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Security Analysis and Portfolio Management Self-Study Notes 2025
Security Analysis and Portfolio Management Important Questions
Dibrugarh University B.Com 6th Sem Hons CBCS Pattern
UNIT-I: Investments: Meaning, Process, and Alternatives; Measurement of Risk and Return; Systematic and Unsystematic Risk; Sources and Measurement; Fundamental and Technical Analysis
True or False Questions
Investment made on house property is a non-negotiable financial investment. (Dibrugarh University 2022)
Answer: TrueDiversification reduces inflation risk. (Dibrugarh University 2022)
Answer: FalseTreasury bill is a money market security. (Dibrugarh University 2023)
Answer: TrueUnsystematic risks arise due to inflation. (Dibrugarh University 2023)
Answer: FalseThe government securities have a maturity period between 3 and 20 years. (Dibrugarh University 2024)
Answer: TrueThe basic principles of technical analysis originate from Dow theory. (Dibrugarh University 2024)
Answer: True
Fill in the Blanks Questions
Leading indicator is ______ (Sensex / GNP / Consumer Price Index). (Dibrugarh University 2022)
Answer: Sensex______ is the highly liquid security. (Share / Debenture / Treasury Bill). (Dibrugarh University 2022)
Answer: Treasury Bill______ is a combination of securities. (Dibrugarh University 2023)
Answer: PortfolioSystematic risk can be managed by the use of ______ of different companies. (Dibrugarh University 2023)
Answer: DiversificationCapital index bonds are linked with ______ (BSE-100 / Consumer Price Index / BSE-Sensex). (Dibrugarh University 2024)
Answer: Consumer Price IndexThe ______ of the stock is called the resistance area. (market price / low price / peak price). (Dibrugarh University 2024)
Answer: Peak price
Write Short Notes Question Answers
1. Systematic risk and unsystematic risk. (Dibrugarh University 2022)
Answer: Systematic risk is the risk that arises from external and uncontrollable factors that affect the entire market or economy. It includes factors such as inflation, changes in interest rates, political instability, natural disasters, and global economic events. Since it impacts the whole market, systematic risk cannot be diversified away and is often referred to as market risk or non-diversifiable risk. For example, a rise in inflation will affect almost all stocks in the market.
Unsystematic risk, on the other hand, is associated with internal factors specific to a company or industry. It includes risks such as poor management decisions, labor strikes, product recalls, or financial mismanagement. Unlike systematic risk, unsystematic risk can be minimized or eliminated through diversification—by investing in a variety of sectors and companies. Thus, while systematic risk affects the broader economy, unsystematic risk is confined to individual firms or sectors.
2. Systematic risk. (Dibrugarh University 2019, 2017)
Answer:
Systematic risk refers to the inherent risk that affects the entire market or a broad range of assets due to macroeconomic factors. This type of risk is beyond the control of individual investors or companies and cannot be mitigated by diversification. Examples of systematic risk include changes in government monetary policy, inflation rates, global economic downturns, wars, or pandemics.
Investors cannot avoid systematic risk even if they hold a well-diversified portfolio. The most common measure of systematic risk is ‘beta,’ which indicates a security’s sensitivity to overall market movements. A high beta indicates greater sensitivity to market changes. Understanding systematic risk is crucial in evaluating the overall risk-return profile of an investment.
3. Fundamental analysis. (Dibrugarh University 2019, 2014, 2013)
Answer:
Fundamental analysis is a method of evaluating securities by analyzing the underlying factors that affect a company’s financial performance. It involves a detailed examination of a company’s financial statements, management efficiency, industry trends, and economic conditions. The goal of fundamental analysis is to determine the intrinsic or fair value of a stock and compare it with its current market price to identify under- or over-valued securities.
This analysis is divided into three levels:
i) Economic Analysis – examines the overall macroeconomic environment, including GDP, interest rates, inflation, and government policies.
ii) Industry Analysis – evaluates the prospects, competition, growth potential, and regulatory environment of the industry.
iii) Company Analysis – focuses on financial ratios, profitability, liquidity, and growth indicators of the company.
Investors who rely on fundamental analysis usually follow a long-term investment approach, aiming to earn returns based on a company’s true worth.
4. Investment philosophy. (Dibrugarh University 2023)
Answer:
Investment philosophy refers to the guiding principles or beliefs that an investor follows while making investment decisions. It includes one’s attitude toward risk, return expectations, time horizon, and strategy for selecting investments. An investor’s philosophy is influenced by their financial goals, personal values, market knowledge, and behavioral tendencies.
