Security Analysis & Portfolio Management
1st Block Assessment
CASE STUDY
The need for corporate governance has arisen because of the increasing concern about the non-compliance of standards of financial reporting and accountability by boards of directors and management of corporate inflicting heavy losses on investors.
The collapse of international giants likes Enron, World Com of the US and Xerox of Japan are said to be due to the absence of good corporate governance and corrupt practices adopted by management of these companies and their financial consulting firms.The failures of these multinational giants bring out the importance of good corporate governance structure making clear the distinction of power between the Board of Directors and the management which can lead to appropriate governance processes and procedures under which management is free to manage and board of directors is free to monitor and give policy directions.
In India, SEBI realised the need for good corporate governance and for this purpose appointed several committees such as Kumar Manglam Birla Committee, Naresh Chandra Committee and Narayana Murthy Committee.Investors and shareholders of a corporate company need protection for their investment due to lack of adequate standards of financial reporting and accountability. It has been noticed in India that companies raised capital from the market at high valuation of their shares by projecting wrong picture of the company’s performance and profitability.The investors suffered a lot due to unscrupulous management of corporate that performed much less than reported at the time of raising capital. “Bad governance was also exemplified by allotment of promoters’ share at preferential prices disproportionate to market value affecting minority holders interest”.
There is increasing awareness and consensus among Indian investors to invest in companies which have a record of observing practices of good corporate governance. Therefore, for encouraging Indian investors to make adequate investment in the stock of corporate companies and thereby boosting up rate of growth of the economy, the protection of their interests from fraudulent practices of corporate of boards of directors and management are urgently needed.Corporate governance is considered as an important means for paying heed to investors’ grievances. Kumar Manglam Birla Committee on corporate governance found that companies were not paying adequate attention to the timely dissemination of required information to investors in by India.Investors will be willing to invest in the companies with a good record of corporate governance.
corporate governance
PR
QR
none of the above
……... realised the need for good corporate governance
Group of answer choices
power
politics
SEBI
all of the above
3.
Investors and shareholders of a corporate company need protection for their………... due to lack of adequate standards of financial reporting and accountability.
Group of answer choices
decision-making
efficiency
investment
none of the above
Group of answer choices
companies
informal
both of the above
none of the above
Group of answer choices
industrial engineering
operations management
Bad
none of the above
Group of answer choices
companies
trustee
AMC
none of the above
Group of answer choices
sponsor
trustee
Kumar Manglam Birla Committee
all of the above
8.
Therefore, for encouraging Indian .............. to make adequate investment in the stock of corporate companies and thereby boosting up rate of growth of the economy, the protection of their interests from fraudulent practices of corporate of boards of directors and management are urgently needed.
Group of answer choices
sponsor
investors
AMC
none of the above
Group of answer choices
Investors
PR
QR
none of the above
Group of answer choices
good corporate governance
trustee
AMC
none of the above
2nd Block Assessment
CASE STUDY
In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit from price movement – stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will overall rise in value, while overvalued stocks will generally decrease in value.
In the view of fundamental analysis, stock valuation based on fundamentals aims to give an estimate of the intrinsic value of a stock, based on predictions of the future cash flows and profitability of the business. Fundamental analysis may be replaced or augmented by market criteria – what the market will pay for the stock, disregarding intrinsic value. These can be combined as "predictions of future cash flows/profits (fundamental)", together with "what will the market pay for these profits?" These can be seen as "supply and demand" sides – what underlies the supply (of stock), and what drives the (market) demand for stock?
In the view of John Maynard Keynes, stock valuation is not a prediction but a convention, which serves to facilitate investment and ensure that stocks are liquid, despite being underpinned by an illiquid business and its illiquid investments, such as factories.The most theoretically sound stock valuation method, called income valuation or the discounted cash flow (DCF) method, involves discounting of the profits (dividends, earnings, or cash flows) the stock will bring to the stockholder in the foreseeable future, and a final value on disposal.[1] The discounted rate normally includes a risk premium which is commonly based on the capital asset pricing model.
