Security Analysis and Portfolio Management

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ISBN 9789393665720

Publication Date Sun Oct 01 00:00:00 UTC 2017

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Biographical note

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This text provides an in-depth introduction to the theoretical framework of Security Analysis and Portfolio Management. This book has been written with a view to offer conceptual clarity in the subject and to demystify the concept of the art of investing. Targeted at the students of management and commerce, this book follows a student-friendly approach.

Cover
Halftitle Page
Title Page
Copyright Page
Dedication
Contents
Preface
Acronyms/Abbreviations
Chapter 1 Investment – An Overview
- Meaning
- Definition
- Economic Investment
- Financial Investment
- Investment Practice
- Features of Investment
- Savings Vs Investment
- Investment Vs Speculation
- Factors and Constraints of Investment
- Investment Objectives
- Rules of Stock Investment
- Sources of Investment Information
  - Type of Information
  - Sources of Information
  - Financial Newspapers & Journals
  - Periodical Indexes
  - Financial Handbooks & Manuals
  - Financial Ratios
  - Electronic Databases
  - Indian Journals and Dailies
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 2 Financial Securities – An Overview
- Meaning
- Features of Financial Instruments
- Types of Financial Instruments
  - Preference Shares
  - Equity Shares
  - Capital
  - Par Value and Book Value
  - Cash Dividends
  - Stock Dividends
  - Non-Voting Equity Shares
  - Convertible Cumulative Preference Shares (CCPS)
  - Company Fixed Deposits
  - Warrants
  - Debentures and Bonds
- Global Debt Instruments
  - Income Bonds
  - Asset Backed Securities
  - Junk Bonds
  - Masala Bonds
  - Indexed Bonds
  - Zero Coupon Bonds (ZCBs)/ Zero Coupon Convertible Debentures
  - Floating Rate Bonds (FRBs)
  - Secured Premium Notes (SPNs)
  - Euro Convertible Bonds
- Importance of Bonds and Debentures
  - Advantages to the Company
  - Advantages to Investors
- Drawbacks of bonus and Debentures
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 3 New Issues Market (NIM)
- Meaning
- NIM and Secondary Market—An Interface
- Services of NIM
  - Investigative Services
  - Advisory Services
  - Guarantee Services
  - Distribution Services
- NIM Vs Secondary Market
- Methods of Marketing Securities
  - Pure Prospectus Method
  - Offer for Sale Method
  - Private Placement Method
  - Initial Public Offer (IPO) Method
  - Rights Issue Method
  - Bonus Issue Method
  - Rights Issue Vs Bonus Issue
  - Book-building Method
  - Stock Option or Employees Stock Option Scheme (ESOS)
  - Bought-out Deals
  - Bought-out Deals Vs Private Placements
- Intermediaries in NIM
  - Merchant Bankers or Lead Managers
  - Underwriters
  - Bankers
  - Brokers
  - Registrars and Share Transfer Agents
  - Debenture Trustees
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 4 Stock Exchange and Trading
- Genesis
- Meaning
- Definition
- Functions/ Services/ Features/ Role
- Stock Exchange and Commodity Exchange Distinguished
- Stock Exchange Traders
- Market-Makers
- Broker-dealer
- Mechanics of Settlement
  - Settlement Cycle at NSE
- New Settlement System
- Counter Party Default
- Settlement Guarantee Mechanism
- Depository
  - The Need
- Systems of Stock Trading
  - Auction Trading System
  - Dealer Trading System
  - Hybrid Trading System
  - Margin Trading System
- Margins
- Interconnected Stock Exchange of India (ISE)
- Indonext
  - Features
- Steps in Stock Trading
  - Trading of Securities
  - For Specified Securities
  - Non-specified Securities
  - Odd-lot Securities
- Stock Exchange Dealings
  - Type
  - Speculative Dealings
- Short Selling and Securities Lending
  - Short Selling
  - Securities Lending
- Stock Broking
- Share Prices—Factors
- Badla System
- Participatory Notes
  - Meaning
  - Features
  - Significance
- Hedge Funds
- Weaknesses