There are several common types of investment philosophies. For example, value investors seek stocks that are undervalued by the market. Growth investors focus on companies with strong growth prospects. Income investors prefer securities that provide regular income such as dividends or interest. Index investors believe in passive investing through index funds, assuming markets are efficient.
A clear and consistent investment philosophy helps investors stay focused during market fluctuations, avoid emotional decisions, and align their actions with long-term financial goals.
5. Intrinsic value. (Dibrugarh University 2023)
Answer:
Intrinsic value is the true or fair value of a security, calculated based on its fundamentals rather than its current market price. It represents what the security is worth according to a detailed analysis of its future cash flows, earnings, dividends, and growth potential. If the market price of a stock is lower than its intrinsic value, it is considered undervalued and may be a good buying opportunity. Conversely, if the market price is higher, the stock may be overvalued.
To estimate intrinsic value, analysts use models like Discounted Cash Flow (DCF), Dividend Discount Model (DDM), or Earnings Multiples. These models consider future expected returns and adjust them using a discount rate to reflect the time value of money and risk. Understanding intrinsic value is crucial in fundamental analysis, as it helps investors make rational and informed investment decisions.
6. Risk and return measurement. (Dibrugarh University 2023)
Answer:
Risk and return are the two key aspects of any investment decision. Return is the reward or profit earned from an investment, usually expressed as a percentage. It can be in the form of dividends, interest income, or capital appreciation. Risk, on the other hand, refers to the uncertainty or variability in returns.
The measurement of return includes average return, holding period return, and compounded annual growth rate (CAGR). Risk is measured using various statistical tools such as standard deviation (which shows volatility), beta (which shows market-related risk), and coefficient of variation (risk per unit of return).
Investors must evaluate both risk and return before investing. While higher returns are desirable, they usually come with higher risks. A balanced risk-return trade-off helps investors choose the most appropriate investment according to their risk tolerance.
7. Money market security. (Dibrugarh University 2024)
Answer:
Money market securities are short-term debt instruments with high liquidity and low default risk, typically issued for a period of less than one year. These instruments are used by governments, banks, and corporations to meet their short-term financial needs and manage cash flows efficiently.
Examples of money market securities include Treasury Bills (T-Bills), Commercial Papers, Certificates of Deposit (CDs), Call Money, and Repurchase Agreements (Repos). These instruments offer a lower return compared to other financial instruments due to their safety and short maturity.
Money market instruments are ideal for conservative investors looking for stable and secure investment avenues. They also play a vital role in maintaining liquidity in the financial system and serve as a benchmark for short-term interest rates.
8. Charting analysis. (Dibrugarh University 2024)
Answer:
Charting analysis, also called technical analysis, is a method of forecasting future price movements of securities based on historical price and volume data. Investors use various types of charts such as line charts, bar charts, and candlestick charts to identify patterns, trends, and signals for buying or selling securities.
The basic principle of charting analysis is that market prices move in trends and that history tends to repeat itself. Technical analysts believe that all relevant information is already reflected in the stock price, so they focus only on price patterns and trading volumes.
Common tools used in charting analysis include moving averages, Relative Strength Index (RSI), Bollinger Bands, and MACD. This method is particularly useful for short-term traders aiming to profit from price movements rather than long-term value.
9. Risk of buying and selling options. (Dibrugarh University 2019)
Answer:
Trading in options involves various types of risks due to the complexity and leverage involved. Buyers of options risk losing the entire premium paid if the market does not move in the desired direction. For example, if a call option does not exceed the strike price before expiry, it becomes worthless.
Sellers of options, especially naked or uncovered options, face even higher risks. A call option seller may face unlimited losses if the stock price rises sharply. Similarly, a put option seller may suffer large losses if the stock price falls significantly.
Other risks include time decay, which reduces the value of an option as it nears expiration, and volatility risk, where unpredictable price swings affect option pricing. Therefore, option trading requires advanced knowledge and a high-risk tolerance.
10. Distinguish between technical and fundamental analysis. (Dibrugarh University 2018)
Answer:
Technical analysis and fundamental analysis are two major approaches to analyzing securities. Technical analysis focuses on studying past market data, mainly price and volume, to predict future price movements. It uses charts, patterns, and indicators like moving averages and RSI to make investment decisions. It assumes that all information is already reflected in the price and that trends tend to repeat.
