Assignment 1st

Q-1 Give an overview of Indian Capital Market with primary market and
secondary market?

Ans. Meaning of Capital Market

Capital market is a market where buyers and sellers engage in trade of financial securities like bonds,
stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions. Capital
markets help channelize surplus funds from savers to institutions which then invest them into productive
use. Generally, this market trades mostly in long-term securities.

Capital market consists of primary markets and secondary markets. Primary markets deal
with trade of new issues of stocks and other securities, whereas secondary market deals with the exchange
of existing or previously-issued securities. Another important division in the capital market is made on
the basis of the nature of security traded, i.e. stock market and bond market.

Primary Market and Secondary Market

Primary Market
In a primary market, securities are created for the first time for investors to purchase. New securities
are issued in this market through a stock exchange, enabling the government as well as companies to
raise capital.

A company issues security in a primary market as an initial public offering (IPO), and the sale
price of such new issue is determined by a concerned underwriter, which may or may not be a financial
institution.

Functions of Primary Market

• New issue offer-The primary market organizes offer of a new issue which had not been
traded on any other exchange earlier. Due to this reason, it is also called a New Issue Market.

Organizing new issue offers involves a detailed assessment of project viability, among other

factors.
 • Underwriting services-Underwriting is an essential aspect while offering a new
issue. An underwriter’s role in a primary marketplace includes purchasing unsold shares if it

cannot manage to sell the required number of shares to the public. A financial institution may

act as an underwriter, earning a commission on underwriting.

• Distribution of new issue-A new issue is also distributed in a primary

marketing sphere. Such distribution is initiated with a new prospectus issue. It invites

the public at large to buy a new issue and provides detailed information on the

company, issue, and involved underwriters.

Secondary Market

The secondary market is where investors buy and sell securities they already own. It is what most

people typically think of as the "stock market," though stocks are also sold on the primary market when

they are first issued.

The secondary market is where investors buy and sell securities from other investors (think of stock

exchanges. Examples of popular secondary markets are the National Stock Exchange (NSE), the New York Stock

Exchange (NYSE), the NASDAQ, and the London Stock Exchange (LSE)

Functions of Secondary Market

▪ A stock exchange provides a platform to investors to enter into a trading transaction of bonds,

shares, debentures and such other financial instruments.

▪ Transactions can be entered into at any time, and the market allows for active trading so that there

can be immediate purchase or selling with little variation in price among different transactions. Also,

there is continuity in trading, which increases the liquidity of assets that are traded in this market.

▪ Investors find a proper platform, such as an organized exchange to liquidate the holdings. The

securities that they hold can be sold in various stock exchanges

Q-2 what are the key features of the National Stock Exchange and the Bombay Stock
Exchange?

Ans. Meaning of National Stock Exchange

The NSE of India limited was created on the basis of the report of the high powered study group
on establishment of new stock exchange, which recommended promotion of NSE by financial
institution to provide access to investors from across the country on an equal footing. In 1992,
NSE was incorporated as a tax paying company unlike other stock exchange in the country.

The capital market (equities) segment commenced operation Nov. 1994 and operations
In derivatives segment were started in June 2000. NSE launched S & P CNX NIFTY (Standard
& Poor Crisis NSE Indices) in April 1996.NSE is one largest interactive VSAT based stock
exchange in the world. Presently it supports more than3000 VSATS. In April 1993, NSE was
recognized as a stock exchange under the securities contract (regulation) act, 1956.

Features of National Stock Exchange

No fixed location for NSE-As it is screen based, there is no need for any stock exchange
floor and all the members of National Stock Exchange are able to transact through their
computer terminals, sitting at their respective offices.

Confidential trading in NSE-The identity of members is trading in NSE is withheld by the

National stock exchange. The transactions and orders are entered only through code numbers.
Thus, the anonymity of trading members is kept confidential with NSE.

Transparency of NSE- There is total transparency in trading operations of NSE as the

opening and closing prices of stocks are available for the investors on screen in realtime. Trading
individuals will also be able to see their orders being executed.

Effective matching of order in NSE - Buy order and Sell orders are effectively and
quickly matched with the help of the trading software, i.e., buying and selling adjustments. The
system also ensures best prices for securities thorough out India (both for buying and selling).
The network system enables the trader to find a perfect match for his order or the system holds
the order until a perfect match for the Buy or Sell order is found.

Borrowings made easy in NSE- One of the salient features of NSE is that for the debt
instruments, the system helps by providing a perfect match with sensible interest rate and
repayment period. This exposure is available throughout India for the sale of debt instruments.
 Meaning of Bombay Stock Exchange

The Bombay Stock Exchange (BSE) is the first and largest securities market in India and was
established in 1875 as the Native Share and Stock Brokers' Association. Based in Mumbai, India,
the BSE lists close to 6,000 companies and is one of the largest exchanges in the world, along
with the New York Stock Exchange (NYSE), Nasdaq, London Stock Exchange Group, Japan
Exchange Group, and Shanghai Stock Exchange.

