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Securities Analysis and Portfolio Management

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It is gratifying to note that this book has come for the eleventh revision, for which the credit should be given to the faculty and students alike interested in this subject. This is particularly tuned to the Indian students and to the Indian environment or to the similarity of this. The theoretical part is kept simple and lucid for the average student to understand easily. The tenor of the treatment is that the subject is practical oriented and useful for self study and the student’s own analysis and research, on many topics of this subject.

Every edition has included some new changes such as new case studies or examples in addition of the updating of the material. Many errors which crept into it at various stages have also been rectified. The effort of each edition is at improving the subject and further simplification of the material. In a subject as this, there are bound to be some repetitions and they are purposely kept intact for the benefit of the students. Each chapter is made self-sufficient, so that the reader can concentrate only on those topics without going back and forth. As such, some concepts and material have to be repeated quite often such as the return and risk, types of return and risk, etc.

The revision has to bear in mind that although the conceptual part of portfolio management or security analysis may remain unchanged, the environment in which practical operations take place change from time to time depending on a host of factors. For this reason, the material needs to be updated from time to time. The portfolio management depends on the securities pricing, their risk-return characteristics and the corporate state of affairs, which depends on the economy, industry, and savings and investment trends in the sector and the economy. In fact, the stock market being a window of the economy, has to reflect all facts and figures of the economy — internal and external.

The GDP growth rate was robust up to 2007-08 but declined to around 6.8%, in 2008-09 and hopes are that it will continue to grow at around 8% in 2009-10 and 8.5% in 2010-11. Despite such hope, the IIP growth rate was only 8% and in particular the infrastructure industrial growth rate was lower at 6.6% in 2009-10 and 5% in 2011-12. Even then, the continued growth rate of GDP in the economy of India was maintained by the growth of around 9 to 10% in services sector.

Contents :

  1. INTRODUCTION TO SECURITIES

What is Investment? — What is Security? — What is Portfolio? — Investment and Speculation — What is Security Analysis? — Investment Activity — Features of Investment Avenues — Risk and Return Relationships — Need for Tradability — Classes of Investments — Investment Profile of Average Household — Noncorporate Investments — Corporate Investments — Investments of Post Offices.

  1. MARKETS FOR SECURITIES AND TAXES

Legal Framework for Securities Markets in India — Investors and Stock Exchanges — Secondary Market Structure — Primary Market — Interconnected Stock Exchange of India — Factors for Investment in Primary Market — Listing Formalities and Procedure — Secondary Market — SEBI and Its Functions — Grievances of Investors — Trading and Settlement — Personal Income Taxation.

  1. RISK AND RETURN — CONCEPTS AND ANALYSIS

Components of Return — Risk Elements — Systematic and Unsystematic Risks — Precise Measures of Risk — Risk and Returns — Capital Assets Pricing Model — Security Market Line (SML) — Portfolio Risk — Arbitrage Pricing Theory — Empirical Testing of APT Model — Problems.

  1. ECONOMIC ANALYSIS

Investment Decision — Economic and Industry Factors — Environmental Considerations — Tax Planning — Execution of Investment Decisions — Forecasting Need — Sources of Investment Information — Analysis — Interpretation — Average and Marginal Costing — Inflation Adjustment — Interpretation.

  1. INDUSTRY ANALYSIS

Industry Group — Sources of Information and Analysis — Importance of Government Policy — Industrial Policy — New Industrial Policy — Policy on Foreign Investment and Collaboration — Industry Groups Listed on Stock Exchanges — Example of Industry Analysis — Investment Decision — Problems.

  1. BASIS FOR COMPANY ANALYSIS

Elements of Financial Analysis — Ratio Analysis — Funds Flow Analysis — Trend Analysis — How to Prepare Cash Flow Statement? — Company Analysis: Sources of Data — Accounting Limitations — Financial Statements — Analysis of Financial Position — Types of Shares — Net Financial Results — Corporate Performance — Blue Chips — Emerging Blue Chips — Honeywell: A Case Study.

