Page 1 of 5
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 11
October 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 244
A Study on Security Analysis of Portfolio Management
Dr.I.Satyanarayana1
, N.B.C. Sidhu*2
, Malloju Krishna Ma Chary3 (15X31E0018)
Abstract:
Investment is a financial activity that involves risk.
It is the commitment of funds for a return expected
to be realized in the future. Investment can be
made in financial assets or physical assets. In
either case there is possibility that the actual
return may vary from the expected return that
possibility is risk involved in it. Investment is
generally distinguished from speculation in terms
of 3 factors namely risk, capital gain and time
period. Gambling is the extreme form of
speculation. Investors may be individual or
institutions there is large no. of investment
avenues for savers in India. Corporate securities,
deposits in the banks and Non-Banking companies,
mutual funds schemes, provident fund schemes, life
insurance policies, government securities are some
of the important avenues.
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1.Principal, Sri Indu institute of Engineering & Technology, Sheriguda, Ibrahimpatnam,Telangana, India.
2.Assoc. Prof & HOD, Dept. of Master of Business Administration, Sri Indu Institute of Engineering &
Technology, Sheriguda, Ibrahimpatnam, Telangna, India.
3.Student, Dept. of Master of Business Administration, Sri Indu Institute of Engineering & Technology,
Sheriguda, Ibrahimpatnam, Telangna, India.
Keywords: financial Markets, functions of financial Markets, Portfolio Management,......etc
Introduction:
INVESTMENT AVENUES
There are a large number of investment
avenues for savers in India. Some of them are
marketable and liquid, while others are non- marketable. Investment avenues can be broadly
categorized under the following head.
CORPORATE SECURITIES:
Equity shares.
Preference shares.
Debentures/Bonds.
Derivatives.
Others.
CORPORATE SECURITIES
Joint stock companies in the private sector
issue corporate securities. These include equity
shares, preference shares, and debentures. Equity
shares have variable dividend and hence belong to
the high risk-high return category; preference
shares and debentures have fixed returns with
lower risk. The classification of corporate
securities that can be chosen as investment avenues
can be depicted as shown below:
Characteristics of investment are Return, Risk,
Safety and liquidity. Risk and return of an
investment related. Normally, the higher the risk,
the higher is the return. Hence an investor
generally prefers liquidity for his investment,
safety of his funds, good return with minimum risk
and maximum return.
RETURN:
The term Return from an investment refers
to the benefits from that investment. In the field of
finance in general and security analysis in
particular, the term return is almost invariably
associated with a percentage (say, return on
investment of 12%) and not a mere amount (like,
profit of Rs. 150.). In security analysis we are
primarily concerned with return forms a particular
investment say, a share or a debenture or other
financial instrument.
Single Period Returns:
It refers to a situation where an investor is
concerned with return from a single period
(Say, one day, one week, one month or one
year).
Multi Period Returns:
It refers to situation where more than single period
returns are under consideration. Investor is concern
with computing the return per period, over a longer
period.
Ex-Post Returns:
The measurement of return from the historical data
can be referred to Ex- Post returns. This includes
the both current income and capital gains (or
losses) brought about by gains price of the security.
The income and capital gains are then expressed as
.a percentage of the initial investment.
Ex-Ante Returns:
The majority of investors tend to emphasize the
return they expect from a security while making
investment decision and the expected return of a
security. This enables the investors to look into
Page 2 of 5
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 11
October 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 245
future prospects from an investment and the
measurement of returns from expectation of
benefits is known as ex-ante returns.
RISK AND EXPECTED RETURN:
There is a positive relationship between the amount
of risk and the amount of expected return i.e., the
greater the risk, the larger the expected return and
larger the chances of substantial loss. One of the
most difficult problems for an investor is to
estimate the highest level of risk he is able to
assume.
.
TYPES OF RISKS:
Risk consists of two components. They are
Systematic Risk
Un-systematic Risk
1. Systematic Risk:
Systematic risk is caused by factors external to the
particular company and uncontrollable by the
company. The systematic risk affects the market as
a whole. Factors affect the systematic risk are
Economic conditions
Political conditions
Sociological changes
The systematic risk is unavoidable. Systematic risk
is further sub-divided into three types. They are
Market Risk
Interest Rate Risk
Purchasing Power Risk
A). Market Risk:
One would notice that when the stock market
surges up, most stocks post higher price. On the
other hand, when the market falls sharply, most
common stocks will drop. It is not uncommon to
find stock prices falling from time to time while a
company‘s earnings are rising and vice-versa. The
price of stock may fluctuate widely within a short
time even though earnings remain unchanged or
relatively stable.
B). Interest Rate Risk:
Interest rate risk is the risk of loss of principal
brought about the changes in the interest rate paid
on new securities currently being issued.
C). Purchasing Power Risk:
The typical investor seeks an investment which
will give him current income and / or capital
appreciation in addition to his original investment.
2. Un-systematic Risk:
Un-systematic risk is unique and peculiar to a firm
or an industry. The nature and mode of raising
finance and paying back the loans, involve the risk
element. Financial leverage of the companies that
is debt-equity portion of the companies differs
from each other. All these factors Factors affect the
un-systematic risk and contribute a portion in the
total variability of the return.