The BSE has helped develop India's capital markets, including the retail debt market, and
has helped grow the Indian corporate sector. The BSE is Asia's first stock exchange and also
includes an equities trading platform for small-and-medium enterprises (SME). BSE has
diversified into providing other capital market services including clearing, settlement, and risk
management

Features of Bombay Stock Exchange

• Bombay Stock Exchange is the oldest and first securities market that was established in
1875 by Premchand Roychand.Based in Mumbai and, it is the largest stock exchange in
India and Asia overall. It has approximately 6,000 companies under its list.

• It has lifted the Indian market and helped corporate to establish a strong capital
base.Besides, it includes and supports trading for retail enterprises and provides safe-
keeping of records, binds, securities to assets, risk management, clearing, settling, and
also loan-like options to all participants.

• It allows agencies, offices, and organizations to create a stable investment environment

for growth in terms related to capital expansion.

• Due to its electronic trading feature, many foreign investors are attracted and interested to
invest in the Indian Stock Exchange BSE.

• The electronic trading system means that the transactions, buying, selling, and engaging
in stock market activities are completely independent of the physical nature of cash or
assets or security.

• That is, individuals and institutions can conduct online exchange remotely via software.
They are allowed to transact equities, currencies, debt, mutual funds, so on using BSE.
Q-3 Discuss the role of SEBI as a regulatory mechanism in Indian Capital Market.
Ans. Role of SEBI in Indian Capital Market
SEBI is regulator to control Indian capital market. Since its establishment in 1992, it is doing
hard work for protecting the interests of Indian investors. SEBI gets education from past cheating
with naive investors of India. Now, SEBI is stricter with those who commit frauds in capital
market.
The role of security exchange board of India (SEBI) in regulating Indian capital market is
very important because government of India can only open or take decision to open new stock
exchange in India after getting advice from SEBI.
If SEBI thinks that it will be against its rules and regulations, SEBI can ban on any stock
exchange to trade in shares and stocks.
Now, we explain role of SEBI in regulating Indian Capital Market more deeply with
following points:

Power to make rules for controlling stock exchange :-SEBI has power to make new
rules for controlling stock exchange in India. For example, SEBI fixed the time of trading 9 AM
and 5 PM in stock market.

To provide license to dealers and brokers: -SEBI has power to provide license to
dealers and brokers of capital market. If SEBI sees that any financial product is of capital nature,
then SEBI can also control to that product and its dealers. One of main example is ULIPs case.
SEBI said, " It is just like mutual funds and all banks and financial and insurance companies who
want to issue it, must take permission from SEBI."

To stop fraud in Capital Market: -SEBI has many powers for stopping fraud in capital
market.
It can ban on the trading of those brokers who are involved in fraudulent and unfair trade
practices relating to stock market.
It can impose the penalties on capital market intermediaries if they involve in insider trading.

To Control the Merger, Acquisition and Takeover the companies :-Many big
companies in India want to create monopoly in capital market. So, these companies buy all other
companies or deal of merging. SEBI sees whether this merge or acquisition is for development of
business or to harm capital market.
To audit the performance of stock market :-SEBI uses his powers to audit the
performance of different Indian stock exchange for bringing transparency in the working of stock
exchanges

To make new rules on carry - forward transactions: Share trading transactions carry
forward cannot exceed 25% of broker's total transactions. 90 day limit for carry forward.

To create relationship with ICAI :- ICAI is the authority for making new auditors of
companies. SEBI creates good relationship with ICAI for bringing more transparency in the
auditing work of company accounts because audited financial statements are mirror to see the
real face of company and after this investors can decide to invest or not to invest. Moreover,
investors of India can easily trust on audited financial reports. After Satyam Scam, SEBI is
investigating with ICAI, whether CAs are doing their duty by ethical way or not.

To Require report of Portfolio Management Activities : SEBI has also power

to require report of portfolio management to check the capital market performance. Recently,
SEBI sent the letter to all Registered Portfolio Managers of India for demanding report.

To educate the investors : Time to time, SEBI arranges scheduled workshops to educate
the investors. On 22 may 2010 SEBI imposed workshop. If you are investor, you can get
education through SEBI leaders by getting update information on this page.

Q-4 what is investment? Is Investment different from speculation?

Ans. Meaning of Investment
Investment is an activity that is engaged in by people who have savings and
investments are made from savings. But all savers are not investors so investment
is an activity which is different from saving.
If one person has advanced some money to another, he may consider his
loan as an investment. He expects to get back the money along with interest at a
future date.
Another person may have purchased one kilogram of gold for the purchase
of price appreciation and may consider it as an investment.
Yet another person may purchase an insurance plan for the various benefit
it promises in future. That is his investment.
Investment involves employment of funds with the aim of achieving
additional income or growth in values or the commitment of resources which have
been saved in the expectation that some benefits will accrue in future.
Thus, investment may be defined as, “a commitment of funds made in
the expectation of some positive rate of return”.
 Investment and Speculation

Investment and speculation involve purchase of assets like shares and securities. Traditionally,
investment is distinguished from speculation with respect to three factors, viz., risk, capital gain
and time period. Speculation is about taking up the business risk in the hope of achieving short
term gain. Speculation essentially involves buying and selling activities with the expectation of
Making a profit from price fluctuations.