  1. COMPANY STUDIES AND EARNINGS FORECASTS

Factors Influencing Earnings — Mechanics of Earnings Flows — EBT Model — Capitalisation or Multiplier Approach — Dividends and Earnings Models — Formula Plans — Forecasting Earnings — Role of Costs and Break-even Point — Problems — Case Study of TISCO and Sun Pharma Industries.

  1. COMPANY ANALYSIS AND EQUITY RESEARCH

Foundation of Research — Forecasting Methods — Present Value Method — Multi-period HPY — Factors Influencing P/E Multiple — Industry and Company Analysis — Investment Decision — Passive and Active Asset Management— Investment in Foreign Markets — Problems — Appendix.

  1. SECURITY PRICING

Factors Influencing Valuation — Constant Growth Model — Equity Valuation — Dividends Capitalisation — Earnings Capitalisation — Use of P/E Ratio — Security Pricing Models — Do Dividends Matter? — Earnings Model, Book Value Model — Graham’s Approach — Problems.

  1. FINANCIAL ARITHMETICS FOR EQUITY AND BONDS

Calculation of Returns Yields — Yields on Bonds — Yield on Equity — Time Value of Money — Yield to Maturity — Valuation of Convertibles — Conversion Ratio — Conversion Premium — Valuation of Rights — Callable Bonds — Warrants and Loyalty Coupons — Problems.

  1. BOND ANALYSIS — MACRO-LEVEL

Advantages of Bonds — Debt Market in India — Public Sector Bonds — ICD and Fixed Deposits — Some Innovative Schemes — Listing of Debentures — Fixed Deposits — Asset-based Securities — Inflation Risk — Price Risk — Determinants of Interest Rates — Structure of Interest Rates — Reforms — Yields —  Shape of Yield Curve.

  1. BOND ANALYSIS — MICRO-LEVEL

Credit Rating System — Risk Factors — Trust Deed — SEBI Guidelines — Earnings Coverage — Liquidity — Management — Non-risk Factors — Government Bond Market in India — Operations of Commercial Banks — RBI and Yield Pattern.

  1. BOND MANAGEMENT — STRATEGIES

Bond Market in India — Interest Rate Structure — Properties of Bonds — Accrued Interest — Discrete Models — Bond Price Theorems — Malkiel Bond Theorems — Types of Bond Management — Yield Curve Study — Riding the Yield Curve — Duration Measure — Duration and Immunisation — Macaulay’s Duration — Theorems of MD — Hicks Modified Duration — Immunisation — Problems of Immunisation — Bond Portfolio Management — Dedicated Portfolio — Price Elasticity — Volatility of Bond Prices — Immunisation Problems — Bond Valuation Problems.

  1. OPTIONS TRADING

What is Options? — Calls and Puts — Types of Derivatives — Options Price — Writer of Options — Price Changes — Risks — Market Structure — Salient Features of Options — Options vs. Badla — Report on Derivatives — Problems.

  1. VALUATION OF RIGHTS, WARRANTS AND CONVERTIBLE CLAIMS

What is Contingent Claim? — What is a Convertible Security? — Valuation of Rights — Preference Shares — Pricing of Convertibles — Graphical Depiction — Brigham’s Model — Valuation of Options — Black-Scholes Model — Problems.

  1. FUTURES TRADING

What is Futures? — Index Futures — Valuation of Index Futures — Arbitrage — Hedging — Topix Price Index Futures — Advantages of Futures Index — Duration Effect — Options on Futures Contracts — NSE Proposals — Derivative Trading in Securities.

  1. FUNDAMENTAL ANALYSIS

Influence of the Economy — Economy vs. Industry and Company — Industry Analysis — Example of an Industry Analysis — Example of Company Analysis — How to Pick up Growth Stocks? — Example of Finolex Industries.