Fundamental analysis, on the other hand, involves evaluating a company’s financial statements, management quality, industry position, and macroeconomic factors to estimate the intrinsic value of a security. It seeks to identify undervalued or overvalued stocks for long-term investment.
Thus, while technical analysis is mostly used by short-term traders, fundamental analysis is preferred by long-term investors seeking to understand a company’s real worth.
11. Process of Investments. (Dibrugarh University 2019)
Answer:
The investment process refers to the systematic approach followed by investors to achieve their financial objectives. The first step is identifying and defining investment goals, which may include wealth creation, retirement planning, or capital preservation.
Next, investors assess their risk tolerance and time horizon to create a suitable investment strategy. The third step involves conducting security analysis to evaluate the potential of various investment options such as stocks, bonds, or mutual funds. After this, a well-diversified portfolio is constructed to balance risk and return.
The investment process also includes regular portfolio monitoring and revision to reflect market changes or personal financial adjustments. Finally, performance evaluation is done to compare actual returns against the desired objectives or market benchmarks.
12. Fixed, variable and convertible securities. (Dibrugarh University 2013, 2014, 2015)
Answer:
Fixed securities are financial instruments that provide a predetermined return over a fixed period, such as bonds, debentures, and preference shares. These securities are ideal for conservative investors seeking steady income with low risk. The issuer is obligated to pay fixed interest or dividends regardless of company performance.
Variable securities, like equity shares, do not offer guaranteed returns. The returns depend on the company’s profitability and market performance. Equity shareholders may earn dividends and benefit from capital appreciation, but they also bear higher risk compared to fixed security holders.
Convertible securities are hybrid instruments, such as convertible debentures or convertible preference shares, which can be converted into equity shares after a specified period. They combine the features of fixed income with the potential for capital gain, making them attractive to investors who want both safety and growth.
13. Efficient market hypothesis
Answer:
The Efficient Market Hypothesis (EMH) is the theory that financial markets are "informationally efficient," meaning that all available information is fully and instantly reflected in asset prices. As a result, it is impossible to consistently achieve higher returns than the average market return by using either fundamental or technical analysis.
EMH has three forms:
i) Weak Form – stock prices reflect all past trading information.
ii) Semi-Strong Form – stock prices reflect all publicly available information.
iii) Strong Form – stock prices reflect all information, both public and private.
According to EMH, only random chance or insider information (in violation of regulations) could lead to consistently higher returns. Critics of EMH argue that market anomalies, irrational behavior, and delayed reactions challenge the idea of perfect efficiency.
14 Marks Questions (and Similar High-Mark Questions Adjusted to 14 Marks)
1. Define the term 'Investment'. Discuss the investment process involved in a series of activities starting from the policy formulation. (Dibrugarh University 2019)
Answer:
Investment refers to the allocation of funds to financial assets or real assets with the objective of generating income, profit, or capital appreciation over time. In simple terms, investment involves the commitment of current funds in anticipation of receiving future benefits.
Investment is a dynamic and continuous process that involves a systematic approach to decision-making. The steps in the investment process include:
i) Investment Policy Formulation:
This is the first step in the investment process where the investor decides about the objectives of investment such as safety, liquidity, income, or capital appreciation. It also involves setting the risk-return preferences, time horizon, and asset allocation preferences.
ii) Investment Analysis:
Once the policy is set, the next step is analyzing various investment alternatives. This includes a detailed examination of financial assets like stocks, bonds, mutual funds, and real estate, using fundamental and technical analysis. The purpose is to evaluate the risk-return characteristics of different securities.
iii) Valuation of Securities:
At this stage, investors determine the intrinsic value of different investment options using valuation models. For instance, the present value of expected future returns is calculated to determine whether a security is under-priced or overpriced in the market.
iv) Portfolio Construction:
After identifying suitable investment avenues, a portfolio is constructed by combining different assets in such a way that the expected return is maximized while minimizing the associated risk through diversification.
v) Portfolio Revision:
Since the financial markets are dynamic, regular monitoring and revision of the portfolio are necessary. Investors may rebalance their portfolios to maintain the desired risk-return profile, respond to changes in market conditions, or realign with financial goals.
vi) Portfolio Evaluation:
Finally, the performance of the investment portfolio is evaluated using various performance measures such as Sharpe Ratio, Treynor Ratio, Jensen’s Alpha, etc., to assess the effectiveness of the investment strategy.