Ex: If a person buys stocks for its dividend, he may be termed as an investor. If he buys with the
anticipation of a price rise in the future and the hope of selling it again, he would be termed as
speculator. The dividing line between speculation and investment is very thin because people
buy stocks for dividends and capital appreciation.

Difference between Investment and Speculation

Basic of Investment Speculation

Difference
Time horizon Plans for a longer time horizon. Plans for a very short period.
His holding period may be from His holding period varies
one year to few years from few days to months
Risk Assumes moderate risk. Willing to undertake high
risk

Return Likes to have moderate rate of Like to have high returns

Return associated with limited risk. For assuming high risk.

Decision Considers fundamental factors and Consider inside

evaluates the performance of the information, hearsays and
company regularly market behavior.

Fund Uses his own funds and avoids Uses borrowed funds to
borrowed funds supplement his personal
Resources.

Safety He chooses the investment alternative Focuses more on return

Which has high degree of safety? Here Than the safety.
safety is primary and return secondary
Q-5 Briefly discuss the procedure for trading and settlement on the
stock exchanges in India?

Ans. Trading and Settlement Procedure

Selecting a Broker or Sub-broker- When a person wishes to trade in the stock market, it
cannot do so in his/her individual capacity. The transactions can only occur through a broker or a
sub-broker. So according to one’s requirement, a broker must be appointed .Now such a broker can
be an individual or a partnership or a company or a financial institution (like banks). They must be
registered under SEBI. Once such a broker is appointed you can buy/sell shares on the stock
exchange.

Opening a Demat Account Since the reforms, all securities are now in electronic format.
There are no issues of physical shares/securities anymore. So an investor must open a
dematerialized account, i.e. a Demat account to hold and trade in such electronic securities. So you
or your broker will open a Demat account with the depository participant. Currently, in India, there
are two depository participants, namely Central Depository Services Ltd. (CDSL) and National
Depository Services Ltd. (NDSL).

Placing Orders -And then the investor will actually place an order to buy or sell shares. The
order will be placed with his broker, or the individual can transact online if the broker provides such
services. One thing of essential importance is that the order /instructions should be very clear.
Example: Buy 100 shares of XYZ Co. for a price of Rs. 140/- or less. Then the broker will act
according to your transactions and place an order for the shares at the price mentioned or an even
better price if available. The broker will issue an order confirmation slip to the investor.

Execution of the Order -Once the broker receives the order from the investor, he executes it.
Within 24 hours of this, the broker must issue a Contract Note. This document contains all the
information about the transactions, like the number of shares transacted, the price, date and time of
the transaction, brokerage amount, etc. Contract Note is an important document. In the case of a
legal dispute, it is evidence of the transaction. It also contains the Unique Order Code assigned to it
by the stock exchange.

Settlement -Here the actual securities are transferred from the buyer to the seller. And the funds
will also be transferred. Here too the broker will deal with the transfer. There are two types of
settlements,

On the Spot settlement: Here we exchange the funds immediately and the settlement follows the
T+2 patterns. So a transaction occurring on Monday will be settled by Wednesday (by the second
working day)
 Assignment 2nd
Q-1 Define the term ‘Risk’. Highlight the differences between systematic and
unsystematic risk.
Ans. Meaning of Risk
Risk may relate to loss of capital, delay in repayment of capital, nonpayment of
interest, or variability of returns. While some investments like government
securities and bank deposits are riskless, others are more risky.
Risk is the variability between the expected and actual returns. Risk refers
to the possibility that the actual outcome of an investment will differ from its
expected outcome. The wider the range of possible outcomes, the greater the risk.

Systematic Risk
It is also known as "market risk" or "un-diversifiable risk", is the uncertainty
inherent to the entire market or entire market segment. Also referred to as
volatility, systematic risk consists of the day-to-day fluctuations in a stock's price.

Types of Systematic Risk:

• Interest risk
• Market risk
• Inflation risk

Unsystematic Risk
Unsystematic "diversifiable risk, also known risk" or "residual as risk," is the type
of uncertainty that comes with the company or industry you invest in.
Unsystematic risk can be reduced through diversification

Types of Unsystematic Risk:

• Business risk
• Financial risk
Difference between Systematic and Unsystematic Risk
• Systematic risk means the possibility of loss associated with the whole
market or market segment. Unsystematic risk means risk associated with a
particular industry or security.

• Systematic risk is uncontrollable whereas the unsystematic risk is

controllable.

• Systematic risk arises due to macroeconomic factors. On the other hand, the
unsystematic risk arises due to the micro-economic factors.

• Systematic risk affects a large number of securities in the market conversely,

unsystematic risk affects securities of a particular company.

• Systematic risk can be eliminated through several ways like hedging, asset
allocation and diversification. As opposed to unsystematic risk that can be
eliminated through portfolio diversification

• Systematic risk is divided into three categories, i.e. Interest risk, market risk
and purchasing power risk. Unlike unsystematic risk, which is divided into
two broad category business risk and financial risk?

Q-2 What are the basis dimensions of fundamental analysis? How

fundamental analysis is different from technical analysis?

Ans. Meaning of Fundamental Analysis

Fundamental analysis is a method of evaluating the intrinsic value of an asset and
analysing the factors that could influence its price in the future. This form of analysis is
based on external events and influences, as well as financial statements and industry
trends.

