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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

Unit- I

Investment: Investment -Meaning- Types - Objectives -Process- Investment Vs Speculation Vs Gambling -Primary and Secondary Markets – indices-types of orders – margin trading - Trading Mechanism. Online, mock, and Virtual trading, Portfolio theory: Concept of Risk, Measuring Risk and Returns – risk classification – Systematic risk – unsystematic risk - standard deviation – variance – correlation coefficient – Beta – Calculating expected return and risk. Financial calculations in Excel using the data from NSE and BSE (Smart beta)

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Unit-II

Securities valuation: Approaches of valuation – fixed income valuation -Bond valuation (Types of Bonds, Interest Rates, Term Structure of Interest Rates, Measuring Bond Yields, Yield to Maturity, Yield to Call, Holding Period Return, Bond Pricing Theorems, Bond Duration, Modified Duration. Active and Passive Bond Management Strategies, Bond immunization, Bond Volatility, Bond Convexity). -equity stock

Valuation -Discounted Cash Flow Techniques, Dividend Discount Models (DDM), Growth Rate cases for DDM, Free Cash Flow Valuation Approaches, Relative Valuation Techniques, Earnings Multiplier Approach, Price/ Earnings, Price/ Book Value, Price/ Sales Ratio, EVA.

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Unit- III

Fundamental analysis and technical analysis: Fundamental Analysis Vs Technical Analysis –Fundamental Analysis - Economy, Industry and Company analysis Technical Analysis –Dow Theory -Line chart, Bar chart, Candle stick chart, Point figure chart-Support level, Resistance Level-Head and Shoulders. Using Excel for charts. Specific five indicators.

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Unit – IV:

Portfolio Analysis: Risk and Return Analysis, Markowitz Portfolio Theory, Mean-Variance Approach, Portfolio Selection, Efficient Portfolios, Single Index Model, Capital Asset Pricing Model, Arbitrage Pricing Theory.

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UNIT-V

Performance Evaluation of Mutual Fund: Mutual Funds, Types of Mutual Funds Schemes, Structure, Trends in Indian Mutual Funds, Net Asset Value, Risk and Return, Performance Evaluation Models: Sharpe Model, Treynor Model, Jensen Model, Fama’s Decomposition Financial calculations in excel Exchange traded funds momentum strategies.

Textbooks

1. Donald E. Fisher, Ronald J. Jordan, “Security Analysis and Portfolio Management”, Prentice Hall of India (P) Ltd., New Delhi, 7th Edition 2018.
2. Jack Clark Frances, “Investment Analysis and Management”, McGraw Hill Book Company New York.
3. Security Analysis And Portfolio Management Paperback – 1 January 2015 by Kevin S. (Author)
4. Securities analysis and portfolio management Hardcover – 3 October 2016 by V.A .Avadhani (Author)
5. Investment Analysis and Portfolio Management | 5th Edition Paperback – 10 March 2017 by Prasanna Chandra (Author)

Reference Books

1. Ranganatham & Madhumathi Security Analysis Portfolio Management, Pearson Education, 2011.

2. Sudhindra Bhat Security Analysis and Portfolio Management, 2017, excel

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COURSE EDUCATIONAL OBJECTIVES (CEO’S):

1. To acquaint the students with working knowledge of investment

2 .To provide students with a conceptual and analytical framework for evaluating a financial security

3 .To familiarize students with fundamental analysis and technical analysis

4 .To construct the optimum portfolio by diversifying risk and maximizing return

5 .To familiarize students with portfolio evaluation and management techniques and strategies.

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COURSE OUTCOMES (CO’S):

At the end of the course students would be able to

CO1 :Apply practical knowledge of investment principles to real-world scenarios.

CO2 :Evaluate financial securities using a conceptual and analytical framework.

CO3 :Analyze financial instruments through both fundamental and technical approaches.

CO4 :Synthesize risk diversification techniques to construct an optimal portfolio.