Thus, investment is not a one-time act but a comprehensive and structured process requiring knowledge, skill, and periodic reassessment.
2. What do you mean by unsystematic risk? What are its sources? How can it be managed? Detail out with examples. (Dibrugarh University 2019, 2015)
Answer:
Unsystematic risk, also known as specific or diversifiable risk, refers to the risk associated with an individual company or industry. It arises due to internal factors specific to a firm or sector and is independent of overall market movements. Unlike systematic risk, unsystematic risk can be reduced or eliminated through diversification.
Sources of Unsystematic Risk:
i) Business Risk: This arises from the internal operations of a firm, such as production inefficiencies, management failures, or declining sales. For example, if a company’s new product fails in the market, it could lead to losses.
ii) Financial Risk: This relates to the way a company finances its assets. Excessive use of debt financing increases financial risk due to fixed interest obligations. A firm with a high debt-equity ratio may face financial distress in case of declining revenues.
iii) Operational Risk: These risks arise from internal system failures, technology issues, or human errors. For instance, a data breach or production accident could negatively impact a firm.
iv) Regulatory and Legal Risk: Companies may face risks from changes in laws, regulations, or legal issues like lawsuits. For example, a ban on a pharmaceutical drug could affect the company manufacturing it.
v) Product Risk and Labor Issues: Introduction of defective products or strikes by employees can impact the operations and profitability of a company.
Management of Unsystematic Risk:
i) Diversification: The most effective way to manage unsystematic risk is to invest in a diversified portfolio of securities from different industries and sectors. By doing this, poor performance in one security can be offset by better performance in another.
ii) Research and Analysis: Thorough research and fundamental analysis before investing in any company can help identify potential risks in advance.
iii) Portfolio Rebalancing: Regular review and adjustment of the portfolio help to mitigate exposure to risky or underperforming securities.
iv) Stop-Loss Strategy: Setting a stop-loss limit can help reduce the impact of unexpected losses from individual securities.
Example:
If an investor invests all funds in a single airline company, and that company faces a strike, the investment could suffer a major loss. However, if the investor had invested in companies from multiple sectors such as healthcare, IT, FMCG, etc., the negative impact would be minimal.
3. "Without adequate information, the investor cannot carry out his investment programme." Explain. (Dibrugarh University 2022)
Answer:
The success of any investment program largely depends on the availability and quality of information. Information is crucial in making sound investment decisions because it reduces uncertainty and helps investors in evaluating risk and return accurately.
i) Decision-Making Based on Data: Investment decisions such as selection of assets, timing of investment, and portfolio construction rely on fundamental and technical information. Without adequate data about financial performance, industry trends, and macroeconomic conditions, the investor may take incorrect or speculative decisions.
ii) Valuation of Securities: To evaluate whether a security is under-priced or overpriced, an investor needs detailed financial statements, earnings reports, market trends, and valuation models. Lack of information could lead to investing in overvalued stocks, resulting in losses.
iii) Risk Assessment: Information helps in identifying various types of risks—market risk, credit risk, operational risk, etc. If the investor does not have access to company disclosures or industry performance reports, it becomes difficult to assess risk accurately.
iv) Portfolio Management: Effective diversification and portfolio balancing require knowledge about different asset classes and their interrelationships. Inadequate information may lead to overexposure to a particular sector, increasing the investor’s vulnerability.
v) Market Timing: Information related to market sentiment, economic policies, and global developments enables investors to time their investments better. Without timely news and updates, investors may enter or exit the market at the wrong time.
vi) Regulatory Compliance and Taxation: Information is also essential for understanding legal aspects, taxation, and compliance which influence the net returns from an investment.
In conclusion, investment is an information-driven activity. Without reliable, timely, and sufficient information, an investor cannot properly analyze securities, evaluate risks, or construct a rational investment strategy. Therefore, informed decision-making is the foundation of a successful investment program.
4. What do you mean by fundamental analysis and technical analysis? Bring out clearly the points of distinction between the two. (Dibrugarh University 2018)
Answer:
Fundamental Analysis is the process of evaluating a security’s intrinsic value by examining related economic, financial, and other qualitative and quantitative factors. It involves analyzing a company’s financial statements, management, industry position, and economic indicators to determine its real worth. Investors use this to assess whether a stock is undervalued or overvalued.