Managerial inefficiently
Technological change in the production process
Availability of raw materials
Changes in the consumer preference
Labour problems
The nature and magnitude of the above mentioned
factors differ from industry to industry and
company to company. They have to be analyzed
separately for each industry and firm. Un- systematic risk can be broadly classified into:
Business Risk
Financial Risk
BUSINESS RISK:
Business risk is that portion of the unsystematic
risk caused by the operating environment of the
business. Business risk arises from the inability of
a firm to maintain its competitive edge and growth
or stability of the earnings. The volatibility in stock
prices due to factors intrinsic to the company itself
is known as Business risk. Business risk is
concerned with the difference between revenue and
earnings before interest and tax. Business risk can
be divided into.
i) Internal Business Risk
Internal business risk is associated with the
operational efficiency of the firm. The operational
efficiency differs from company to company. The
efficiency of operation is reflected on the
company‘s achievement of its pre-set goals and the
fulfilment of the promises to its investors.
ii) External Business Risk
External business risk is the result of operating
conditions imposed on the firm by circumstances
beyond its control. The external environments in
which it operates exert some pressure on the firm.
The external factors are social and regulatory
factors, monetary and fiscal policies of the
government, business cycle and the general
economic environment within which a firm or an
industry operates.
FINANCIAL RISK:
It refers to the variability of the
income to the equity capital due to the debt capital.
Financial risk in a company is associated with the
capital structure of the company. Capital structure
of the company consists of equity funds and
borrowed funds. To provide knowledge to investor
Y
Page 3 of 5
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 11
October 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 246
about various type of risk associated various
investment instruments.
Security not only involves keeping the principal
sum intact but also keeping intact its purchasing
power.
Stability of income so as to facilitate planning
more accurately and systematically the
reinvestment or consumption of income.
Capital growth which can be attained by
reinvesting in growth securities or through
purchase of growth securities.
Financial reasons: make money, maximize returns
Strategy: expression of strategy, supports strategy
To communicate vertically; to create visibility
To communicate horizontally
To increase objectivity
To increase sales and market share
To achieve focus
The port folio management deals with the process
of selection securities from the number of
opportunities available with different expected
returns and carrying different levels of risk and the
selection of securities is made with a view to
provide the investors the maximum yield for a
given level of risk or ensure minimum risk for a
level of return. Portfolio management is a process
encompassing many activities o f investment in
assets and securities. It is a dynamics and flexible
concept and involves regular and systematic
analysis, judgment and actions .The objectives of
this service are to help the unknown investor with
the expertise of professionals in investment
portfolio management.
The study covers basic means concept of equity
and equity related instruments.
The study is restricted to explain only the risk
associated with various products
The tools used for a graphical presentation of data
include pie charts and other accessories
PORTFOLIO ANALYSIS
MARKOWITZ MODEL:
Markowitz model is a theoretical framework for
analysis of risk and return and their relationships.
He used statistical analysis for the measurement of
risk and mathematical programming for selection
of assets in a portfolio in an efficient manner.
Markowitz approach determines for the investor
the efficient set of portfolio through three
important variables i.e.
Return
Standard deviation
Co-efficient of
correlation
Markowitz model is also called as a “Full
Covariance Model“. Through this model the
investor can find out the efficient set of portfolio
by finding out the trade off between risk and
return, between the limits of zero and infinity.
According to this theory, the effects of one security
purchase over the effects of the other security
purchase are taken into consideration and then the
results are evaluated. Most people agree that
holding two stocks is less risky than holding one
stock. For example, holding stocks from textile,
banking and electronic companies is better than
investing all the money on the textile company‘s
stock. Markowitz had given up the single stock
portfolio and introduced diversification. The
single stock portfolio would be preferable if the
investor is perfectly certain that his expectation of
highest return would turn out to be real.
ASSUMPTIONS:
All investors would like to earn the
maximum rate of return that they can achieve
from their investments.
All investors have the same expected single
period investment horizon.
All investors before making any investments
have a common goal. This is the avoidance
of risk because Investors are risk-averse.
Investors base their investment decisions on
the expected return and standard deviation of
returns from a possible investment.
The investor assumes that greater or larger
the return that he achieves on his
investments, the higher the risk factor
surrounds him. On the contrary when risks
are low the return can also be expected to be
low.
The investor can reduce his risk if he adds
investments to his portfolio.
An investor should be able to get higher
return for each level of risk “by determining
the efficient set of securities“.
An individual seller or buyer cannot affect
the price of a stock. This assumption is the
basic assumption of the perfectly competitive
market.
THE EFFECT OF COMBINING TWO
SECURITIES:
It is believed that holding two securities is less
risky than by having only one investment in a
person‘s portfolio. When two stocks are taken on a
portfolio and if they have negative correlation then
risk can be completely reduced because the gain on
one can offset the loss on the other. This can be
shown with the help of following example:
INTER- ACTIVE RISK THROUGH
COVARIANCE:
Covariance of the securities will help in
finding out the inter-active risk. When the
covariance will be positive then the rates of return
of securities move together either upwards or
downwards. Alternatively it can also be said that
the inter-active risk is positive. Secondly,
covariance will be zero on two investments if the
rates of return are independent. Holding two