Fundamental analysis is one of two major methods of market analysis, with the other
being technical analysis. While technical traders will derive all the information they need
to trade from charts, fundamental traders look at factors outside of the price movements
of the asset itself
 Meaning of Fundamental Analysis
Technical analysis differs from fundamental analysis, in that traders attempt to identify
opportunities by looking at statistical trends, such as movements in a stock's price and volume.
The core assumption is that all known fundamentals are factored into price, thus there is no need
to pay close attention to them. Technical analysts do not attempt to measure a security's intrinsic
value. Instead, they use stock charts to identify patterns and trends that suggest what a stock will
do in the future.

Basic of Fundamental Analysis Technical Analysis

Difference
Fundamental Analysis is a practice of Technical analysis is a method
Meaning analyzing securities by determining of determining the future price
the intrinsic value of the stock of the stock using charts to
identify the patterns and trends

Determining security or market’s Understanding a security’s

Purpose prospective patterns by analysing fundamentals via its financial
historical price movements and performance, management,
volumes of trade and overall market
conditions.
Investors typically use it for short- Market Participants
Usage term trading. predominantly utilize is for
long term investment

Support and resistance, moving Overvalued and undervalued

Buy And Sell Signal averages, trend lines, and stocks
momentum-based indicators

Predicted on the basis of past and Predicted on the basis of

Future Price present performance and profitability charts and indicators
of the company
Q-3 What is beta? Is it a better measure of risk than the standard
deviation?

Ans. Meaning of Beta

Beta measures the risk (volatility) of an individual asset relative to the market portfolio. Beta
aims to gauge an investment’s sensitivity to market movements. It is a measure of the fund’s
volatility relative to other funds. It is not an absolute measure of volatility; it measures a stock’s
volatility relative to the market as a whole. Therefore, beta measures how movement in the stock
price relates to the changes in the entire stock market. It is the average change in percentage in
the value of the fund accompanying a 1% increase or decrease in the value of the S&P 500
index. For example, a stock with a beta of 1.5 goes up about 50% more than the index when the
market goes down. Similarly, a stock with a beta of 2.00 experiences price swings double than
those of the broader market. An S&P index fund, by definition, has a beta of 1.0.

Meaning of Standard Deviation

Standard deviation is the most widely used statistical measure of spread which essentially reports
a fund’s volatility. The volatility of a single stock is commonly measured by its standard
deviation of returns over a recent period. The standard deviation of a stock portfolio is
determined by the standard deviation of returns for each individual stock along with the
correlations of returns between each pair of stock in the portfolio. It includes both the unique risk
and systematic risk. Higher standard deviations are generally associated with more risk. If you
scale the standard deviation of one market against another, you obtain a measure of relative risk.
The funds with standard deviations of their annual returns greater than 16.5 are more volatile
than average.

Difference between Beta and Standard Deviation

Both Beta and Standard deviation are two of the most common measures
of fund’s volatility. However, beta measures a stock’s volatility relative to
the market as a whole, while standard deviation measures the risk of
individual stocks. Standard deviation is a measure that indicates the degree
of uncertainty or dispersion of cash flow and is one precise measure of risk.
Higher standard deviations are generally associated with more risk. Beta,
on the other hand, measures the risk (volatility) of an individual asset
relative to the market portfolio.
Q-4 Describe the Industry life Cycle. What are its implications for
the investor?

Ans. Meaning of Industry life Cycle

The industry life cycle refers to the evolution of an industry or business
through four stages based on the business characteristics commonly
displayed in each phase. The four phases of an industry life cycle are the
introduction, growth, maturity, and decline stages. Industries are born
when new products are developed, with significant uncertainty regarding
market size, product specifications, and main competitors. Consolidation
and failure whittle down an established industry as it grows, and the
remaining competitors minimize expenses as growth slows and demand
eventually wanes

Implications for the investor

Introduction Phase-The introduction, or startup, phase involves the development and
early marketing of a new product or service. Innovators often create new businesses to enable the
production and proliferation of the new offering. Information on the products and industry
participants are often limited, so demand tends to be unclear. Consumers of the goods and
services need to learn more about them, while the new providers are still developing and honing
the offering. The industry tends to be highly fragmented in this stage. Participants tend to be
unprofitable because expenses are incurred to develop and market the offering while revenues
are still low.

Growth Phase-Consumers in the new industry have come to understand the

value of the new offering, and demand grows rapidly. A handful of important
players usually become apparent, and they compete to establish a share of the new
market. Immediate profits usually are not a top priority as companies spend on
research and development or marketing. Business processes are improved, and
geographical expansion is common. Once the new product has demonstrated
viability, larger companies in adjacent industries tend to enter the market through acquisitions or
internal development.
Maturity Phase-The maturity phase begins with
a shakeout period, during which growth slows, focus shifts toward
expense reduction, and consolidation occurs. Some firms achieve
economies of scale, hampering the sustainability of smaller competitors.
As maturity is achieved, barriers to entry become higher, and the
competitive landscape becomes more clear. Market share, cash flow, and
profitability become the primary goals of the remaining companies now
that growth is relatively less important. Price competition becomes much
more relevant as product differentiation declines with consolidation.