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 5 Listing and De-Listing
- Listing
  - Corporate Obligation
  - Legal Binding
- Security Listing
- Listed Company
- Stock Exchange
- Recognized Stock Exchange
- Characteristics
- Legal Provisions
- Steps
- Legal Significance
- Listing and Corporate Governance
  - Particulars to be Furnished
- Listing Agreement
  - Meaning
  - Features
- Stock Exchange Powers
- Benefits
- Consequences of Non-Listing
- Suspension or Withdrawal
- De–listing
  - Meaning
  - Legal Position
- Compulsory De–Listing
  - Meaning
  - Causes
  - Issues
  - Safeguards
- Voluntary De–listing
  - Meaning
  - Causes
  - Circumstances
  - Issues
  - Safeguards
  - Procedures
- Norms for De–Listing
  - Minimum Percentage of Equity Capital
  - SEBI’s Takeover Regulations — Regulation 21(3)
  - Financial or Business Aspects
- De–Listing Procedures
  - Panel
- Relisting
  - New Norms
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 6 Bombay Stock Exchange (BSE)
- Origin and Establishment
- Services
- Achievements
- Awards and Accolades
  - Awards Won in the Year 2014
  - Awards Won in the Year 2013
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 7 OTCEI, NSDL, STCE, Indian Stock Exchanges
- OTCEI
- Genesis
- Over-The-Counter
- OTCEI Vs Other Stock Exchanges
  - Need and Objectives
  - Features
  - Benefits
  - Securities Traded
  - Players
  - Functions
- Methods of Offering New Issues
  - Primary Issue
  - Secondary Issue
  - Book-building
  - Bought-out Deals
- Trading Mechanism
  - For Listed Securities
  - Steps in Trading
  - For Permitted Securities
  - Bad Delivery
- Settlement Procedure
  - For Listed Securities
  - For Permitted Securities
  - Day-wise Settlement Procedure
- Slow Growth of OTCEI — Causes
- National Securities Depository Limited (NSDL)
  - Genesis
  - Promoters or Shareholders
  - Objectives
  - Basic Services
  - Special Services
- Depository System—Business Partners
  - Benefits of Depository System
- Securities Trading Corporation of India Limited (STCI)
  - Genesis
  - RBI Support
  - Current Activities
- Money Market
  - Participants
  - Features
- Money Market Instruments
  - Call/Notice Money
  - Features
  - Treasury Bills
  - Term Money
  - Certificates of Deposits (CD)
  - Inter-Corporate Deposit (ICD)
  - Commercial Papers (CPs)
  - Ready Forward Contracts (Repos)
  - Commercial Bills
- Indian Stock Exchanges
- The National Stock Exchange of India Limited (NSE)
  - Genesis
  - Objectives
  - Trading Mechanism
  - Settlement
  - Counter Guarantee
  - Price Bands
  - Listing Requirement
- Trading
  - Wholesale Debt Market
  - Electronic Trade Monitoring System
  - Corporate Structure
  - The Board
  - Executive Committee
  - The Promoters
  - The Committees
  - The Products
  - Major Indices
  - Derivatives
- Computer-To-Computer Link (CTCL) Facility
- Internet Based Trading
- Mutual Fund Service System (MFSS)
  - Salient Features of MFSS
- Exchange Traded Funds (ETF)
  - Index Funds
  - Working Capital Funding
  - Direct Payout to Investors
- Reference Rates—FIMMDA-NSE MIBID MIBOR
- NSE Zero-Coupon Yield Curve (ZCYC)
- NSE VaR for Government Securities
- Constituent SGL Account
- Book-Building at NSE
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 8 SEBI – Functions and Working
- Origin
- Genesis
- Features of the SEBI Bill
- Objectives
- Management
- Powers and Functions
  - Under the SEBI Act
  - Under the SCRA
  - Power to Make Rules
  - Power to Make Regulations
  - Penalties
  - Power to Adjudicate
- Regulatory Role
- Role and Relevance
  - Credible Regulatory Structure
  - Market Surveillance
  - Disclosure Standards
  - Best Governing Practices
  - Building Investor Confidence
  - Global Outlook
  - Improving Operational Efficiency
  - Screen Based Trading
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 9 Mutual Funds
- Genesis
- Definition
- Features/Role/Benefits
- Products/Schemes
  - Operational Classification
  - Return-Based Classification
  - Investment-Based Classification