CO5 :Utilize portfolio evaluation and management techniques for effective decision-making

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• Investment involves making of a sacrifice in the present with the hope of deriving future benefits.
• It is considered the sacrifice of certain present value of money in anticipation of a reward.

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Definition

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1. Investment involves employment of own funds or borrowed funds on a real or financial asset for a certain period of time in anticipation of a return in future.

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• Investments refers to sacrifice of current resources in anticipation of a future benefit.
• Investment involves commitment of certain current cash flow in anticipation of an uncertain future cash flows.

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Definition of Investment

Investing involves allocating funds to assets with the expectation of generating returns. These returns can be in the form of interest, dividends, capital appreciation, or a combination of these.

Financial Security

Investing allows individuals to build a financial safety net and protect their wealth from inflation and market fluctuations.

Long-Term Growth

Investing for the long term allows individuals to accumulate wealth and achieve their financial goals, such as retirement planning, purchasing a home, or funding education.

Passive Income

Investing can generate passive income streams, such as dividends from stocks or rental income from real estate, providing financial independence.

Types of Investment

TYPES OF INVESTMENT

• Financial & Non-financial Deposits
• Government Saving Schemes
• Money Market Instruments
• Bonds Or Debentures
• Equity Shares
• Mutual Fund Schemes
• Insurance Products
• Retirement Products
• Real Estate
• Precious Objects
• Financial Derivatives

Money Market Instruments

Blue-chip shares

Blue chip stocks are shares of very large and well-recognised companies with a long history of sound financial performance. ... Since then the term has been used to refer to highly-priced stocks, but now it is used more commonly to refer to high-quality stocks.

or

A blue-chip stock is a huge company with an excellent reputation. These are typically large, well-established and financially sound companies that have operated for many years and that have dependable earnings, often paying dividends to investors. A blue-chip stock typically has a market capitalization in the billions, is generally the market leader or among the top three companies in its sector, and is more often than not a household name. For all of these reasons, blue-chip stocks are among the most popular to buy among investors. Some examples of blue-chip stocks are IBM Corp., Coca-Cola Co. and Boeing Co.

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https://www.samco.in/knowledge-center/articles/best-blue-chip-stocks-to-buy-now-in-india/

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Income shares :

These stocks belong to companies that have comparatively stable operation and limited growth opportunities . The bank shares and some of the fast moving consumer goods , stocks as nestle and Hindustan lever may be termed as income shares

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Penny stocks

Penny stocks are those that trade at a very low price, have very low market capitalisation, are mostly illiquid, and are usually listed on a smaller exchange. Penny stocks in the Indian stock market can have prices below Rs 10. These stocks are very speculative in nature and are considered highly risky because of lack of liquidity, smaller number of shareholders, large bid-ask spreads and limited disclosure of information.

https://ournifty.com/nse-penny-stocks-list.html#:~:text=Penny%20stocks%20below%20Rs.10%3A%20%20%20%20Serial,%20%206.9%20%20115%20more%20rows%20

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Growth shares

the stocks that have higher rate of growth than the industrial growth rate in profitability are refereed to as growth shares

Right now all IT companies shares

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Defensive shares

Defensive stocks are relatively unaffected by the market movements for ex : pharmaceutical stock

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Cyclical shares:

The business cycles affects the cyclical shares the upward and downward movement of the business cycle affect the business prospects of certain companies and their stock prices

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Ex : auto mobile

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Speculative shares

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Shares that have lot of speculative trading in them are referred to as speculative shares .during the bull and bear phases of the market . This shares attracts the attention of the traders

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Value share

A value stock refers to shares of a company that appears to trade at a lower price relative to its fundamentals, such as dividends, earnings, or sales, making it appealing to value investors . A value stock can generally be contrasted with a growth stock . A value stock is trading at levels that are perceived to be below its fundamentals.