In July 2010, a Delaware court ruled on appropriate inputs to use in discounted cash flow analysis in a dispute between shareholders and a company over the proper fair value of the stock. In this case the shareholders' model provided value of $139 per share and the company's model provided $89 per share. Contested inputs included the terminal growth rate, the equity risk premium, and beta.[2]
The fundamental valuation is the valuation that people use to justify stock prices. The most common example of this type of valuation methodology is P/E ratio, which stands for Price to Earnings Ratio. This form of valuation is based on historic ratios and statistics and aims to assign value to a stock based on measurable attributes. This form of valuation is typically what drives long-term stock prices.
The other way stocks are valued is based on supply and demand. The more people that want to buy the stock, the higher its price will be. And conversely, the more people that want to sell the stock, the lower the price will be. This form of valuation is very hard to understand or predict, and it often drives the short-term stock market trends.
There are many different ways to value stocks. The key is to take each approach into account while formulating an overall opinion of the stock. If the valuation of a company is lower or higher than other similar stocks, then the next step would be to determine the reasons.
1.………...is the method of calculating theoretical values of companies and their stocks.
Group of answer choices
stock valuation
maslow
fayol
all
Group of answer choices
public
management
employees
future
3.In the view of fundamental analysis, stock valuation based on fundamentals aims to give an estimate of the …………. of a stock
Group of answer choices
planning
organising
staffing
intrinsic value
Group of answer choices
economics
engineering
management
Fundamental
Group of answer choices
public
management
employees
stock
The most theoretically sound stock valuation method, called …………., involves discounting of the profits (dividends, earnings, or cash flows) the stock will bring to the stockholder in the foreseeable future, and a final value on disposal.
Group of answer choices
network flow problems
multi-commodity flow problems
income valuation or the discounted cash flow (DCF) method
none
The discounted rate normally includes a ………. which is commonly based on the capital asset pricing model.
Group of answer choices
planning
production
transportation
risk premium
The fundamental valuation is the valuation that people use to justify ………….prices.
Group of answer choices
stock
minimize
keep same
all
The other way stocks are valued is based on ………. and demand.
Group of answer choices
all
new
old
supply
If the…………. of a company is lower or higher than other similar stocks, then the next step would be to determine the reasons.
Group of answer choices
information
valuation
both
none
3rd Block Assessment
CASE STUDY
Fundamental analysts examine earnings, dividends, assets, quality, ratio, new products, research and the like. Technicians employ many methods, tools and techniques as well, one of which is the use of charts. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns.
Technicians using charts search for archetypal price chart patterns, such as the well-known head and shoulders or double top/bottom reversal patterns, study technical indicators, moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns.
Technical analysts also widely use market indicators of many sorts, some of which are mathematical transformations of price, often including up and down volume, advance/decline data and other inputs. These indicators are used to help assess whether an asset is trending, and if it is, the probability of its direction and of continuation. Technicians also look for relationships between price/volume indices and market indicators. Examples include the moving average, relative strength index, and MACD. Other avenues of study include correlations between changes in Options (implied volatility) and put/call ratios with price. Also important are sentiment indicators such as Put/Call ratios, bull/bear ratios, short interest, Implied Volatility, etc.
There are many techniques in technical analysis. Adherents of different techniques (for example, Candlestick analysis -the oldest form of technical analysis developed by a Japanese grain trader-, Harmonics, Dow theory, and Elliott wave theory) may ignore the other approaches, yet many traders combine elements from more than one technique. Some technical analysts use subjective judgment to decide which pattern(s) a particular instrument reflects at a given time and what the interpretation of that pattern should be. Others employ a strictly mechanical or systematic approach to pattern identification and interpretation.
Contrasting with technical analysis is fundamental analysis, the study of economic factors that influence the way investors price financial markets. Technical analysis holds that prices already reflect all the underlying fundamental factors. Uncovering the trends is what technical indicators are designed to do, although neither technical nor fundamental indicators are perfect. Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions.
Group of answer choices
earnings
dividend
assets
all of the above
Group of answer choices
efficiency
stick
charts
all of the above
Technicians using charts search for archetypal price chart …………., such as the well-known head and shoulders
Group of answer choices
physiologic
safety
belonging
patterns
Technical analysts also widely use ………...of many sorts, some of which are mathematical transformations of price, often including up and down volume, advance/decline data and other inputs.