  1. TECHNICAL ANALYSIS

Importance of Timing — Basic Tenents of Technical Analysis — Tools of Technical Analysis — Dow Theory — Chartist Method — Import of Technical Analysis — Charts and Trend Lines — Moving Averages — Breaking the Neckline — Elliot Wave Theory — Oscillator.

  1. EFFICIENT MARKET THEORY (Random Walk Hypothesis)

What is Security Valuation? — What is Market Analysis? — Random Walk Hypothesis — Theoretical Framework — Investment and Time Value of Money — Efficient Market Theorem — FAMA’s Contribution — Test of Random Walk Theory — Essence of Random Walk Theory — Gordon Hypothesis — Walter Model — M.M. Hypothesis — Graham and DODD Model — Malkiel and Cragg Model — Cootner’s Model — Limitations — Assumptions.

  1. INTRODUCTION TO PORTFOLIO THEORY

Conditions of Certainty — Opportunities Set with Uncertainty — Risk Measures — Risk and Return in Portfolio Theory — What is Portfolio?

  1. CAPITAL MARKET THEORY

Content of Capital Market Theory — Efficient Frontier — CML — SML — Market Efficiency and CAPM — Trend Walk Theory — CAP Theory — Modern Portfolio Theory — Limitations of CAPM — Investors’ Wealth Maximisation — Indifference Curve Technique — Efficient Frontier.

  1. RISK AND RETURN IN PORTFOLIO MANAGEMENT

What is Risk? — How to Minimise Risk? — Risk-Return Analysis — Decomposition of Return — Problems.

  1. CAPITAL ASSET PRICING MODEL (CAPM)

CAPM Assumptions — CML — SML — CAPM Analysis — Uses and Limitations — Diversification — Example on Measurement of Risk — Markowitz Diversification — Asset Pricing — Implication of SML — Problems.

  1. PORTFOLIO ANALYSIS

Return on Portfolio — Risk on Portfolio — Regression Equation — Alpha — Beta — Rho — An Example for Covariance and Correlation — Problems.

  1. DIVERSIFICATION AND TECHNIQUES OF RISK REDUCTION

What is Diversification? — Random Diversification — International Diversification — Risks in Foreign Investment — FFI’s Investment in India — Passive International Investment — Active International Investment — Advantages of Diversification — Naive Diversification — Evans and Archers’ Study.

  1. BASICS OF PORTFOLIO MANAGEMENT IN INDIA

Investment Strategy Objectives — Risk and Beta — Time Value of Money Application to Portfolio Management — MPT and Dominance Concept — SEBI Guidelines for Portfolio Managers — Portfolio Managers — Portfolio Management Service — SEBI Norms.

  1. MARKOWITZ MODEL

Assumptions of Markowitz Theory — Markowitz Diversification — Parameters — Criteria of Dominance — Markowitz Model — Portfolio Risk — Arbitrage Pricing Theory — Asset Selection — Components of Expected Return — Empirical Testing — Sharpe Model — Optimal Portfolio of Sharpe — Basis for Cut-off Rate — Problems.

  1. MODERN PORTFOLIO THEORY

Basis of Modern Portfolio Theory — Dominance Concept — Role of Beta — Duration — Target Return — Problems.

  1. PORTFOLIO MANAGEMENT: CONSTRUCTION, REVISION AND EVALUATION

Fact Sheet — Clients’ Database — Objectives of Investors — Motives for Investment —Tax Provisions — Capital Gains — Portfolio Construction — Risk-Return Analysis — Time Horizon of Strategy — Types of Risk — Efficient Portfolio — Market Efficiency Theorem — Diversification — Portfolio Management — Elements of Portfolio Management — Execution of Strategy — Monitoring — Building of the Portfolio — Portfolio Revision — Security Pricing and Portfolio Management — Markowitz Model of Portfolio Theory — Risk Analysis — Evaluation of Portfolio Performance — Criteria for Evaluation of Portfolio — Example of Sharpe’s Measure — Treynor’s Measure Evaluation Problem — Comparison — Jensen’s Measure — Jensen’s Model — Evaluation Criteria for Portfolios — Portfolio Performance Evaluation — Jensen’s Performance Measure: (JP) — Returns and Performance Evaluation — Problems — Take Home Problems.

