MBA PAPER 4.

22
Investment analysis and portfolio management
Syllabus
UI! " # Investment: Concept and Goals Types of Investment Financial Real Business Personal
Institutional Comparison of Investments, Speculation, Gamblin !eadin Concepts of Portfolio and Portfolio
"anaement Goals#Ris$ and Return Trade off%
UI! 2 # Financial Investment &venues: Fi'ed Income (aryin Income Securities%
UI! $ # Investment &nalysis: &spects of &nalysis &nalysis Return &nalysis: Concepts, "easures and
Computation of Return of Individual Security and Portfolio Ris$ &nalysis: Concepts, Types, "easure Computation of
Ris$ of Individual Security and Portfolio (aluation &nalysis: S)are (aluation Bond (alue Price *arnins &nalysis%
UI! 4 # &pproac)es to Investment &nalysis: Fundamental &nalysis Concept and Components Tools of *conomy,
Industry and Company &nalysis Tec)nical &nalysis: Concept and Tools &ssumption T)eories: +o, T)eory
Contrary -pinion T)e Confidence Inde', Breadt) of "ar$et and Strent) &nalysis "ovin &verae &nalysis C)art
Patterns%
UI! % # Portfolio Construction and C)oice: "ar$o,t. +iversification *fficient Frontier Ris$ Return in different
Curves Portfolio C)oice Sinle and T,o Factorial "odels /arane "ultiplier "et)od%
UI! & # Capital &sset Pricin "odel &ssumption and &pplication Capital "ar$et /ine and Security "ar$et /ine
*fficient "ar$et !ypot)eses T)e 0ea$ly *fficient, Semi Stronly *fficient and Stronly *fficient "ar$et Forms
Random 0al$ T)eory%
UI! # ' Portfolio Performance: "easures: S)arpe, Treynor and 1ensen Portfolio &udit and Portfolio Revision :
2eed and "et)od Formula Plans%
(ontents
UI! # I 3% Investment &nalysis and Portfolio "anaement
UI! # II 4% Financial Investment &venue
UI! # III 5% Investment &nalysis
UI! # I) 6% &pproac)es to Investment &nalysis
UI! # ) 7% Portfolio Construction and C)oice
UI! # )I 8% Capital &sset Pricin "odel
UI! # )II 9% Portfolio Performance
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*esson "
Investment Analysis and Portfolio Management
Introdu+tion
Investment is t)e sacrifice of current li:uidity or current rupees or current dollars for future li:uidity, future rupees or
future dollars% T)ere are different concepts and types of investment% In detail, t)ese concepts and types of investment
are dealt in t)is lesson%
(on+epts of investment
T)ere are t,o concepts of investment, vi., t)e economic concept and t)e financial concept%
T)e economic concept of investment refers to investment as ;e'penditures on ne, plants, mac)inery, capital
e:uipment and so fort), ,it) t)e )ope of ma$in added ,ealt)<% To ma$e added ,ealt), t)e rate of return on t)e
investment must be more t)an t)e real cost of capital% Suppose, one estimated t)at )is investment in t)e above
referred to assets is ivin )im a real of return of 37%7= p%a% and )is nominal cost of capital is 4>= inflation bein
3>=% T)e real cost of capital is iven by nominal cost inflation rate ? 4>= # 3>= ? 3>=% T)en, t)e investor ma$es a
net ,ealt) addition to t)e e'tent of 3@3 A rB C @3 A DEB I, ,)ere I ? oriinal investment, r ? real rate of return and DE ?
real cost of capital% If ,e assume an I ? Rs% 3>> mn, t)en
0ealt) addition ? Rs% 3>> mn @3 A 37%7=B C @3A3>=B Rs% 3>> mn
? Rs% 3>> mn @3%377B C @3%3B Rs% 3>> mn
? Rs% 3>7 mn#Rs% 3>> mn ? Rs% 7 mn
T)e economic concept of investment is ,ealt) creatin oriented and t)at depends on Return on investment @rB and
real cost of capital @D EB% -nly if r F D E ,ealt) addition result% If r ? D E, neit)er ,ealt) addition nor ,ealt) depletion
results% If r G D E, ,ealt) depletion ta$es places%
T)e financial concept of investment refers to investment as, ;commitment of funds in financial assets ,it) t)e )ope of
ettin current income in t)e form of dividend or interest and C or capital ain:% It is not)in but sacrificin certain
present consumption for a )oped for en)anced future consumption% Put ot)er,ise, investment is postponement of
consumption% T)at is ;savins< are considered as investment% Savins can be in any form% & farmer produces 3>>
bas of paddy, but consumes only 6> bas of paddy and difference is )is savins and )ence )is investment% &
salaried employee earnin Rs% 4 la$) p%a% and )is consumption e'penditure is Rs% 3%7 la$)s and )ence )is savins
Rs% 7>,>>> amount to investment ,)ic) may be in t)e form of undra,n ban$ balance, s)ares, debentures, old,
2ational Savins Certificates *tc%
,oals of Investment 0)atever may be t)e nature of investment, ,)et)er it is economic or financial, it )as lot of
motives% T)ey are as follo,s:
3% Get decent current income
4% -btain reasonable capital ain
5% Benefit from ta'#off
6% Ri)t to participate in ro,t)
7% Reduce ris$, iven overall return
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