Decline Phase-The decline phase marks the end of an industry's

ability to support growth. Obsolescence and evolving end markets
negatively impact demand, leading to declining revenues. This creates
margin pressure, forcing weaker competitors out of the industry. Further
consolidation is common as participants seek synergies and further gains
from scale. Decline often signals the end of viability for the
incumbent business model, pushing industry participants into adjacent
markets. The decline phase can be delayed with large-scale product
improvements or repurposing, but these tend to prolong the same
process.
 Assignment 3rd

Q-1 what is Dow Theory and how is it used to determine the better direction
of stock market? Explain.

Ans. Meaning of Dow Theory

The Dow theory is a financial theory that says the market is in an upward trend if
one of its averages (i.e. industrials or transportation) advances above a previous
important high and is accompanied or followed by a similar advance in the other
average. For example, if the Dow Jones Industrial Average (DJIA) climbs to an
intermediate high, the Dow Jones Transportation Average (DJTA) is expected to
follow suit within a reasonable period of time.

How the Dow Theory Works

There are six main components to the Dow theory.

The Market Discounts Everything.-The Dow theory operates on the efficient markets
hypothesis (EMH), which states that asset prices incorporate all available information. In other
words, this approach is the antithesis of behavioral economics.
Earnings potential, competitive advantage, management competence—all of these factors and
more are priced into the market, even if not every individual knows all or any of these details. In
more strict readings of this theory, even future events are discounted in the form of risk.

Three Primary Kinds of Market Trends-Markets experience primary trends which last
a year or more, such as a bull or bear market. Within these broader trends, they experience
secondary trends, often working against the primary trend, such as a pullback within a bull
market or a rally within a bear market; these secondary trends last from three weeks to three
months. Finally, there are minor trends lasting less than three weeks, which are largely
noise.Trends Have Three Phases-A primary trend will pass through three phases, according to
the Dow theory. In a bull market, these are the accumulation phase, the public participation (or
big move) phase, and the excess phase. In a bear market, they are called the distribution phase,
the public participation phase, and the panic (or despair) phase.
Indices Must Confirm Each Other-In order for a trend to be established, Dow postulated
indices or market averages must confirm each other. This means that the signals that occur on
one index must match or correspond with the signals on the other. If one index, such as the Dow
Jones Industrial Average, is confirming a new primary uptrend, but another index remains in a
primary downward trend, traders should not assume that a new trend has begun.

Volume Must Confirm the Trend-Volume should increase if the price is moving in the
direction of the primary trend and decrease if it is moving against it. Low volume signals a
weakness in the trend. For example, in a bull market, the volume should increase as the price is
rising, and fall during secondary pullbacks. If in this example the volume picks up during a
pullback, it could be a sign that the trend is reversing as more market participants turn bearish.

Trends Persist Until a Clear Reversal Occurs-Reversals in primary trends can be confused
with secondary trends. It is difficult to determine whether an upswing in a bear market is a
reversal or a short-lived rally to be followed by still lower lows, and the Dow theory advocates
caution, insisting that a possible reversal be confirmed.

Q-2 Fundamental analysis helps in analyzing the fundamentals whereas

technical analysis helps in analyzing the timing of the market. Discuss and
explain the various types of tools used by the technical analyst.

Ans. Technical Analysis

Technical indicators are used by traders to gain insight into the supply and demand
of securities and market psychology. Together, these indicators form the basis
of technical analysis. Metrics, such as trading volume, provide clues as to whether
a price move will continue. In this way, indicators can be used to generate buy and
sell signals. In this list, you'll learn about seven technical indicators to add to
your trading toolkit. You don't need to use all of them, rather pick a few that you
find help in making better trading decisions.
 Tools of Technical Analysis

On-Balance Volume- First up, use the on-balance volume indicator (OBV) to
measure the positive and negative flow of volume in a security over time.
The indicator is a running total of up volume minus down volume. Up
volume is how much volume there is on a day when the price rallied. Down
volume is the volume on a day when the price falls. Each day volume is added or
subtracted from the indicator based on whether the price went higher or lower.

Accumulation/Distribution Line- One of the most commonly used indicators to

determine the money flow in and out of a security is
the accumulation/distribution line (A/D line).It is similar to the on-balance volume
indicator (OBV), but instead of considering only the closing price of the security
for the period, it also takes into account the trading range for the period and where
the close is in relation to that range.

Average Directional Index-The average directional index (ADX) is a trend

indicator used to measure the strength and momentum of a trend. When the ADX
is above 40, the trend is considered to have a lot of directional strength, either up
or down, depending on the direction the price is moving.

Aroon Indicator-The Aroon oscillator is a technical indicator used to

measure whether a security is in a trend, and more specifically if the price is hitting
new highs or lows over the calculation period .

MACD-The moving average convergence divergence (MACD) indicator helps

traders see the trend direction, as well as the momentum of that trend. It also
provide a number of trade signals. When the MACD is above zero, the price is in
an upward phase. If the MACD is below zero, it has entered a bearish period.