Group of answer choices
primal simplex algorithm
auction algorithm.
market indicators
none of the above
These indicators are used to help assess whether an ……... is trending
Group of answer choices
asset
physiological
safety
belonging
Technicians also look for relationships between price/volume indices and ……….indicators.
Group of answer choices
sociology research
management training
secondary and higher psychology instruction
market
Some technical analysts use subjective judgment to decide which pattern(s) a particular instrument reflects at a given time and what the interpretation of that ………... should be.
Group of answer choices
pattern
tri
fri
hex
Contrasting with technical analysis is fundamental analysis, the study of ……….. factors that influence the way investors price financial markets.
Group of answer choices
after
equal to
economic
together
Technical analysis holds that prices already reflect all the underlying ……….factors.
Group of answer choices
25
20
fundamental
40
Some traders use technical or fundamental analysis exclusively, while others use both types to make …………...decisions.
Group of answer choices
20
economic
trading
correct
4th Block Assessment
CASE STUDY
In finance, arbitrage pricing theory (APT) is a general theory of asset pricing that holds that the expected return of a financial asset can be modelled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor-specific beta coefficient. The model-derived rate of return will then be used to price the asset correctly—the asset price should equal the expected end of period price discounted at the rate implied by the model. If the price diverges, arbitrage should bring it back into line.
The theory was proposed by the economist Stephen Ross in 1976.In the APT context, arbitrage consists of trading in two assets – with at least one being mis-priced. The arbitrageur sells the asset which is relatively too expensive and uses the proceeds to buy one which is relatively too cheap.
Under the APT, an asset is mispriced if its current price diverges from the price predicted by the model. The asset price today should equal the sum of all future cash flows discounted at the APT rate, where the expected return of the asset is a linear function of various factors, and sensitivity to changes in each factor is represented by a factor-specific beta coefficient.
A correctly priced asset here may be in fact a synthetic asset - a portfolio consisting of other correctly priced assets. This portfolio has the same exposure to each of the macroeconomic factors as the mis-priced asset. The arbitrageur creates the portfolio by identifying x correctly priced assets (one per factor plus one) and then weighting the assets such that portfolio beta per factor is the same as for the mispriced asset.
When the investor is long the asset and short the portfolio (or vice versa) he has created a position which has a positive expected return (the difference between asset return and portfolio return) and which has a net-zero exposure to any macroeconomic factor and is, therefore, risk free (other than for firm-specific risk). The APT along with the capital asset pricing model (CAPM) is one of two influential theories on asset pricing. The APT differs from the CAPM in that it is less restrictive in its assumptions. It allows for an explanatory (as opposed to statistical) model of asset returns. It assumes that each investor will hold a unique portfolio with its own particular array of betas, as opposed to the identical "market portfolio". In some ways, the CAPM can be considered a "special case" of the APT in that the securities market line represents a single-factor model of the asset price, where beta is exposed to changes in value of the market.
Additionally, the APT can be seen as a "supply-side" model, since its beta coefficients reflect the sensitivity of the underlying asset to economic factors. Thus, factor shocks would cause structural changes in assets' expected returns, or in the case of stocks, in firms' profitability.
On the other side, the capital asset pricing model is considered a "demand side" model. Its results, although similar to those of the APT, arise from a maximization problem of each investor's utility function, and from the resulting market equilibrium (investors are considered to be the "consumers" of the assets).
Note: this is a timed quiz. You may check the remaining time you have at any point while taking the quiz by pressing the keyboard combination SHIFT, ALT, and T... Again: SHIFT, ALT, and T...
…………..is a general theory of asset pricing that holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor-specific beta coefficient.
Group of answer choices
APT
motivation
style
none of the above
is a general theory of asset pricing that holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor-specific beta coefficient.
Group of answer choices
economics
political science
psychology
APT
arbitrage consists of trading in two ………... – with at least one being mis-priced.
Group of answer choices
military bearing
physical fitness
confidence
assets
The arbitrageur sells the asset which is relatively too expensive and uses the proceeds to ………..one which is relatively too cheap.