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• Insurance Products

Investment objectives /charterstics

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• Return
• Risk
• Liquidity
• Hedge against inflation
• Safety

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Share is purchased in 2020 at Rs ,1000 , disposed at Rs 1100 in 2021 and the dividend yield is RS 50 , then the return would be calculated as follows

= (100 +50)/1000 x100

= 150/1000 x100

= 15 %

https://www.bseindia.com/markets/equity/EQReports/StockPrcHistori.html?flag=0

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https://tradingeconomics.com/india/inflation-cpi

Safety :The safety of on investment implies the certainty of return of capital without loss of money or time. Safety is another feature which an investor desires for his investments. Every investor expects to get back his capital on maturity without loss and without delay.

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Investment process

Investment process involves a series of activities leading to purchase of securities or other investment alternatives

It consist of five stages

1. Framing of investment policy
2. Investment analysis
3. Valuation
4. Portfolio construction
5. Portfolio evaluation

The investor or government before proceeding into investment formulates the policy for the systematic functioning . The essential ingredients of the policy are the investible funds, objectives and the knowledge about the investment alternatives and market

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Investible funds : the entire investment procedure revolves around the availability of investible funds. The fund may be generate through saving or from borrowings . if the funds are borrowed , the investor of has to be extra careful in the selection of investment alternatives . The return should be higher than the interest he pays . Mutual funds invest their owner’s money in securities .

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Objectives:

The objectives are framed on the premises of the required rate of return , need for regularity of income , risk perception and the need for the liquidity . The risk taker is objective is to earn high rate of return in the form of capital appreciation , whereas the primary objective of the risk averse is the safety of the principal.

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Knowledge :

The knowledge about the investment alternatives and markets plays a key role in the policy formulation . The investment alternatives range from security to real estate . The risk and return associated with investment alternatives differ from each other. investment in equity is high yielding but has more risk than the fixed income securities . Tax sheltered schemes offer tax benefit to the investor

The investor should be aware of the stock market structure and the functions of the brokers .the mode of operation varies among BSE, NSE . Brokerage charges are also different . The knowledge about the stock exchange enable him to trade the stock intelligently.

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Security analysis

After formulating the investment policy , the securities to be bought have to be scrutinised through the market and company analysis

Market analysis

The stock market mirrors the general economic scenario . The growth in gross domestic product and inflation are reflected in the stock prices .the recession in the economy results in a bear market . The stock prices may be fluctuating in the short run but in the long run they move in trends . i.e either upwards or downwards. The investor can fix his entry and exit point through technical analysis

Industry analysis

The industries that contribute to the output of the major segments of the economy vary in their growth rates and their overall contribution to economic activity .some industries grow faster than the GDP and are expected to continue in their growth . For ex : Information technology and Pharmaceutical industry . The economic significance and the growth potential of the industry have to be analysed

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Company analysis

The purpose of company analysis is to be help the investor to make better decision . The company’s earnings, profitability , operating efficiency , capital structure and management have to be screened . The factor have direct bearing on the stock prices and the return of the investors . Appreciation of the stock value is a function of the performance of the company. Company with high product market share is able to create wealth to the investors in the form of capital appreciation

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Valuation

The valuation helps the investor to determine the return and risk expected from an investment in the common stock . The intrinsic value of the share is measured through the book value of the share and price earing ration . Simple discounting models also can be adopted to value the shares. The stock market analysts have developed many advanced models to value the shares. The real worth of the share is compared with the market price and then the investment decision are made

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Future value :

The future value of securities could be estimated by using a simple statistical technique like trend analysis . The analysis of historical behaviour of the price enables the investor to predict the future values.

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Construction of portfolio

A Portfolio is a combination of securities . The portfolio is constructed in such manner to meet the investor goals and objectives. The investor should decide how best to reach the goals with securities available. The investor tries to attain maximum return with minimum risk. Towards this end he diversifies his portfolio and allocates funds among the securities

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Diversification : the main objective of diversification is the reduction of the risk in the loss of capital and income . A diversified portfolio is comparatively less risky than holding a single portfolio . There are several ways to diversify the portfolio

Debt and equity diversification : Debt instrument provide assured return with limited capital appreciation . Common stocks provide income and capital gain but with the flavour of uncertainty . Both debt instruments and equity are combined to complement each other.