Technical Analysis involves the study of past market data, primarily price and volume, to forecast future price movements. It is based on the assumption that all information is already reflected in the market price and that patterns tend to repeat over time.
Points of Distinction between Fundamental and Technical Analysis:
i) Basis of Analysis:
Fundamental analysis focuses on financial performance and intrinsic value, while technical analysis relies on historical price trends and chart patterns.
ii) Objective:
Fundamental analysis aims to determine the true value of a stock for long-term investment. Technical analysis is used to predict short-term price movements for trading purposes.
iii) Data Used:
Fundamental analysis uses balance sheets, income statements, economic reports, etc. Technical analysis uses price charts, volume data, moving averages, and indicators like RSI, MACD.
iv) Time Horizon:
Fundamental analysis is used for long-term investment decisions. Technical analysis suits short-term or medium-term trading.
v) Approach:
Fundamental analysis assumes that the market may misprice a stock, offering opportunities. Technical analysis assumes that price patterns and trends repeat over time and can be exploited.
vi) Tools and Techniques:
Fundamental analysis uses valuation models such as DCF, P/E ratio, etc. Technical analysis uses tools like trend lines, candlestick patterns, and momentum indicators.
In summary, both approaches are useful in their own ways—fundamental analysis is ideal for investors looking at long-term value, while technical analysis is suitable for traders seeking to profit from short-term price movements. Some investors use a combination of both to make well-informed decisions.
5. What is economic forecasting? How are economic forecasting techniques helpful for investors? (Dibrugarh University 2022)
Answer:
Economic forecasting is the process of predicting future economic conditions based on the analysis of economic data, trends, and models. It involves the estimation of future economic variables such as GDP growth, inflation, interest rates, unemployment, and consumer spending using statistical and econometric models.
Types of Economic Forecasting Techniques:
i) Qualitative Techniques: Based on expert opinions and market intuition, such as Delphi method and market surveys.
ii) Quantitative Techniques: Based on mathematical models using historical data, such as time-series analysis, regression models, and econometric modeling.
Importance of Economic Forecasting for Investors:
i) Predicting Market Trends: Economic forecasting helps investors anticipate market movements by understanding future economic growth or recession. For instance, forecasts of GDP growth may indicate a bullish market, while a slowdown may signal bearish conditions.
ii) Interest Rate Expectations: Forecasting inflation and central bank policy decisions helps investors adjust their portfolios, particularly in bonds and interest-sensitive stocks.
iii) Sectoral Performance: Economic indicators such as industrial production, export-import data, and consumer demand forecasts guide investors in identifying which sectors are likely to perform better.
iv) Investment Timing: Economic forecasts help investors in deciding when to enter or exit markets. For example, before a predicted downturn, an investor might shift funds to safer assets.
v) Risk Management: Forecasting economic downturns helps investors prepare defensive investment strategies, including diversification or investing in hedging instruments.
vi) Long-Term Strategy Planning: Investors, especially institutional ones, use economic forecasts to plan strategic asset allocations over the medium to long term.
In conclusion, economic forecasting plays a vital role in investment decision-making by reducing uncertainty and equipping investors with forward-looking insights into market and economic behavior.
6. State the economic and financial meaning of investment. Discuss the factors that differentiate the investor from speculator and gambler. (Dibrugarh University 2023)
Answer: Economic Meaning of Investment: In economics, investment refers to the addition to the capital stock of the economy. It includes expenditure on physical assets such as machinery, infrastructure, and technology that help in increasing productive capacity and generating future income.
Financial Meaning of Investment: In finance, investment means the commitment of funds to financial instruments such as shares, bonds, mutual funds, or real estate with the aim of earning returns over time, in the form of interest, dividends, or capital appreciation.
Differences among Investor, Speculator, and Gambler:
i) Objective:
Investor: Seeks steady, long-term returns with safety and growth.
Speculator: Aims to earn quick profits by taking calculated risks.
Gambler: Engages in activities purely based on chance without analysis or logic.
ii) Time Horizon:
Investor: Has a long-term perspective, often years.
Speculator: Short- to medium-term horizon.
Gambler: No defined time frame; seeks instant results.
iii) Risk Consideration:
Investor: Avoids high risk, prefers moderate and manageable risk.
Speculator: Accepts higher risk in anticipation of higher returns.
Gambler: Takes extreme and uncalculated risks.
iv) Use of Analysis:
Investor: Uses detailed fundamental and technical analysis.
Speculator: May use analysis but focuses on market sentiment.