- Mutual Funds in India
- Managing Mutual Funds in India
  - The Sponsor
  - The Trustees
  - The Custodians
  - Asset Management Company (AMC)
- Portfolio Management Process in Mutual Funds
  - Setting Investment Goal
  - Identifying Specific Securities
  - Portfolio Designing
  - Portfolio Revision
- Operational Efficiency of Mutual Funds
  - Net Return
  - Net Asset Value (NAV)
  - Load
  - Disclosures
  - Voting Right to Investors
  - Investors’ Protection
- Evaluating Mutual Funds
  - Treynor Model
  - Sharpe Model
- Mutual Fund Holders’ Account
- Causes for Poor Performance of Mutual Funds
- Association of Mutual Funds Industry (AMFI)
  - Policy Developments Relating to Mutual Funds
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 10 Risk and Return
- Genesis
- Certainty
- Uncertainty
- Risk
  - Risky Projects - Chart
  - Types of Risk
  - Sources of Risk
- Return
  - Measurement of Return – Approaches
  - Risk-Return Relationship
  - Historical Return
  - Historical Risk
  - Expected Rate of Return (ERR) and Expected Risk (ER)
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 11 Time Value of Money (TVM)
- Meaning
- Objectives
- Importance
- TVM as a Losing Proposition
- TVM as a Gaining Proposition
- Time Preference for Money (TPM)
  - Meaning
  - Reasons
- Dimensions of TVM
  - Discounting Technique
  - Compounding Technique
  - Use of Time Value Tables
- Solving Problems on Time Value of Money
  - Computing Values Under Compounding Technique
  - Computing Values Under Compounding Technique
  - Effective Rate of Interest (ERI)
  - Implicit Rate of Interest (IRI)
  - Computing Values Under Discounting Techniques
  - True Rate of Interest (TRI)
- Doubling Period (DP)
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 12 Time Value of Money & Resource Allocation
- Genesis
- Borrowing
- Lending
- Financial Markets
  - Meaning
  - Benefits
- Types of Investments
- Market Interest Rates and Prices
  - Meaning
  - Features
  - Shifting Resources Across Time
- Present Value/Present Wealth
  - Calculating PV – Methods
- Future Value
- Real Asset Investing
  - Investment & Financial Exchange Line
  - Working of Real-Asset Investment
- NPV (Wealth)
  - Features of NPV
- Internal Rate of Return (IRR)
  - Calculation of IRR
- NPV Vs IRR
  - Multiple Investments and the Financial Exchange Line
- Simple Real Investment by a Corporation
  - Conclusion
- Multi-Period Finance
  - Compound Interest
- Multi-Period Cash Flow
- NPV Vs IRR
- Interest Rates, Interest Rate Futures and Yields
  - Spot Rates
  - Yield to Maturity (YTM)
  - Influence of YTM
  - Forward Interest Rates
  - Nominal Forward Rate (NFR)
- Calculating Spot Rate With Forward Rate
- Interest Rate Futures
  - Forward Price
  - Forward Market
  - Financial Risk
  - Financial Futures Market
  - Hedge
  - Alternative Method
  - Conclusion
- Bond Duration
  - Calculation
  - Miscellaneous Illustrations
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 13 Valuation of Financial Securities
- Meaning of Financial Security
- Definition of 'Valuation'
  - Types of Valuation
- Valuation of Bonds
  - Required Rate of Return, Bond Rate of Interest and Bond Value – Relationship
  - Methods of Valuation
  - Valuation of Preferred Stock
  - Valuation of Equity Share
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 14 Derivatives and Stock Index Futures
- Genesis
- Derivatives
  - Meaning
  - Growth of Derivatives Market – Factors
  - Limitations of Derivatives Market
  - Functions of Derivatives Market
  - Categories of Derivatives
  - Forward Rate Agreement (FRA)
  - Futures and Options—Participants
  - General Functions of Dealers
  - Benefits of Derivatives
  - Risks in Derivatives Market
- Derivatives and Financial System
  - Capital Standards for Derivatives
  - Regulating Derivatives Market
  - Advent of Derivatives Market in India
- Stock Index Futures
  - Genesis
  - Derivatives Contract
  - Futures Contract
- Stock Index
- Stock Index Futures (SIF)
  - Features Of SIF
  - Pricing SIF