Industry diversification : industries growth and their reaction to government polices differ from each other . Banking industry shares may provide the regular return but with limited capital appreciation . Information technology stock yield high return and capital appreciation but their growth potential after covid is not predicate . Thus industry diversification is needed and it reduce risk

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Company diversification :

Securities from different companies are purchased to reduce the risk . Technical analysis suggest that the investor buy securities based on the price movement. Fundamental analysis suggest the selection of financially sound and investor friendly companies

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Selection based on the diversification level , industry and company analyses the securities have to be selected .funds are allocated for the selected securities. Selection of securities and the allocation of funds and seals the construction of portfolio

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Evaluation

The portfolio risk has to be managed efficiently . The efficient manager calls for evaluation of the portfolio

The process consists of portfolio appraisal and revision

Appraisal the return and risk performance of the security vary from time to time . The variability in returns of the securities is measured and compared . The developments in the economy , industry and relevant companies from which the stocks are brought have to be appraised . The appraisal warns the loss and steps can be taken to avoid such losses

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Revision : Revision depends on the result of the appraisal , the low yielding securities with high risk are replaced with high yielding securities with low risk factor .to keep the return at a particular level necessitates the investor to revise the components of the portfolio periodically

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Investment vs Speculation

Speculation means taking up the busines risk in the hope of getting short term gains .speculation involves buying and selling activities with the expectation of getting profit from the price fluctuations

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Financial markets are platforms where assets such as stocks, bonds, commodities, and currencies are traded. They play a crucial role in the global economy by facilitating the allocation of resources, providing liquidity, and enabling price discovery.

• Money Market
• Capital Market

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MONEY MARKET:

It is a market which deals in short term securities and whose maturity period is less than one year

Capital Market:

It is a market which deals in medium and long term securities with a maturity period of more than one year.

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Money Market Instruments

Distinction between Capital Market and Money Market��

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Capital market is of further two types:

1. Primary Market
2. Secondary Market

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Primary Market

• The primary market, also known as the new issue market, is the segment of the financial market where new securities, such as stocks and bonds, are issued and sold for the first time. It plays a crucial role in the capital formation process, enabling governments, corporations, and other entities to raise funds directly from investors.

companies raise funds by issuing financial instruments.

1.Offer through Prospectus: Companies issue a prospectus to the public to raise funds by offering shares, debentures, etc., through advertisements.

1. Offer for Sale: Securities are sold to brokers or issuing houses at an agreed price, who then resell them to investors.
2. Private Placement: Shares are issued and allotted to selected individuals or companies privately, rather than to the general public.
3. Rights Issue: New shares are issued to existing shareholders based on the terms and conditions set by the company.
4. e-IPOs (Electronic Initial Public Offerings): Companies raise funds by issuing capital to the public through an online system of the stock exchange.

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Difference between Primary and Secondary Market:��

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• Secondary Market
• Secondary market is a market which deals with the sale and purchase of existing securities. It is also called the stock market or stock exchange.
• SEBI prescribes the framework within which all the securities are traded, cleared and settled.
• It provides opportunities of disinvestment and reinvestment to investors by exchange of securities.

Securities indices

Indices (Stock Market Index)

Definition: A stock market index is a statistical measure that reflects the changes in the market value of a selected group of stocks.

Purpose: Benchmark to track overall market performance.

Popular Indian Indices:

• Nifty 50 – 50 large companies on NSE.
• Sensex – 30 top companies on BSE.
• Sectoral Indices – Nifty Bank, Nifty IT, Nifty Pharma, etc.

Global Indices:

• Dow Jones, S&P 500 (US), FTSE 100 (UK), Nikkei 225 (Japan).

Use of Indices:

• Measuring market sentiment.
• Benchmark for fund managers.
• Basis for Index Funds/ETFs.

Types of Orders

Market Order: Buy/sell immediately at the current market price.

Limit Order: Buy/sell at a specified price or better.