Gambler: Relies purely on luck or chance.
v) Return Expectation:
Investor: Expects consistent returns over time.
Speculator: Expects to benefit from short-term market fluctuations.
Gambler: Expects a windfall gain from chance events.
vi) Regulatory and Legal Aspect:
Investor and Speculator: Operate within the legal financial markets.
Gambler: Often operates outside the legal financial framework, involving betting or unauthorized activities.
In conclusion, while investors and speculators operate in financial markets, their approach and attitude toward risk differ significantly. Gambling, on the other hand, lacks rationality and planning and is driven by mere chance.
7. What do you understand by company analysis? Explain the tools available for company analysis. (Dibrugarh University 2023)
Answer: Company analysis refers to the process of evaluating a company’s financial health, performance, and growth potential in order to make informed investment decisions. It is a part of fundamental analysis and helps in estimating the intrinsic value of a company’s stock.
Objectives of Company Analysis:
To assess profitability and financial stability
To evaluate management efficiency
To estimate the intrinsic value of the company’s securities
To understand future growth prospects
Tools of Company Analysis:
i) Financial Statement Analysis:
This includes examining income statements, balance sheets, and cash flow statements to assess profitability, liquidity, solvency, and efficiency. Key ratios include:
Profitability Ratios (e.g., Net Profit Margin, Return on Equity)
Liquidity Ratios (e.g., Current Ratio, Quick Ratio)
Leverage Ratios (e.g., Debt-Equity Ratio)
Efficiency Ratios (e.g., Inventory Turnover, Asset Turnover)
ii) Trend Analysis:
Involves studying past financial data over a period to identify trends in revenue, profits, expenses, etc. This helps in forecasting future performance.
iii) Comparative Analysis:
The company’s performance is compared with that of other companies in the same industry to assess relative performance. Benchmarking with peers provides insights into strengths and weaknesses.
iv) SWOT Analysis:
Examines the internal strengths and weaknesses of the company along with external opportunities and threats. This gives a qualitative picture of the company’s strategic position.
v) Management Evaluation:
Assessing the quality and effectiveness of the management team based on their decision-making, leadership, innovation, and governance practices.
vi) Corporate Governance:
Review of board structure, transparency, accountability, and adherence to regulatory norms provides insight into the long-term sustainability of the business.
vii) Earnings Quality and Growth Potential:
Analyzing the consistency and reliability of reported earnings and the scope for growth based on industry position, innovation, and competitive advantage.
In conclusion, company analysis provides investors with vital insights about where and how to invest by studying both quantitative and qualitative factors affecting a company’s performance.
8. Define security. What are the investor’s objectives in investing their funds in the stock market? (Dibrugarh University 2024)
Answer:
Security is a financial instrument that represents ownership (in case of stocks), a creditor relationship (in case of bonds), or rights to ownership (in case of derivatives). Securities can be traded in financial markets and are issued by corporations, governments, and financial institutions.
Types of securities include:
Equity Securities: Represent ownership in a company (e.g., shares).
Debt Securities: Represent a loan to an entity, to be repaid with interest (e.g., bonds, debentures).
Hybrid Securities: Combine features of both debt and equity (e.g., convertible debentures).
Derivatives: Contracts whose value is derived from underlying assets (e.g., futures, options).
Objectives of Investors in the Stock Market:
i) Capital Appreciation:
Investors aim to buy stocks at a low price and sell them at a higher price, thereby gaining from the increase in the market value of the investment.
ii) Income Generation:
Regular income can be earned in the form of dividends from equity shares and interest from debt instruments.
iii) Portfolio Diversification:
By investing in different companies and sectors through the stock market, investors reduce unsystematic risk and build a balanced portfolio.
iv) Liquidity:
Stock markets provide a high degree of liquidity, allowing investors to easily buy and sell securities.
v) Ownership and Voting Rights:
Equity shareholders enjoy partial ownership of the company and may have voting rights in corporate decisions.
vi) Hedge Against Inflation:
Equity investments often offer returns that can outpace inflation, preserving the real value of money.
vii) Tax Benefits:
Investors may avail tax advantages on long-term capital gains and dividend income as per prevailing tax laws.
viii) Speculative Gains:
Some investors actively trade in the stock market to earn short-term profits based on price fluctuations.
In conclusion, securities are vital investment tools, and stock markets serve as a platform for investors to fulfill multiple objectives including wealth creation, income generation, and diversification.
