Course: Capital Market and Portfolio Management

Internal Assignment Applicable for December 2022 Examination

Question No.1:
Assume that you are planning to invest in the capital market. What steps will you follow
to start trading in the capital market.
Answer:
Investing in capital market is one of the few opportunities for the general public to
become a part of the growth story of large corporations. It is a saving and wealth creation
option for salaried individuals with higher average return in the long term when
compared to bank deposits.
Creating a trading account with a stockbroker and opening demat account with a
depository participant is the prerequisite for trading in the capital market. But the
important task is to decide and plan on the strategy and intention for investing in the
stock market.
Before starting investing, the investor must calibrate his expectations from the market
and not see it as a money doubling scheme. He must learn about the risks associated with
each category of investment and should decide on the risk he is willing to take in
accordance to his goals.
He must study the market dynamics and the overall economy and choose the stocks or
trading instruments accordingly. He must decide on how to allocate his funds to minimize
the risk and get the best return. He should learn to diversify his holdings so that not all
eggs are in the same basket.
He must also decide on the time horizon for each investment and select the stocks or
trading instruments accordingly.
Further, once all of it is studied and decided and the investment is made, he should
periodically review the portfolio and analyse if the strategy is working as intended and
make any necessary changes in the composition of the portfolio so that the goal set out is
achieved.
These are the steps and measures that I would take when investing in the capital market.
 Course: Capital Market and Portfolio Management
Internal Assignment Applicable for December 2022 Examination
Question no.2:
You are given the following information on two stocks BI and B2. The stock B1
performed well in slowdown as compared to B2. Both the shares are selling at Rs.90 per
share. The estimated rupee return of the stock is given as follows:
Economy’s
Behaviour

High Growth Low Growth Stagnation Recession

Probability 0.45 0.25 0.2 0.1

Return on B1 90 98 106 122

Return on B2 120 104 72 48

Calculate the expected return and risk in the following cases:

1. When you invested 5000 in B1
2. When you invested 5000 in B2
Write down your preferences
Answer:
Expected return and the risk involved are the two basic indicators that an investor will
calculate before investing. Expected return as the name suggests is the return that the
investor expects on his investment by considering the probability of different scenarios
and the return expected at those scenarios.
The risk on investment is calculated by measuring the variance and is calculated as the
average squared deviations from the average rate of return.
The formula for Expected return is:
E(R)= ∑(probability*return on asset)
And
The formula for variance is:
σ2= ∑ Pi(rate of return-expected rate of return)^2
 Course: Capital Market and Portfolio Management
Internal Assignment Applicable for December 2022 Examination
Let us assume that we have invested in stock B1
In this scenario,
Expected return E(R)= (0.45*90) + (0.25*98) + (0.2*106) + (0.1*122)
=40.50+24.50+21.20+12.20 = 98.40
If Rs. 5000 is to be invested in stock B1, the expected return = (5000/90)*98.40 = 5467/-
The measure of risk, variance in this case is calculated as below:
Variance = {0.45 * (90 - 98.4)^2 + 0.25 * (98 - 98.4)^2 + 0.2 * (106 - 98.4)^2 + 0.1 *
(122-98.4)^2}
= {(0.45 x 70.56) + (0.25 x 0.16) + (0.2 x 57.76) + (0.1 x 556.96)}
= (31.75 + 0.04 + 11.55 + 55.70) = 99.04
Standard deviation = √99.04 = 9.95
Let us assume that we have invested in stock B2
In this scenario,
Expected return E(R)= (0.45*120) + (0.25*104) + (0.2*72) + (0.1*48)
=54+26+14.40+4.8 = 99.20
If Rs. 5000 is to be invested in stock B1, the expected return = (5000/90)*99.20 = 5511/-
The measure of risk, variance in this case is calculated as below:
Variance = {0.45 * (120-99.20)^2 + 0.25 * (104-99.20)^2 + 0.2 * (72-99.20)^2 + 0.1 *
(48-99.20)^2}
= {(0.45 x 432.64) + (0.25 x 23.04) + (0.2 x 739.84) + (0.1 x 2621.44)}
= (194.69 + 5.76 + 147.79 + 262.14) = 610.38
Standard deviation = √610.38 = 24.70

Therefore as can be seen with the above calculations, the difference in risk taken is much
higher when the same amount is invested in stock B1 for similar gains when compared
to investing in stock B1. Hence for obtaining similar gains, it is preferred to invest in stock
B1 as it comes with much lesser risk compared to stock B2.
 Course: Capital Market and Portfolio Management
Internal Assignment Applicable for December 2022 Examination
Question no.3:
There is an ongoing debate regarding the fundamental analysis and technical analysis.
One school of thought supports fundamental analysis, while the other school supports
that stock market cannot work effectively without technical analysis” these statements
have raised a confusion among the investors.
a. As a security analyst how do you effectively explain the difference between
fundamental and technical analysis to the investors.
Answer: Fundamental analysis and technical analysis are the two methods of
analysing investment decisions.
Fundamental analysis is an analytical method wherein detailed study of economic
factors, industry overall and of the company balance sheet along with other ratios to
determine the future of the company and the growth potential by investing in it. This
type of analysis is made for arriving at long-term investing strategies. Here, both the
external factors such as direction of the economy, industry prospects in view of the
competition, policies and earning potential as well as the individual performance of
the company with respect to its profitability, and other benchmarks arrived through
balance sheet analysis and analysis of cashflow statements.
Whereas, Technical analysis is an investment technique wherein, historical trading
data and movement of stock price and trends are analysed to arrive at investment
decisions. This is a statistical method of studying patterns to predict the future trends
of the price movement. It is based in the volume of trade and direction of movement
in reference to the historical data. This technique is frequently used in arriving at
short term investment decisions. There are many technical indicators which helps in
arriving at patterns for a particular stock as well as breadth and sentiment indicators
which are used for the analysis to zero in on investment decisions.
b. Do you prefer one analysis over the other? Give reasons for your choice.
Answer: Both fundamental analysis and technical analysis are used by stock market
investors for investment in the market. Fundamental analysis is frequently used for
deciding on long term investment decisions whereas technical analysis is used for
making short term tactical investment decisions.
Fundamental analysis will help us in understanding the actual strength and
weaknesses of the company and will reveal things about the business that may not
have been factored in by the market giving the investors an edge in making correct
and financially lucrative decisions.
Technical analysis will help us in determining the trends and mood of the market with
respect to the stock being analyzed and will give the general view of the sentiment of
 Course: Capital Market and Portfolio Management
Internal Assignment Applicable for December 2022 Examination
the market with reference to the said stock. This insight will give tremendous
advantage in the short term as market reacts to what is publicly available and
knowing the sentiment of the market will give an advantage for the traders to time
the market in short term.
Thus each method is having its own niche competencies which gives an added
advantage to the investor in those scenarios. Fundamental analysis may arrive at an
investment decision which might prove to be right in the long run but may not
necessarily make you money in the short term and vice versa. Therefore, I would
prefer to use both fundamental analysis with the technical analysis which might give
you the complete picture on the true potential of the company and the market
sentiment and trends to arrive at the correct investment decision.