Stop Loss Order: Triggered when a stock hits a certain price, used to limit losses.

Stop Limit Order: Combines stop loss and limit – executes only at a set price after trigger.

Cover Order (CO): Market/limit order with a compulsory stop-loss.

Bracket Order (BO): Includes entry, target, and stop-loss in one order.

Good till Cancelled (GTC): Order remains until executed or cancelled.

Day Order: Expires if not executed within the same trading day.

Market Order

 Market Order is the simplest types of orders.

A market order is a trading order to buy or sell a security at the best possible price at the current market.

it means once the order to buy or sell is entered, the system will execute the orders with the best prices available in the market.

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Market order gets executed almost immediately.

In a market order, the trader or investor do not have control on the price but there is a very high probability that the order will get executed.

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Limit Order

A limit order is one of the types of orders, where the trader can set a price to buy or sell a security.

Unlike market order, where the trader doesn’t have any control over price, in a limit order, the trader will set the price.

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Stop-Loss types of orders

• A stop-Loss order is one of the most important types of orders where a trader can limit his or her losses by exiting a trade if a specific price is reached.
• By placing a stop-loss order, one can save himself from incurring high losses if the price goes against them.

Stop-loss market order

Stop-loss market order is types of orders, where the trader sets a trigger price to exit the trade if the price goes against his expectation.

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• Stop-loss limit order
• Stop-loss limit order is almost similar to stop-loss types of orders but it does not get executed at market price.
• It will get executed at the specified limit price set by the trader.
• In these types of orders, the trader will have to set a trigger price and a limit price.

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• Bracket Order (BO)
• Bracket order is one of the types of orders in which 3 orders bundled into one.
• You can enter a new position with a target and a stop-loss. All bracket orders are limit orders.
• The stop-loss and target will have to be in absolute points (i.e. 1,2,5,10, etc).
• Eg: If the share of ABC is trading at Rs. 1000. We can put a bracket order to buy it at Rs. 1000 with a target of 10 points and a stop loss of 5 points.

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Cover Order

• Cover order is one of the types of orders by which we can enter a position along with a stop-loss in the same order form.

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Based on Time Duration

Also based on time duration, there can be:

Good For Day Order – order will stay valid till the end of the current trading session.

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Good Till Day Order – We can keep our order active for a few days.

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Eg- If we place an order on 1^st March and it does not get executed, we can carry forward to say till 4^th march.

If it doesn’t get executed even on 4^th march, the order will be cancelled.

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Immediate or Cancel Order – Types of orders once placed will be executed immediately if it is not executed it will cancel itself.

In this case, it may so happen that the order will be partially executed.

Eg- If we place an order to buy 1000 shares and only 600 shares get immediately purchased, the rest order of 400 will gets cancelled.

Margin Trading

Definition: Borrowing money from a broker to buy shares.

Mechanism:

• Investor deposits margin (initial investment).
• Broker lends the balance amount.

Example:

• If margin requirement is 25%, to buy shares worth ₹1,00,000, investor pays ₹25,000 and broker lends ₹75,000.

Advantages:

• Higher purchasing power.
• Potential for higher returns.

Risks:

• Amplifies losses.
• Investor must maintain minimum margin (margin call).

Types of Margin in Trading

1. Initial Margin

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Definition: The minimum margin amount that a trader must deposit with the broker to open a leveraged position.

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Purpose: Ensures that the trader has enough funds to take exposure.

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Example: If initial margin requirement is 20%, to buy shares worth ₹1,00,000, the trader must pay ₹20,000.

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2. Maintenance Margin

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Definition: The minimum balance that must be maintained in the margin account to keep the position open.

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If balance falls below this level: Broker issues a margin call asking the trader to add funds.

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Example: If maintenance margin is 15% of ₹1,00,000 = ₹15,000, and account falls below this, broker asks for top-up.

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3. Variation Margin

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Definition: Additional margin collected due to market fluctuations when losses occur.

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Applies in: Futures and derivatives trading.