9. Define the term “Investment”. Discuss the different avenues available to an investor for making investments. Explain its objectives. (2014, 2016, 2018, 2024)
Answer: Investment refers to the commitment of funds to an asset or project with the expectation of generating future returns or benefits. It involves allocating money in various assets such as stocks, bonds, real estate, mutual funds, or fixed deposits to earn income or capital appreciation.
Avenues of Investment Available to Investors:
i) Equity Shares: Investment in company stocks offers ownership and dividend income along with capital appreciation. However, it carries a higher level of risk due to market volatility.
ii) Bonds and Debentures: These are fixed-income securities where investors lend money to companies or governments and receive interest at regular intervals. They are considered safer than equity investments.
iii) Mutual Funds: Pooling of money from multiple investors to invest in a diversified portfolio of securities managed by professionals. It offers diversification and convenience.
iv) Fixed Deposits: Offered by banks and financial institutions, they provide fixed returns over a specified period and are relatively risk-free.
v) Public Provident Fund (PPF): A government-backed savings scheme that offers tax benefits and fixed interest. Suitable for long-term savings.
vi) Real Estate: Investment in property for rental income or capital gain. It requires significant capital and is relatively illiquid.
vii) Gold and Precious Metals: Considered a hedge against inflation, gold is a traditional and popular investment avenue in India.
viii) Derivatives: Instruments like futures and options derive their value from underlying assets. They are used for speculation or hedging but involve high risk.
Objectives of Investment:
i) Capital Appreciation: To increase the value of the invested principal over time.
ii) Income Generation: To earn regular returns through dividends, interest, or rent.
iii) Wealth Creation: Long-term investments lead to accumulation of wealth.
iv) Safety and Security: Ensuring that the principal amount remains protected from loss.
v) Liquidity: To ensure ease in converting investment into cash when required.
vi) Tax Benefits: Some investments offer tax deductions under various sections of the Income Tax Act.
vii) Hedge Against Inflation: Investment in certain assets helps preserve purchasing power by offering inflation-adjusted returns.
In conclusion, investment involves balancing risk and return while meeting personal financial goals through suitable avenues.
10. State the economic and financial meaning of investment. Discuss the factors that differentiate the investor from speculator and gambler. (2023)
Answer:
Economic Meaning of Investment:
In economics, investment refers to the creation of new capital assets such as buildings, machinery, infrastructure, etc., that enhance future productive capacity and income generation in the economy.
Financial Meaning of Investment:
In finance, investment refers to the allocation of funds to financial instruments like stocks, bonds, mutual funds, etc., with the goal of earning income or capital gains over a period.
Differences between Investor, Speculator, and Gambler:
i) Objective:
Investor: Focuses on safety and long-term wealth creation.
Speculator: Aims at short-term profits by predicting price movements.
Gambler: Takes chances with the hope of winning, without any logical basis.
ii) Risk Attitude:
Investor: Risk-averse and cautious.
Speculator: Risk-taker but calculated.
Gambler: Takes uncalculated and excessive risks.
iii) Time Horizon:
Investor: Long-term approach.
Speculator: Medium or short-term approach.
Gambler: Very short-term, often instantaneous.
iv) Analysis Used:
Investor: Uses detailed research, fundamental and technical analysis.
Speculator: May use some analysis and market trends.
Gambler: Relies solely on luck and chance.
v) Capital Protection:
Investor: Seeks to protect capital while earning returns.
Speculator: Willing to risk capital for higher returns.
Gambler: Capital preservation is not a concern.
vi) Legal Framework:
Investor and Speculator: Operate within regulated financial systems.
Gambler: Often outside formal financial markets, sometimes illegal.
In conclusion, investment is a disciplined approach, unlike speculation and gambling, which carry significantly higher risks without guaranteed outcomes.
11. Write a brief note on Fundamental analysis along with its types (2014, 2018). Also State their tools and techniques with examples (2015, 2013, 2023)
Answer:
Fundamental analysis is the process of evaluating a security’s intrinsic value by examining related economic, financial, and other qualitative and quantitative factors. The goal is to determine whether a security is overvalued or undervalued.
Types of Fundamental Analysis:
i) Economic Analysis:
It involves studying macroeconomic indicators such as GDP growth, inflation, interest rates, unemployment, fiscal and monetary policy. These factors influence the overall business environment.
ii) Industry Analysis:
Examines the industry in which the company operates. It includes factors like demand-supply conditions, competition, regulatory environment, life cycle stage, etc.
iii) Company Analysis:
It includes financial statement analysis, management efficiency, growth prospects, profitability, and competitive position.