Relative Strength Index-The relative strength index (RSI) has at least three
major uses. The indicator moves between zero and 100, plotting recent price gains
versus recent price losses. The RSI levels therefore help in gauging momentum and
trend strength.
Q-3 Explain Capital Asset Pricing Model (CAPM). Discuss its assumptions
and how does it help in estimating the expected return of a security.

Ans. Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) describes the relationship between
systematic risk and expected return for assets, particularly stocks. CAPM is widely
used throughout finance for pricing risky securities and generating expected
returns for assets given the risk of those assets and cost of capital

Assumptions of Capital Asset Pricing Model

Risk-averse investors-The investors are basically risk averse and diversification is

necessary to reduce their risks.

Maximizing the utility of terminal wealth- An investor aims at maximizing the utility
of his wealth rather than the wealth or return. The term ‘Utility’ describes the differences in
individual preferences. Each increment of wealth is enjoyed less than the last as each increment
is less important in satisfying the basic needs of the individual. Thus, the diminishing marginal
utility is most applicable to wealth.

Choice on the basis of risk and return:-Investors make investment decisions on the
basis of risk and return. Risk and return are measured by the variance and the mean of the
portfolio returns. CAPM assumes that the rational investors put away their diversifiable risk,
namely, unsystematic risk. But only the systematic risk remains which varies with the Beta of the
security.

Similar expectations of risk and return-All investors have similar expectations

of risk and return. In other words, all investors’ estimates of risk and return are the
same. When the expectations of the investors differ, the estimates of mean and
variance lead to different forecasts.
 Q-4 Describe the basic Arbitrage Pricing Theory (APT) Model of
two factors and what are the advantages of APT?

Ans. Arbitrage Pricing Theory (APT)

Arbitrage pricing theory (APT) is a multi-factor asset pricing model based on the
idea that an asset's returns can be predicted using the linear relationship between
the asset’s expected return and a number of macroeconomic variables that capture
systematic risk. It is a useful tool for analyzing portfolios from a value
investing perspective, in order to identify securities that may be temporarily
mispriced

How the Arbitrage Pricing Theory Works

The arbitrage pricing theory was developed by the economist Stephen Ross in
1976, as an alternative to the capital asset pricing model (CAPM). Unlike the
CAPM, which assume markets are perfectly efficient, APT assumes markets
sometimes misprice securities, before the market eventually corrects and securities
move back to fair value. Using APT, arbitrageurs hope to take advantage of any
deviations from fair market value.

Advantage of Arbitrage Pricing Theory

• It has fewer restrictions. ...

• It allows for more sources of risk. ...

• It does not specify specific factors. ...

• It allows for unanticipated changes. ...

• It allows investors to find arbitrage opportunities. ...

• It generates a large amount of data. ...

 Assignment 4th

Q-1 What do you understand by term structure of interest rate? How do

theories explain the term structure of the interest rate?

Ans. Meaning of Term Structure of Interest rate

Term structure of interest rates is a calculation of the relationship between the yields on
securities which only differ in their term to maturity. This relationship has several determinants
among them interest rates and yield curve. Economists and investors believe that the shape of the
yield curve reflects the market's future expectation for interest rates and the conditions for
monetary policy. This paper reviews the work of Cox, Ingersoll and Ross of 1985 in their
handling of term structure of interest rates as well as look at different models of term structure of
interest rates both single factor and multifactor models.

THEORETICAL REVIEW OF TERM STRUCTURE

• Expectations Theory- The theory asserts that a long term rates constitute an average
(a weighted average in the case of coupon bearing securities) of expected future short
term rates. It says that forward rates (or marginal rate of interest) constitute unbiased
estimates of future spot rates. Investor’s expectations of future interest rates alone create
the shape of the yield curve.

• Liquidity Preference Theory- This theory is one of the two forms of biased
expectations theory. Duration measures the price risk of holding a bond. Duration
increases as the bond’s maturity lengthens. Risk aversion will cause forward rates to be
systematically greater than expected spot rates, usually by an amount increasing with
maturity. The term premium is the increment required to induce investors to hold longer
term securities. Even default free bonds are risky because of uncertainty about inflation
and future interest rates.

• Market Segmentation Theory- This theory assumes that markets for different
maturity bonds are completely segmented. The interest rate for each bond with a different
maturity is then determined by the supply of and demand for the bond with no effects
from the expected returns on other bonds with other maturities. Individuals have stronger
maturity preferences and bonds of different maturities trade in separate and distinct
markets. Longer bonds that have associated with them inflation and interest risks are
completely different assets than short term bonds.
Q-2 Write a note on Bond Theorem?
Ans. Bond valuation is a technique for determining the theoretical fair value of a
particular bond. Bond valuation includes calculating the present value of the bond's future
interest payments, also known as its cash flow, and the bond's value upon maturity, also
known as its face value or par value.