  - Benefits of SIF
  - Hedging Using SIF
  - Speculation Using SIF
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 15 Fundamental Analysis
- Meaning
- Features
- Analytical Framework
  - Global Economic Analysis
  - National Economic Analysis
  - National Industry Analysis
  - Company Analysis
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 16 Technical Analysis
- Technical Analysis
  - Mechanism
  - Importance
  - Criticisms
  - Fundamental Vs Technical Analysis
  - Techniques
- Arguments in Favour of Technical Analysis
  - Arguments Against Technical Analysis
  - Indicators & Oscillators of Technical Analysis
- Charting Techniques
  - Utility of Charts
  - Chart Patterns
- Types of Chart
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 17 Portfolio Management – An Overview
- Portfolio
  - Meaning
  - Types of Portfolio
- Portfolio Management
  - Meaning
  - Definition
  - Need
  - Types
  - Objectives/Features/Importance
- Portfolio Management Vs Wealth Management
- Portfolio Manager
  - Meaning
  - Types
  - Functions
  - Strategies
  - Registration
  - Capital Adequacy
  - Minimum Business
  - Agreement
  - Reports to be Furnished
  - Disclosure Document
  - Funds Management
- SEBI Regulations
  - Application for Grant of Certificate
  - Conformance to Requirements
  - Furnishing of Further Information, etc.
  - Consideration of Application
  - Capital Adequacy Requirement
  - Procedure for Registration
  - Renewal of Certificate
  - Procedure Where Registration is Not Granted
  - Effect of Refusal to Grant Certificate
  - Payment of Fees
  - No Person to Act as Portfolio Manager Without Certificate
  - Conditions for Grant or Renewal of Certificate to Portfolio Manager
  - Period of Validity of the Certificate
- Fees
- General Obligations
  - Contract with Clients
  - Contents
  - Disclosures
- General Responsibilities
  - Independent Management
  - Acting in Fiduciary Position
  - Transaction within Limits
  - Not Deriving any Personal Benefit
  - Not Lending Securities
  - Proper Handling of Complaints
- Investment of Clients’ Funds
  - Acting as per Agreement
  - Withdrawal of Funds and Securities
  - Investing in Money Market Instruments
  - Not Indulging in Speculation
  - Undertaking Client-Wise Dealings
  - Adopting Prevailing Price
  - Safekeeping of Funds and Securities
  - Acting as Agent
  - Securities Lending
  - Conformance to Rule
- Maintenance of Books of Accounts
  - Books of Accounts
  - Intimation to the SEBI
  - Furnishing Statements of Accounts
  - Submission of Half-yearly Results
- Accounts and Audit
- Reports to be Furnished
- Report on Steps Taken on Auditor’s Report
  - Disclosures to the Board
  - Appointment of Compliance Officer
- Inspection and Disciplinary Proceedings
  - Right of Inspection by the Board
  - Notice Before Inspection
  - Obligations of Portfolio Manager on Inspection
  - Submission of Report
  - Action on Inspection or Investigation Report
  - Appointment of Auditor
- Procedure for Action in Case of Default
  - Liability for Action in Case of Default
  - Penalties (Since Deleted)
  - Suspension of Registration
  - Cancellation of Registration
  - Order of Suspension and Cancellation
  - Manner of Holding Enquiry
  - Show-Cause Notice and Order
  - Effect of Suspension and Cancellation
  - Publication of Order of Suspension
  - Appeal to the Securities Appellate Tribunal
- Code of Conduct (Regulation 13)
- Model Disclosure Document
  - Minimum Disclosure
- Portfolio Management Framework
  - Planning the Portfolio
  - Selection of Portfolio
  - Evaluation of Portfolio
  - Revision of Portfolio
- Portfolio Performance
  - Treynor’s Portfolio Performance Measure
  - Graphical Presentation
  - Jensen’s Portfolio Performance Measure
  - Graphical Presentation
  - Fama’s Portfolio Performance Measure
- Revision of Portfolio
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 18 Portfolio Theory
- Portfolio Analysis
- Portfolio Theory
- Objectives/Importance
- Markowitz Portfolio Analysis
  - Features