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Example: If market moves against your position, you may need to pay extra funds daily (Mark-to-Market settlement).

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4. Exposure Margin (Additional Margin)

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Definition: Extra margin required over and above the initial margin to cover high-risk positions.

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Purpose: Protects against extreme volatility.

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Example: For highly volatile stocks, brokers may ask for additional 5–10% exposure margin.

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5. SPAN Margin (Standard Portfolio Analysis of Risk)

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Definition: Margin calculated using a sophisticated risk model for futures and options (F&O).

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Used by: NSE, BSE in India.

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Considers: Worst-case loss based on price and volatility changes.

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6. Extreme Loss Margin (ELM)

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Definition: An additional safeguard margin collected by exchanges to cover unexpected market shocks.

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Charged: As a fixed percentage of trade value.

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7. Cross Margin

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Definition: Allows offsetting margin requirements if you hold hedged positions (example: futures + options in the same stock).

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Benefit: Reduces total margin requirements

Trading Mechanism

Offline Trading: Placing orders through brokers (traditional method).

Online Trading: Electronic platform via internet (NSE, BSE, brokers like Zerodha, Upstox).

Steps in Trading:

• Open Demat & Trading Account.
• Place order (buy/sell).
• Order matched in exchange (NSE/BSE).
• Trade confirmation.
• Settlement (T+1 day in India).

Settlement System:

• Equity: T+1 (trade day + 1 day).
• Derivatives (F&O): Cash settled or physical delivery.

Online, Mock, and Virtual Trading

Online Trading:

• Investors use online platforms/apps (Zerodha Kite, Groww, Upstox, ICICI Direct).
• Provides real-time quotes, charts, portfolio tracking.

Mock Trading:

• Exchanges (like NSE) conduct mock trading sessions to test systems.
• Used by brokers to check order routing, connectivity, and price feeds.

Virtual Trading (Paper Trading):

• Practice trading with virtual money.
• Platforms: Moneybhai (Moneycontrol), NSE Paathshala, TradingView (paper trading).
• Helps beginners learn without financial risk.

Nifty indices in india

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https://www1.nseindia.com/live_market/dynaContent/live_watch/live_index_watch.htm

Depositories

As an investor you must know about the depositories in the country. In India, there are two depositories: National Securities Depositories Ltd (NSDL) and Central Securities Depositories Ltd (CDSL). Both the depositories hold your financial securities, like shares and bonds in dematerialised form, and facilitate trading in stock exchanges. Before starting your trading journey, you must keep in mind that you are compulsorily required to open a demat account and a trading account. You must always remember to open the best demat account with a reliable stock broker as it will help you make wise investment decisions

A clearing house acts as a mediator between any two entities or parties that are engaged in a financial transaction. Its main role is to ensure that the transaction goes smoothly, with the buyer receiving the tradable goods he intends to acquire and the seller receiving the right amount paid for the tradable goods he is selling.

Clearing house

Portfolio concept

RISK

• Risk is involved in every activity whether it is of professional ,personal or business. Every individual while doing any activity expects some returns. But it is obvious that the actual returns may never be the same as that of the expected returns .There always exists a difference between the expected and the actual returns. This difference is termed as “RISK”

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Risk definition

• Definition: Risk implies future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain from an investment.

• In finance, risk is the probability that actual results will differ from expected results.

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• Risk is measured by the variability of return

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Different types of risk can be classified under two main groups, viz.,

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A. Systematic Risk

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Systematic risk is due to the influence of external factors on an organization. Such factors are normally uncontrollable from an organization's point of view.

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It is a macro in nature as it affects a large number of organizations operating under a similar stream or same domain. It cannot be planned by the organization.

Unsystematic Risk

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Unsystematic risk is due to the influence of internal factors prevailing within an organization. Such factors are normally controllable from an organization's point of view.

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It is a micro in nature as it affects only a particular organization. It can be planned, so that necessary actions can be taken by the organization to mitigate (reduce the effect of) the risk.

