Capital Markets and Portfolio Analysis

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Capital Markets and Portfolio Analysis
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KEY LEARNINGS
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CAPITAL MARKETS

• Capital markets trade securities with lives of
  more than one year

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Investments Security Analysis

• A three-step process
• The analyst considers prospects for the economy,
  given the state of the business cycle.
• The analyst determines which industries are
  likely to fare well in the forecasted economic
  conditions.
• The analyst chooses particular companies within
  the favored industries
• (EIC Analysis)

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Portfolio Management
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The Six Steps of Portfolio Management

1. Learn the basic principles of finance.
2. Set portfolio objectives.
3. Formulate an investment strategy.
4. Have a game plan for portfolio revision.
5. Evaluate performance.
6. Protect the portfolio when appropriate.

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RISK RETURN Measuring Returns

• Capital gain(loss) return P1-P0
• P0
• Total return Dividend Capital gain
• Average rate of return

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• The return of a portfolio is equal to the
  weighted average of the returns of individual
  assets (or securities) in the portfolio with
  weights being equal to the proportion of
  investment value in each asset.

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CAPITAL MARKET
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• Capital Market

Primary Market
Secondary Market
Stock Market
Bond Market
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Capital Market

• The market for long term securities like bonds,
• equity stocks is divided into PRIMARY MARKET
  and SECONDARY MARKET.
• PRIMARY MARKET
• Deals with the new issues of securities.
• SECONDARY MARKET
• Deals with outstanding securities.
  Also known as STOCK MARKET.

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INDIAN Capital Market

• For securities, where companies and governments
  can raise long-term funds
• Components
• Stock markets
• Bond markets

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INDIAN Capital Market

• Stock Market
• market for the trading of company stock and
  derivatives
• securities listed on a stock exchange
• Bond Market
• financial market where participants buy and sell
  debt securities
• refers to the government bond market

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Trading Pattern

• spot delivery transactions
• forward delivery transactions
• Role of the Capital Market
• canalize investments from the investors
• types of financial instruments
• equity instruments
• credit market instruments
• insurance instruments
• foreign exchange instruments
• hybrid instruments
• derivative instruments.

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Indian Capital Market

• Experienced sweeping changes
• Indias government bond segment is comparable
• Innovative products
• Facilitate investment and economic growth.

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INDIAN CAPITAL MARKET TRENDS
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Improving macroeconomic fundamentals, A sizeable
skilled labour force and Greater integration
with the world economy
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And, despite its increasing correlation with
world markets in recent years (see chart 2),
India still offers diversification in global
portfolios.
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Nearly 90 of total domestic bonds outstanding
are government issuances (i.e. Treasury bills,
notes and bonds), squeezing out corporate and
other marketable debt securities.
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And unlike the derivative instruments that are
available for equities, those for fixed income
instruments (e.g. options in interest rates) in
the organised exchanges have failed to take off,
limiting the price discovery in the secondary
markets.
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Although India does have a functional legal
system, the countrys law enforcement still
lags behind the more advanced economies of Hong
Kong and Singapore according to the World Bank
This implies that efforts to raise corporate
governance need to be accompanied by a stronger
legal framework to bring greater stability in its
capital markets and foster investor confidence.
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In total, Indias debt and equity markets were
equivalent to 130 of GDP at the end of 2005.
This is an impressive stride, coming from just
75 in 1995, suggesting issuers growing
confidence in market based financing.
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Portfolio Analysis
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Investments

• Investment positions are undertaken with the goal
  of earning some expected return.
• Diversification is essentialreduce the
  variability of returns
• A single asset or portfolio of assets is
  considered to be efficient if no other offers
  higher expected return with the same risk

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Portfolio Analysis

• Portfolio Analysis is a study of the
  performance of specific portfolios under
  different circumstances.
• Includes the efforts made to achieve the best
  trade-off between risk tolerance and returns
• Involves quantifying the operational and
  financial impact of the portfolio.

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Portfolio Analysis

• Extends to all classes of investments
• Bonds
• Equities
• Indexes
• Commodities
• Funds
• Options
• Securities

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Portfolio Analysis

• Portfolio analysis is broadly carried out for
  each asset at two levels
• Risk aversion
• Analyzing returns

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Portfolio Analysis

• Risk aversion
• Analyzes the portfolio composition while
  considering the risk appetite of an investor
• Analyzing returns
• Prospective returns are calculated through the
  average and compound return (arithmetic mean that
  considers the cumulative effect on overall
  returns) methods

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Portfolio ManagementCONCEPTS
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Portfolio Analysis

• Markowitz Mean-Variance Analysis
• Considers the correlation between individual
  securities
• Three types of correlation
• Perfect positive correlation
• Perfect negative correlation
• Zero correlation

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Portfolio Analysis

• Capital Asset Pricing Model (CAPM)
• Determine a theoretically appropriate required
  rate of return of an asset
• The model takes into account the asset's
  sensitivity to non-diversifiable risk (ß)
• Alpha
• a risk-adjusted measure of the so-called active
  return on an investment
• indicates how an investment has performed after
  accounting for the risk it involved

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Portfolio Analysis tools

• Determining dispersion of returns
• the measure of volatility or standard deviation
  of returns for a particular asset
• Portfolio Expected Return
• Portfolio Risk STANDARD DEVIATION
• Association between the returns for a pair of
  securities - COVARIANCE

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Job of a portfolio manager

• Use these risk and return statistics in
  choosing/combining assets in such a way that will
  result in minimum risk at a given level of
  return, also called efficient portfolios

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Job of a portfolio manager

• Formulates an investment strategy based on the
  investment policy statement.
• Must understand the basic elements of capital
  market theory.
• Various stock categories have to be analyzed.
• Subsequently, portfolio has to be managed

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References

• http//www.yeahindia.com/c-india1.htm
• http//www.sbidfhi.com/capital-market.htm
• http//en.wikipedia.org/wiki/Modern_portfolio_theo
  ry
• http//www.economywatch.com/market/capital-market/
  

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Group 2 Akanki Agarwal Sheetal Shokeen Varuna
Madaan Amita Esha Kukreja Dixit Goyal Kapial
Sharma Harneet Kaur