- Indifference Curve Analysis
  - Meaning
  - Analysis - How Risk-Averse Investor could Increase Utility
  - Investor Risk Preference Model
  - Further Northwest Principle/Risk-Aversion Model
  - Assumption of Non-Satiation
  - Assumption of Risk Aversion
  - Further Northeast Model
  - Further North Model
- Random Walk Theory (RWT)
  - Statement
  - Mechanism
  - Assumptions
  - Exceptions
  - RWT Vs Other Theories
  - Role of Luck
  - Practical Implications
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 19 Efficient Market Hypothesis (EMH)
- Statement
- Assumptions
  - No Outperformance Possible
  - Presence of Rational Investors
- Three Levels
  - Weak Form
  - Semi-Strong Form
  - Strong Form
- The Elliott Wave Principle
  - Elliott Wave – Basic 5 Sequence
  - Elliott Wave – Corrective Wave
- Efficient (Market) Portfolio (EP)
  - Meaning
  - EP Set (Two Securities Case)
- Efficient Frontier (EF)
  - Principle of Dominance
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 20 CAPM and APM
- Capital Asset Pricing Model (CAPM)
  - Meaning
  - Risk-Free and Risky Securities
  - Risk-Averse Investor
  - Risk-Friendly Investor
  - Objectives of CAPM
  - Assumptions of CAPM
  - Validity of CAPM
  - Criticisms of CAPM
  - Components of CAPM
  - Value Additivity and the CAPM
- Capital Market Line
  - Risk-Return Trade-Off Theory
  - Determining Market Risk-Return Trade-Off
  - Components Risk-Return Trade-Off
  - Slope of CML (CMLS)
  - Separation Theorem
- Security Market Line (SML)
  - Company Cost of Capital
  - Implications of CAPM
  - Limitations of CAPM
- Arbitrage Pricing Model (APM)
  - Arbitrage
  - Types of Return
  - CAPM Vs APM
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 21 Wealth Management - An Overview
- Genesis
- Wealth Management – An Emerging Sector
- Concept of Wealth Management
- Key Challenge Areas
- Need for Wealth Management
- Wealth Management - Components
- Wealth Management - Major Steps
  - Financial Planning
  - Portfolio Strategy Definition / Asset Allocation
  - Portfolio Management
  - Strategy Review and Alignment
- Private Wealth Management Services
- Wealth Management Services
- Wealth Management Services - Benefits
- Wealth Management Services - Limitations
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 22 Portfolio Return & Risk
- Portfolio
  - Portfolio Theory
- Diversification
  - Portfolio Diversification
  - Portfolio Return
  - Portfolio Risk (For Two Securities, A and B and for Single Period)
  - Correlation & Portfolio Variance
  - Components of Portfolio Risk
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 23 Sharpe Index Model
- Genesis
- Assumptions
- Statement of Sharpe’s Single Index Model
  - Sharpe’s Single Index Model – Graphical Presentation
  - Components of Return
  - Single Index Model - Risk Characteristics Line
- Portfolio Selection Model
  - Excess Return-Beta Ratio
- Sharpe Optimal Portfolio
  - Construction of Optimal Portfolio
  - Number of Inputs Needed for a Portfolio Analysis
- Summary
- Review Questions
- Further Readings
- Online Resources
Chapter 24 Alternative Investments
- Genesis
- Meaning
- Definition
- Features
- Alternative Investment Assets
  - Private Equity
  - Start-Ups
  - Venture Capital
  - Real Assets
  - Private placement
  - Hedge Funds
  - Fund-of-Funds
  - Real Estate Investment Trusts (REITs)
  - Exchange Traded Funds (ETFs)
  - Crowd-Funding
- Summary
- Review Questions
- Further Readings
- Online Resources
Glossary
Index

Dr. Gurusamy holds a doctorate in Financial Services. He is currently Professor and Head, Department of Commerce, University of Madras, Chennai. He has more than 30 years of teaching and research experience. His area of interest includes accounting and finance, banking and insurance. A prolific writer, he has published books on Financial Services and Systems, Financial Markets and Institutions, Banking Theory Law and Practice and Merchant Banking and Financial Services.

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