  1. PORTFOLIO MANAGEMENT BY CORPORATES

Risk Return of Corporate Business — Kinds of Risk — Markowitz Diversification — Theoretical Framework — Revenue Sensitivity — Agency Theory — Cash Flow Estimates — Adjusting Company Beta.

  1. PORTFOLIO REVISION – FURTHER ASPECTS

Introduction – Formula Plan – Time Value of Money and Securities – Constant Dollar Value Plan – Constant Dollar Cost Averaging – Constant Ratio Plan – Variable Ratio Plan – Conclusions.

  1. LINEAR PROGRAMMING APPLICATION

Problem Setting — Assumptions — Definition — Geometrical or Graphical Method — Simplex Method — LPP Basic Solutions — Application of LP to Portfolio Management — Problems.

  1. PORTFOLIO MANAGEMENT IN MUTUAL FUNDS

Introduction — Definition — Types of Funds — Unit Trust of India — UTI Schemes for Resident Indians — Off shore Funds — SBI Mutual Fund — India Magnum Fund N.V. — Other Funds — Overall Progress in India — Investment Policy — For All MFs Common Rules — Advantages of Mutual Funds — Progress in Nineties — Regulation of Mutual Funds — Money Market Mutual Funds (MMFs) — Structure and Growth of MF Industry — MMF’s Regulation — Authorisation of New Mutual Funds — Mutual Funds Present Status — Evaluation of Performance of MF — Taxation and M.Fs — Wealth Tax — Gift Tax — Tax Benefit under 1999-2000 — Saga of Fortunes of MFs — Stocklending by Mutual Funds — Annexure I – RBI Guidelines on Mutual Funds — Annexure II – SEBI.

  1. TRADING IN PORTFOLIO MANAGEMENT  

Introduction — What is Disinvestment? — Why Disinvestment? — Role of Disinvestment — Disinvestment Under Adverse Conditions — Disinvestment Motivated by Market Conditions — Types of Disinvestment — Factors Influencing Disinvestment — Role of Fundamental Factors — How to Make Disinvestment Decision? — Objectives — Investment Avenues — Stock Market Disinvestment — Fundamental Analysis — FIIs and the Art of Contrariness — FII Investments in India — Role of Technical Factors — Timing of Disinvestment (Through Technical Analysis) — RSI (Relative Strength Index) — Moving Average Convergence and Divergence (MACD) — Disinvestment by Government Sector — Problems of PSU Disinvestment — NAVARATNAS — Central Public Sector Undertakings — Divestment Methods of Government — Open Bidding Process of Divestment — A Proposal on Mutual Fund Rate — Banks’ Divestment Scheme

  1. SECURITIES MARKET REPORT (BSE)

Introduction — Global Comparison — Overview of BSE Market Report — Globalisation Trend — Daily Report Analysis — Sensex Shows 5% Fall on FII Selling — Price Index Snapshots of the Market — Trade Turnover — Advance/Decline Line — Role of Institutional Agencies on the Market — Trading Cycle — Record Dates and Book Closure — Circuit Band Hitters — Speculative Positions — Surveillance System — Index Details — BSE Stock Tables — ET/BSE Indicators — Face Value — Market Macro Indicators — Badla Statistics — Derivatives Trading.

Selected Bibliography

ISBN

Year of publication

2022

Edition

Twelfth

Pages

492

Weight

870 (In Grams)

Library Dollar Price

68

Type

Author

Dr.V.A.Avadhani

Publisher

Himalaya pub