Group of answer choices
buy
motivation
style
none of the above
Under the APT, an asset is mispriced if its……...diverges from the price predicted by the model.
Group of answer choices
same
current price
equal
relevant
The ............. today should equal the sum of all future cash flows discounted at the APT rate, where the expected return of the asset is a linear function of various factors, and sensitivity to changes in each factor is represented by a factor-specific beta coefficient.
Group of answer choices
physical
asset price
non-cooperative
emotional
A correctly priced ……….. here may be in fact a synthetic asset - a portfolio consisting of other correctly priced assets.
Group of answer choices
physical
cooperative
asset
all of the above
This ……... has the same exposure to each of the macroeconomic factors as the mispriced asset.
Group of answer choices
physical
portfolio
non-cooperative
emotional
The ……….. creates the portfolio by identifying x correctly priced assets (one per factor plus one) and then weighting the assets such that portfolio beta per factor is the same as for the mispriced asset.
Group of answer choices
physical
cooperative
arbitrageur
shares
The theory was proposed by the economist Stephen Ross in 1976.
Group of answer choices
APT
motivation
style
none of the above
5th Block Assessment
CASE STUDY
The Treynor ratio (sometimes called the reward-to-volatility ratio or Treynor measure), named after Jack L. Treynor, is a measurement of the returns earned in excess of that which could have been earned on an investment that has no diversifiable risk (e.g., Treasury bills or a completely diversified portfolio), per each unit of market risk assumed.
The Treynor ratio relates excess return over the risk-free rate to the additional risk taken; however, systematic risk is used instead of total risk. The higher the Treynor ratio, the better the performance of the portfolio under analysis.Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any, of active portfolio management. It is a ranking criterion only. A ranking of portfolios based on the Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a broader, fully diversified portfolio. If this is not the case, portfolios with identical systematic risk, but different total risk, will be rated the same. But the portfolio with a higher total risk is less diversified and therefore has a higher unsystematic risk which is not priced in the market.
An alternative method of ranking portfolio management is Jensen's alpha, which quantifies the added return as the excess return above the security market line in the capital asset pricing model. As these two methods both determine rankings based on systematic risk alone, they will rank portfolios identically.In finance, Jensen's alpha (or Jensen's Performance Index, ex-post alpha) is used to determine the abnormal return of a security or portfolio of securities over the theoretical expected return. It is a version of the standard alpha based on a theoretical performance index instead of a market index.
The security could be any asset, such as stocks, bonds, or derivatives. The theoretical return is predicted by a market model, most commonly the capital asset pricing model (CAPM). The market model uses statistical methods to predict the appropriate risk-adjusted return of an asset. The CAPM for instance uses beta as a multiplier.Jensen's alpha was first used as a measure in the evaluation of mutual fund managers by Michael Jensen in 1968. The CAPM return is supposed to be 'risk adjusted', which means it takes account of the relative riskiness of the asset.
This is based on the concept that riskier assets should have higher expected returns than less risky assets. If an asset's return is even higher than the risk adjusted return, that asset is said to have "positive alpha" or "abnormal returns". Investors are constantly seeking investments that have higher alpha.
Since Eugene Fama, many academics believe financial markets are too efficient to allow for repeatedly earning positive Alpha, unless by chance. Nevertheless, Alpha is still widely used to evaluate mutual fund and portfolio manager performance, often in conjunction with the Sharpe ratio and the Treynor ratio.
1 . ………...is a measurement of the returns earned in excess of that which could have been earned on an investment that has no diversifiable risk
Group of answer choices
Treynor ratio
leadership
motivation
all
Group of answer choices
history
product
market
risk-free rate
Group of answer choices
club
seminar
hotel
portfolio
4.
Like the ……….. ratio, the Treynor ratio (T) does not quantify the value added, if any, of active portfolio management.
Group of answer choices
performance optimization
safety engineering
testing
Sharpe
Group of answer choices
collective values,
beliefs
principles of organizational members
fully diversified
……………….is used to determine the abnormal return of a security or portfolio of securities over the theoretical expected return.
Group of answer choices
club
seminar
hotel
Jensen alpha
The security could be any asset, such as ,…………..
