St. Joseph’s College of Commerce (Autonomous)

End Semester Examination- April 2013

MIB – IV Semester

 SECURITIES ANALYSIS AND PORTFOLIO MANAGEMENT

Duration:  3 Hours                                                                                        Max. Marks: 100

Section -A

1. Answer ANY SEVEN questions                                                                   (7×5=35)

 

1. “The RBI’s decision to cut rates will help revive investment in the economy,” Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, said, adding that the economy was beginning to bottom out after a long slowdown. He was referring to the Repo rate and CRR. Explain how?
2. India has a BBB- rating from S&P, the lowest investment grade among the BRIC group of large emerging economies and one notch above “junk” status. In the light of the above, write a note on credit rating symbols and junk bonds.
3. There is this joke about a dealer whose trades were based on technical calls. One day his boss asks him which stock he is trading on, and he answers ‘Ford’. “Great company. In fact own a Ford car,” says his boss. “I didn’t know they made cars,” the technical trader replies. Bring out the meaning of the above statement by differentiating between Fundamental analysis and Technical analysis.
4. HDFC Bank, the country’s second largest private sector bank has suspended around 20 employees pending enquiry into the allegations made by Cobrapost representatives, stating that the bank employees are encouraging money laundering. Explain money laundering with special emphasis on the present case.

5. Suppose an edible oil importer wants to import edible oil worth USD 100,000 and places his import order on July 15, 2008, with the delivery date being 4 months ahead. At the time when the contract is placed, in the spot market, one USD was worth say INR 44.50. But, suppose the Indian Rupee depreciates to INR 44.75 per USD when the payment is due in October 2008, the value of the payment for the importer goes up to INR 4,475,000 rather than INR 4,450,000. What would be his hedging strategy?

 

6. You are an Investment consultant with rich experience in equity research and portfolio management. You are requested by a client to give a presentation on equity valuation. You prepare the following:

 

• The equity stock is currently selling for INR 30 per share. The dividend expected next year is INR 2.00. The investor’s required rate of return on this stock is 15%. If the constant growth model applies, what is the expected growth rate?

 

• The equity share is expected to provide a dividend of INR 2.00 and fetch a price of INR 18.80 a year hence. What price would it sell for now if investors’ required rate of return is 12%?

 

7. (a) ABC Co. has a Days Sales Outstanding ratio of 60 days. Total credit sales for the year were $2,400,000. What is the balance in accounts receivable?

 

• If a firm has interest expenses of $10,000 per year, sales of $700,000, a tax rate of 40%, and a net profit margin of 7%, what is the firm’s times interest coverage ratio?

 

1. Is subscription to 6-year post office monthly income scheme considered as investment? Why?

9. What are the qualitative factors to be considered for Company Analysis?

 

10. Explain diagrammatically the concept of role reversal in Technical Analysis.

 

Section -B

1. Answer any THREE (3×15=45)

1. (a) What are the different stages of industry cycle and the main features of such stages?

 

• What is five-force analysis and its utility for industry analysis?

(8+7)

1. (a) Consider the following information of three mutual funds A, B and C and the market.

	Mean Return	Standard Deviation (%)	Beta
A	12	18	1.1
B	10	15	0.9
C	13	20	1.2
Market Index	11	17	1.0

The mean risk free rate was 6%. Calculate the Treynor measure and Sharpe measure to evaluate the MF performance.

(b) What are the various methods of classification of Mutual Funds on the basis of investment objective?

(8+7)

1. (a) Briefly explain the E-I-C framework of Fundamental Analysis.

• The total risk of a portfolio consist of two parts: Market risk (systematic) and Unique risk (unsystematic). Explain.

(8+7)

1. The stock of P Ltd performs well relative to other stocks during recessionary periods, while the stock of Q Ltd does well during the growth period. Both the stocks are currently selling for INR 100/share. The rupee return (dividend plus price) of these stocks for the next year would be as follows:

	High growth	Low growth	Stagnation	Recession
Probability	0.3	0.4	0.2	0.1
Return of P Ltd stock	100	110	120	140
Return of Q Ltd stock	150	130	90	60

Calculate the expected return and standard deviation of:

• INR 1000 in equity stock of P Ltd
• INR 1000 in equity stock of Q Ltd
• INR 500 in equity stock of P Ltd and INR 500 in Q Ltd.
• INR 700 in equity stock of P Ltd and INR 300 in Q Ltd.

Which of the above 4 options would an investor choose and why? (15 marks)

1.  (a) The returns on the equity stock of Auto Electricals Limited and the market portfolio over a 11 year period are given below:

Year	Return on Auto Electricals Ltd. (%)	Return on Market Portfolio (%)
1	15	12
2	-6	1
3	18	14
4	30	24
5	12	16
6	25	30
7	2	-3
8	20	24
9	18	15
10	24	22
11	8	12

Calculate the beta for the stock of Auto Electricals Limited.

(b ) Explain the relationship between coupon rate, required yield and price of a bond.

(10+5)

1. (a) What do SML and CML represent?

• Suppose a company has issued 1975 lakh shares of which 900 shares are promoters’ holdings and its closing price on BSE on say May 10, 2009 was INR 350 per share. , The market capitalization on May 9th 2009 was 354420 lakhs. The index value on the same day was 5620 points. How will the index on May 10th be calculated? Explain the method employed to calculate the index.

(8+7)

Section C

• Case study – Compulsory Question.                                (15+5 marks)

1. (a) What are the 4 main types of charts used in Technical Analysis? Show them diagrammatically and differentiate between them.

Technical analysts believe that certain formations or patterns observed on the bar chart or line chart have a predictive value. Explain how the following patterns help such an analyst to predict stock behaviour.

 

• Give a summary of option pay off patterns

 

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