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Risk measurement

understanding the nature of the risk is not adequate unless the investor or analyst is capable of expressing it in some quantitative terms . Expressing the risk of a stock in quantitative terms makes its comparable with other stocks .

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Measurement cannot be assured of cent per cent accuracy because risk is caused by numerous factors such as social , political , economic and managerial efficiency .

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Measurement provides an approximate quantification of risk . The statistical tool often used to measure and used as a proxy for risk is the standard deviation

1.Standard Deviation

Standard deviation measures the volatility or the degree of variation in the returns of an asset or portfolio over time. It shows how much the returns deviate from the average or expected returns. A higher standard deviation indicates higher volatility and risk, while a lower value suggests more stability.

2. Variance

Variance is a statistical measure that shows the spread of returns. It is the square of the standard deviation and provides insight into the dispersion of returns around the mean. Higher variance means the returns are more spread out, indicating more risk.

3. Correlation Coefficient

The correlation coefficient measures the strength and direction of the relationship between two variables, typically two asset returns.

• A value of +1 means the assets move perfectly in sync.
• A value of 0 means there is no correlation between them.
• A value of -1 means the assets move in opposite directions.�A portfolio with assets that have low or negative correlation can reduce overall risk.

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4.Beta (β)

Beta measures the sensitivity of an asset’s returns relative to the returns of the overall market (systematic risk).

• A β of 1 means the asset’s price moves with the market.
• A β greater than 1 indicates that the asset is more volatile than the market.
• A β less than 1 suggests that the asset is less volatile than the market.�Beta helps in understanding an asset's risk in relation to the market and is a key component of the Capital Asset Pricing Model (CAPM) used to calculate expected returns.

In summary, systematic risk affects the entire market and cannot be diversified away, while unsystematic risk is specific to individual securities or industries and can be reduced through diversification. Standard deviation and variance provide insights into the volatility of returns, while the correlation coefficient helps assess how different assets move relative to each other. Beta measures the market risk exposure of a particular security relative to the overall market.

Actual Return (Realized Return):�Investors receive their returns from shares in the form of dividends and capital gains/ losses. The formula for calculating the annual return on a share is:�

A share is currently selling at Rs 50 . it is expected that a dividend of Rs 2 per share would be paid during the year and the share could be sold at Rs .54 at the end of the year . calculate the expected return from the share

R = 2+(54-50)/50

= (2+4)/50

= 6/50

= 0.12 = 12%

• The returns on securities A and B are given below

Give the security of your preference. the security has to be selected on the basis of return and risk

Return E(r) = R₁ XP₁ + R₂ XP₂₊ R₃ XP₃

Security A = 4 x 0.5 + 2 X 0.4 +0 x 0.1

= 2 + 0.8 + 0

Expected Return = 2.8

Security B = 0 x 0.5 + 3 X 0.4 +3 x 0.1

= 0 +1.2+0.3

Expected Return = 1.5

Return wise, security A is return is high

RISK

Expected return are insufficient for decision making . The risk aspect should also be considered . The most popular measure of risk is the variance or standard deviation of the probability of possible returns

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RISK

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• Security A

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Security A:

Standard deviation

σ = √1.76 =1.33

Security B

Security B:

Standard deviation

σ = √2.25 =1.5

In security A, the return is high and risk is low , hence A is Preferrable

A stock costing Rs 120 Pays no dividends. The possible prices that the stock might sell for the end of the year with the respective probabilities as follows

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1.Calculate the expected return

Here the probable returns have to be calculated using the formula

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Calculation of probable returns

Price Possible return (per cent )

115 =(0+(115-120)/120 =-0.0416=4.17

120 0.00

125 4.17

130 8.33

135 12.50

140 16.67

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Calculation of expected return

The following table provides monthly return data (%) for ITC stock and the BSE market index over a 12-month period:

1.Compute the expected monthly return of ITC and BSE.

Sum of Rm = 49.82

Sum of Ri = 111.69

Mean Rm = 49.82 / 12 = 4.1517%

Mean Ri = 111.69 / 12 = 9.3075%