic Conditions, Political Situations, Sociological Changes.
  • 10. Market Risk  Market Risk: It is the portion of the variability of return that is caused by the alternating forces of the bull and bear phases.  Bull Market- The index moves from a low level to its peak. It is due to the rising investor confidence and expectations of further capital gains.  BearMarket- Index declines haltingly from the peak to a market low point for a significant period.
  • 11.  Tangible Events – Real events such as earthquake, war, political uncertainty and fall in the value of currency.  Intangible Events – They are related to market psychology which are affected by real events. Reactions to real events become over reactions and push the market either upward or downward.
  • 12. Interest Rate Risk It is the variation in the return caused by fluctuations in the market interest rate. It affects: 1. Bond Return: - When interest rate rise, new issues will hit the market with higher interest rate resulting in less demand for old bonds. - When interest rate declines, new bonds will yield low returns making the old bonds worth more. - Demand for bond goes up when the stock market is depressed and the demand for government bond goes up when the govt issues attractive bonds than the private sector. 2. Cost of Borrowing:
  • 13. Purchasing Power Risk  It is the probable loss in the purchasing power of the returns to be received. Inflation is the reason for purchasing power risk.  Inflation- Persistent increase in price. - Demand Pull Inflation - Cost Push Inflation - Real Rate of Return
  • 14. Real Rate of Return = {(1 + r)/(1+IR) } – 1 Where IR = Inflation Rate r = return Investor gets a return of 12% on his investment and the inflation rate is 6.8% Real Rate of Return ={( 1+ 0.12)/(1+0.068)}-1 = {1.12/1.068}-1 RR = 1.0486-1=0.0486=4.86%
  • 15. Unsystematic Risk  It is unique and peculiar to a firm or an industry. It stems from financial leverage, managerial inefficiency, technological change in the production process , availability of raw material, change in consumer preferences and labour problems. 1. Business risk refers to the difference between revenue and EBIT 2. Financial risk refers to the difference between EBIT and EBT. Financial risk is associated with capital structure of the company.
  • 16. Business Risk Internal Business Risk Fluctuations in sales Research and Development Personnel Management Fixed Cost Single Product External Business Risk Social and Regulatory Factors Political Factors Business Cycles
  • 17. Minimizing Risk Exposure  Protection against market risk – studying the past price behaviour of the stock.  Protection against Interest rate risk- Holding the investment to maturity, Buying TB and bonds of short maturity, investing in bonds with different maturity dates.  Protection against inflation- investment in short term securities and diversification in investment.  Protection against Business and Financial Risk- Analyzing the strengths , weakness, profitability and capital structure of the company.
  • 18. Risk Measurement  Ex-post risk- Variance from mean value measures the ex-post risk using historical data.  Ex-ante risk- Variance is calculated with the help of probable returns.  Characteristic Regression Line (CRL): It is a simple linear regression model estimated for a particular stock against the market index return to measure it’s diversifiable and undiversifiable risks.
  • 19. CRL formula Ri = αi + βi Rm + ei where Ri = Return of the ith stock, αi = Intercept, βi = Slope of the ith stock, Rm = Return of the market index, ei =The error term. β = n Σ XY – (ΣX)(ΣY) --------------------- , α = Ỳ - βX n Σ X2 - (ΣX)2
  • 20. Beta and its intrepretation  Beta : It is the slope of the CRL. It describes the relationship between stock return and the index return.  Beta = 1=> 1% change in the market index return causes exactly 1 % change in the stock return.  Beta = 0.5 => The stock is less volatile compared to the market.  Beta = 2 => The stock return is more volatile.  Negative Beta indicates that the stock moves in the opposite direction to the market return.
  • 21. Characteristic Regression Line Market Return Stock Return A l p h a Beta