Understanding Bond Valuation

A bond is debt instrument that provide a steady income stream to the investor in
the form of coupon payment At the Maturity date the face value of the bond is
repaid to the bondholder. The characteristics of a regular bond include

• Coupon rate- A coupon rate is the yield paid by a fixed-income security; a

fixed-income security's coupon rate is simply just the
annual coupon payments paid by the issuer relative to the bond's face or par
value. The coupon rate, or coupon payment, is the yield the bond paid on
its issue date.
• Maturity date- The maturity date refers to the moment in time when the
principal of a fixed income instrument must be repaid to an investor.
The maturity date likewise refers to the due date on which a borrower
must pay back an installment loan in full
• Current Price-Current price is the most recent price at which a security
was sold on an exchange. It serves as a baseline for buyers and sellers. It is
an indicator of current value, but the real price of the next sale may be
higher or lower depending on supply and demand.
Q-3 A company paid a dividend of Rs. 2 in last year. It is expected to grow at 6%
per annum perpetually. What is the value of share if equity capitalization rate if
16%

Ans.

Computation of Valuation of Equity with Dividend yield + Growth Method

P= D = 2 = 2 = 20 Answer
R-G 0.16-.0.06 0.1

Q-4 A 3 year bond with the face value of Rs. 1,000 pays a coupon rate of 8%
is currently selling at Rs. 905. Find out the current yield and yield to maturity

Ans. Computation of Valuation of Bond

Annual coupon rate= 1000*8%=80

Current Yield= Annual Coupon Payment =80 = 0.00833 or 8.84%

Market Price 905

Yield of maturity= C+(M-P)/N = 80+(1000-905)/3

0.4M+0.6P (0.4*1000)+(0.6*905)

=80+95/3 = 80+32 = 112 = 0.118 or 11.87%

400+543 943 943

 Assignment 5th
Q-1 What is strategic asset allocation? List the steps involved in the formal
approach to strategic allocation of a portfolio. How does asset allocation help
in managing a portfolio?

Ans. Meaning of Strategic Asset Allocation

Strategic asset allocation is a portfolio strategy whereby the investor sets
target allocations for various asset classes and rebalances the portfolio periodically.
The target allocations are based on factors such as the investor's risk tolerance,
time horizon, and investment objectives The portfolio is rebalanced when the
original allocations deviate significantly from the initial settings due to differing
returns.
Strategic Asset Allocation Process
Assessment of Risk -The Strategic Asset Allocation process begins with the assessment
of the risk tolerance level of an investor. This is done in a detailed manner with the help of
questionnaires as well as via discussions between the investor and the entity constructing
the portfolio.

Investment Horizon -Another key input is the investment horizon, i.e. the duration for
which an investor intends to keep the money invested in the portfolio.

These two inputs are key in determining the eventual portfolio and are used in tandem. For
an investor who has a high level of risk tolerance, a higher exposure to equities may not
necessarily be the optimal choice unless the time-frame of investment is also known.
Thus, for a high-risk investor with a short-term time horizon, a more moderate equity
exposure would be suggested compared to another investor who has a similar tolerance for
risk but a relatively longer time-frame to remain invested.

Broad-Based Asset Allocation -After assessing an investor’s risk profile and

discussing the investment horizon, an allocation to broad-based asset classes like equities,
fixed income, and cash is made keeping in mind the expected return of these asset
classes given their levels of risk.
Further Allocation in Each Broad Based Asset Classes- This step is followed by further
breaking down these broad asset classes into categories divided into market
capitalization groups, by geographical divisions, or by analytical groups or any other
method. Similar to the broad-based asset classes, percentage allocation to these categories
follow the next step.

Monitoring and Rebalancing-After the Strategic Asset Allocation is determined, it is

monitored and rebalanced on a particular frequency like bi-annually or annually.Let’s see
how this works by an example. Rebalancing in the Strategic Asset Allocation Process

Q-2 What is mutual fund? Discuss its characteristics and give a note on systematic
investment plan ?

Ans. Meaning of Mutual Funds

A mutual fund is a type of financial vehicle made up of a pool of money collected from many
investors to invest in securities like stocks, bonds, money market instruments, and other assets.
Mutual funds are operated by professional money managers, who allocate the fund's assets and
attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is
structured and maintained to match the investment objectives stated in its prospectus

5 Characteristics of Strong Mutual Fund Shares

Low Fees or Expenses-Mutual funds with relatively low expense ratios are
generally always desirable, and low expenses do not mean low performance. In
fact, it is very often the case that the best-performing funds in a given category are
among those that offer expense ratios below the category average.

Consistently Good Performance-Most investors utilize investing in mutual

funds as part of their retirement planning. Therefore, investors should select a fund
based on its long-term performance, not on the fact that it had one really great year.
Consistent performance by the fund's manager, or managers, over a long period of
time indicates the fund will likely pay off well for an investor in the long-run
Sticking to a Solid Strategy-The best-performing funds perform well
because they are directed by a good investment strategy. Investors should be
clearly aware of the fund's investment objective and the strategy the fund manager
uses to achieve that objective

Trustworthy, With Solid Reputations-The best funds are perennially

developed by well-established, trustworthy names in the mutual fund business, such as
Fidelity, T. Rowe Price, and the Vanguard Group With all the unfortunate investing
scandals over the past 20 years, investors are well-advised to do business only with firms
in which they have the utmost confidence in, in regard to honesty and fiscal
responsibility.

Plenty of Assets, but Not Too Much Money-The best-performing

funds tend to be those that are widely invested in but fall short of being the funds
with the very highest amount of total assets. When funds perform well, they attract
additional investors and are able to expand their investment asset base.