Group of answer choices
stock
assets
derivatives
all
The theoretical return is predicted by a market model, most commonly the …………
Group of answer choices
capital asset pricing model (CAPM).
different
unequal
relevant
The CAPM for instance uses …………. as a multiplier.
Group of answer choices
beta
leadership
motivation
all
It is a version of the standard alpha based on a theoretical performance index instead of a market index.
Group of answer choices
Jensen alpha
leadership
motivation
all
Full Syllabus Assessment
CASE STUDY
Mutual fund executives owe their livelihoods to shareholders, but most treat investors like ordinary customers rather than partners or bosses.
That’s why we get to this time of year and I feel a need to ask fund honchos to give shareholders some meaningful gifts for the holidays. The changes fund firms could make to help shareholders are endless — but I’m not greedy. Every year or two I create a wish list and would gladly settle for just a few upgrades at a time.
Fund companies should fulfill shareholder wishes not because ‘tis the season for it, but because it’s the right thing to do. Regulators know it; in the past, the things I have requested have become reality mostly when some wrongdoing came to light that required a slap on the wrist to the industry. These “reforms” have mostly been about injecting some common sense into the fund-ownership process.Funds provide investment objectives, but that’s a vague statement, more about methods than expectations. Rules prohibit funds from making projections.
But managers and fund directors know the background and they create targets that aren’t shared with the outside world; they understand that they created a fund because they felt they could achieve, say, “above-average results over time horizons of five years and longer.” Fund boards use those kinds of expectations to decide if a manager is doing the job well enough to be rehired, but they also give those managers a lot of slack. Shareholders, however, should be able to see whether the fund is achieving its internal goals. It would let them create clear expectations and measure whether a fund is meeting them.Many times, a fund’s biggest asset to the sponsor is that marketers can sell it, rather than that it can deliver superior performance. In those cases, it’s not in the shareholder’s best interests to keep things going.
Unfortunately, because mediocre funds create something of an annuity for the management company — regularly delivering fees from investors who are inert or simply oblivious to inferior, uninspired results — the fund world is not a meritocracy. Sponsors often keep lousy funds operating for decades.
If a fund doesn’t deserve to survive — if performance is undistinguished and second-rate — kill it off. Merge or liquidate it, but encourage shareholders to find worthwhile investments rather than subjecting them to second-rate, uninspired issues.The Internal Revenue Service does a better job of highlighting changes to tax codes and filing instructions than funds do of notifying shareholders whenever there are changes in the prospectus or operating rules. A simple, highlighted summary of what is new and different this year immediately alerts investors to changes; even if all they do is skim the documents, it enhances their understanding of the fund, and reduces the potential for surprises.
Mutual fund executives owe their livelihoods to shareholders, but most treat ………... like ordinary customers rather than partners or bosses.
Group of answer choices
Henri Fayol
Chester Barnard
Mary Parker Follet
Investors
……... companies should fulfill shareholder wishes
Group of answer choices
Fund
Henri Fayol
Chester Barnard
Mary Parker Follet
Funds provide ………... objectives, but that’s a vague statement, more about methods than expectations.
Group of answer choices
investment
culture
leadership
motivation
Rules prohibit funds from making ………....
Group of answer choices
social relationships
job content
projections
all
Shareholders, however, should be able to see whether the ………...is achieving its internal goals.
Group of answer choices
Lillian Gilbreth
Frank Gilbreth
fund
none of the above
a fund’s biggest asset to the ………. is that marketers can sell it
Group of answer choices
leadership
sponsor
style
none of the above
mediocre funds create something of an …………. for the management company
Group of answer choices
Henri Fayol
annuity
Chester Barnard
Mary Parker Follet
…………... often keep lousy funds operating for decades.
Group of answer choices
leadership
Sponsors
style
none of the above
Merge or liquidate it, but encourage …….to find worthwhile investments rather than subjecting them to second-rate, uninspired issues.
Group of answer choices
shareholders
culture
leadership
motivation
it’s not in the ……….. best interests to keep things going.
Group of answer choices
shareholder’s
Henri Fayol
Chester Barnard
Mary Parker Follet