Tools and Techniques of Fundamental Analysis:
i) Financial Ratio Analysis:
Profitability Ratios: Net Profit Margin, Return on Equity (ROE)
Liquidity Ratios: Current Ratio, Quick Ratio
Leverage Ratios: Debt-Equity Ratio
Efficiency Ratios: Inventory Turnover, Asset Turnover
ii) Earnings Per Share (EPS):
Indicates the earnings available to equity shareholders. Higher EPS signifies better profitability.
iii) Price-Earnings (P/E) Ratio:
Reflects how much investors are willing to pay per rupee of earnings. It is used to compare valuation.
iv) Dividend Yield:
Shows return in the form of dividends on the market price of a share.
v) Cash Flow Analysis:
Helps in assessing the liquidity position and operational efficiency.
Example:
If a company has high EPS, low debt, and operates in a growing industry, fundamental analysis might suggest it is a good long-term investment.
Fundamental analysis is suitable for long-term investors who seek stable growth by identifying strong companies with sound fundamentals.
12. Write a brief note on Technical analysis (2014, 2018). Also State their tools and techniques with examples (2015, 2013, 2017)
Answer:
Technical analysis is a method of evaluating securities by analyzing market data such as price and volume. It focuses on identifying patterns, trends, and market psychology to forecast future price movements.
Principles of Technical Analysis:
i) Market Discounts Everything: All information is already reflected in the stock prices.
ii) Prices Move in Trends: Once a trend is established, it tends to continue.
iii) History Tends to Repeat Itself: Price patterns tend to repeat due to market psychology.
Tools and Techniques of Technical Analysis:
i) Charts:
Used to visually analyze price movements. Types include line charts, bar charts, and candlestick charts.
ii) Trends and Trendlines:
Uptrend: Prices make higher highs and higher lows.
Downtrend: Prices make lower highs and lower lows.
iii) Support and Resistance Levels:
Support is the price level at which buying interest is strong enough to prevent the price from falling. Resistance is the level at which selling pressure is strong enough to prevent the price from rising.
iv) Technical Indicators:
Moving Averages: Smooth out price data to identify trends (e.g., 50-day, 200-day MA).
Relative Strength Index (RSI): Measures speed and change of price movements.
MACD (Moving Average Convergence Divergence): Shows the relationship between two moving averages.
v) Volume Analysis:
Volume helps confirm trends. Rising prices with rising volume indicate strength.
Example: If a stock breaks a resistance level with high volume, it may signal a buying opportunity.
Technical analysis is mostly used by short-term traders and speculators to time the market and exploit price movements.
13. What is Risk? What are its various sources (2017, 2018)? How can risk on an asset be calculated? Distinguish between systematic and unsystematic risk. (2015, 2016, 2019, 2022)
Answer:
Risk refers to the possibility of deviation from expected returns on an investment. It arises due to uncertainties in market behavior, economic conditions, or company performance.
Sources of Risk:
i) Market Risk: Due to fluctuations in market prices, interest rates, and investor sentiment.
ii) Inflation Risk: Loss of purchasing power due to rising prices.
iii) Interest Rate Risk: Changes in interest rates affect bond prices and fixed income returns.
iv) Business Risk: Company-specific issues such as poor management, product failure, etc.
v) Financial Risk: High levels of debt increase the risk of insolvency.
vi) Liquidity Risk: Difficulty in selling an asset without significant price reduction.
vii) Political Risk: Changes in government policies, taxation, or regulations.
Calculation of Risk:
Risk is often measured using standard deviation, which quantifies the dispersion of returns from the mean.
Formula:
Standard Deviation (σ) = √(Σ(Ri - R̄)² / N)
Where Ri = Return in each period, R̄ = Average return, N = Number of observations
Systematic vs. Unsystematic Risk:
Systematic vs. Unsystematic Risk: In conclusion, understanding and managing risk is essential for building a strong and resilient investment portfolio. While systematic risk is unavoidable, unsystematic risk can be mitigated with proper diversification and asset allocation.
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Disclaimer: This Dibrugarh University Security Analysis and Portfolio Management Self-Study Notes is prepared solely for educational and reference purposes. Please do not copy, record, or redistribute this material on any website, YouTube channel, or any other platform.
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