Systematic Investment Plan (SIP)

A systematic investment plan (SIP) is a plan where investors make regular, equal payments into
a mutual fund, trading account, or retirement account such as a 401(k). SIPs allow investors to
save regularly with a smaller amount of money while benefiting from the long-term advantages
of dollar-cost averaging (DCA). By using a DCA strategy, an investor buys an investment using
periodic equal transfers of funds to build wealth or a portfolio over time slowly.

How SIPs Work

Mutual fund and other investment companies offer investors a variety of investment options
including systematic investment plans. SIPs give investors a chance to invest small sums of
money over a longer period of time rather than having to make large lump sums all at once. Most
SIPs require payments into the plans on a consistent basis—whether that's weekly, monthly,
quarterly.

The principle of systematic investing is simple. It works on regular and periodic purchases of
shares or units of securities of a fund or other investment. Dollar-cost averaging involves buying
the same fixed-dollar amount of a security regardless of its price at each periodic interval.
Q-3 Write a note on how the Mutual Fund Industry has grown in India.
Differentiate between a debt fund and an equity fund?

Ans. Mutual Funds

Mutual fund is a financial tool used for investing in capital market. It creates a
pool of money by accepting investments from people, be it individuals or corporate
houses or NRIs and invests it in capital market instruments like shares, debentures,
stocks etc. The pool of money is generated from investors who share common
financial goal namely capital appreciation and / or dividend earning. When you
invest money in a mutual fund scheme, you get units of mutual fund as per its
NAV i.e. net asset value. Investing in mutual fund is beneficial as it will help you
in diversifying your portfolio, this investment is backed by professionals who help
you take wise investment decisions

Growth of mutual fund industry in India

• Phase 1: Formation and Growth of UTI (1964 to 1987) The phase 1 witnessed the
incorporation and introduction of Unit Trust of India by passing an Act by Parliament.
The incorporation of UTI was done by Reserve Bank of India. Post its incorporation, it
was the only institution that accepted investments and offered mutual fund units.

• Phase 2: Establishment of Public Sector Funds (1987 to 1992) The year 1987 witnessed
the establishment of public sector funds i.e. other public sector institutions like banks and
NBFCs were allowed to start mutual fund houses. This resulted in opening up of
economy and State Bank of India was the first bank to establish a mutual fund company
in the year 1987.

• Phase 3: Introduction of Private Sector Funds (1992 to 1997) After the successful
introduction of Public Sector Funds, the mutual fund industry opened up and witnessed
the establishment of private sector funds from the year 1993, giving Indian investors the
extensive opportunity to choose mutual funds from public and private sector. On the
other hand, it increased the competition for Indian mutual fund companies.
 • Phase 4: Growth and introduction of SEBI regulations (1997 to 1999) As the mutual fund
sector was witnessing and achieving newer heights, it was important to create a body that
created comprehensive rules and regulation for this industry and creating a responsible
organisation to overlook the working of this sector.

• Phase 5: Emergence of a Large and Stable Industry (1999 to 2004) This phase witnessed
the integration of the entire industry with a similar set of rules and regulations. The
uniform and standardized operations and regulations made it easier for investors to invest
in various mutual fund companies resulting in increase of asset under management from
Rs. 68000 crores in previous phase to over Rs. 1.50 lakh crores during this phase.

• Phase 6: Amalgamation and Growth (2004 onwards) The mutual fund industry has seen
immense growth and globalisation since the day of its incorporation. From the year 2004,
this industry witnessed integration as there were many mergers, demergers and
acquisitions of companies and schemes like Allianz Mutual Fund taken over by Birla Sun
Life, PNB mutual fund by Principal etc.

Q-3 Differentiate between Sharpe’s and Treynor’s measure for evaluating

performance of a portfolio.?

Ans. Treynor Measure

Treynor measure is used to normalize the risk premium or the expected return over
the risk-free rate which is done by dividing the premium with the beta of the
portfolio. This implies that one has the premium that is independent of the
portfolio risk which means one can compare two portfolios’ performances even
though they have different betas. This is important because some portfolios may
give higher excess return but at the same time might have more risk and higher
beta.
 Sharpe Measure
Like Treynor measure, Sharpe measure too is used to normalize the risk premium
or the expected return over the risk-free rate. This measure is done by dividing the
premium with the portfolio-standard deviation. This implies that one is left with
the premium that is independent of the portfolio risk. This suggests that one can
compare two portfolios’ performances even though they have different standard
deviation or risk. A portfolio that is very risky or volatile might give better return.

Comparing Treynor Measure and Sharpe Measure

Treynor and Sharpe measures are pretty much similar performance measures with
very few differences. While one uses the relative market risk or beta to normalize
the performance the other uses the standard deviation or the absolute risk. While
Sharpe ratio is applicable to all portfolios, Treynor is applicable to well-diversified
portfolios. While Sharpe is used to measure historical performance, Treynor is a
more forward-looking performance measure. Thus, both these performance
measures work in different ways towards better representation of the performance.
To know more about Treynor measure and Sharpe measure, you can explore our
training courses on Financial Risk Manager exam preparation.