Download 3. Define financial Meaning of Investment

SNS College of Technology
(An Autonomous Institution)
Coimbatore - 35
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Department of MBA
16BA708 – Investment Management
UNIT 1 – INVESTMENT SETTING
1. Define Economic Meaning of Investment
A Net addition to the nation’s capital stock which consists of goods and services that are
used in the production of other goods and services.
2. Define Speculation
Speculation means taking up the business risk in the hope of getting short term gain. Also
means a financial instrument involving high risk, in expectation of significant returns.
3. Define financial Meaning of Investment
Commitment of a person’s funds to derive future income in the form of interest, dividend,
premiums, pension benefits or appreciation in the value of their capital by purchasing shares,
debentures, post office savings certificates, insurance policies.
4. Define marketable securities and non-marketable securities

Marketable securities:
A security that can be bought and sold in a secondary financial market.

Non-marketable securities:
Non-marketable securities are investments that cannot be transferred from
one party to another through sale.
5. Define money market
A segment of the financial market in which financial instruments with high liquidity and
very short maturities are traded. The money market is used by participants as a means for
borrowing and lending in the short term, from several days to just under a year.
6. Define Commercial paper
Commercial paper is a money-market security issued (sold) by large corporations to
obtain funds to meet short-term debt obligations (for example, payroll), and is backed only by an
issuing bank or corporation's promise to pay the face amount on the maturity date specified on
the note.
7. Define Preference shares
Shares in a company which give their holders an entitlement to a fixed dividend but
which do not usually carry voting rights. Return of preference share capital before the return of
equity share capital at the time of winding up of the company.
8. List out the different type of bonds.

Bearer Bonds

Deep Discount Bonds

Mortgage Bond

Secured and Unsecured Bonds

Perpetual and redeemable bonds

Fixed interest rate bonds and floating interest rate bonds.
9. List out the differences between investment and speculation.
Basis
Investment
Speculation
Type of contract
Creditor
Ownership
Basis of acquisition
Usually
purchase
by
outright
Often-on-margin
Length of commitment
Comparatively long term
For a short time only
Source of income
Earnings of enterprise
Change in market price
Quantity of risk
Small
Large
Stability of income
Very stable
Uncertain and erratic
10. List out the different types of shares.

Growth shares – Higher rate of growth in profitability

Income shares – belongs to company that have stable operations and limited growth
opportunities

Defensive shares-unaffected by market movements

Cyclical shares – business cycle affects the cyclical shares

Speculative shares-lot of speculative trading involved
11. Define Debenture.
A debenture is an unsecured bond issued by a company without providing any specific
asset as collateral. Only well-established and creditworthy companies are able to issue
debentures.
12. Define mutual funds
A mutual fund is a type of investment fund that pools money from many investors to
purchase securities.
13. What are Non Marketable securities?

Bank Deposit

Post office Deposit

Insurance Policies

NBFC’s Deposit

Provident fund schemes
14. Write a short note on risk.
•
Risk means the probability of having adverse or low returns as compared to the expected
returns.
•
Arises when there is a possibility of variation between expectations and realizations with
regard to a investment.
•
Total Risk =Systematic Risk + Unsystematic risk
•
15. List out the Objectives of SCRA.

Regulation of stock exchanges.

Regulation of transaction in securities.

To prevent undesirable speculation in securities.
16. State the Objectives of Investment

Maximisation of return

Minimisation of risk

Hedge against inflation

Maintaining liquidity

Increasing safety

Saving tax
17. List out the different measures of risk.

Volatility

Standard deviation

Probability distributions

Beta
18. What do you mean by Trade-off between Expected Return and Risk?
In competitive financial markets, the largest risks have the largest payoffs. In financial
markets, investors are constantly on the lookout for either the same risk for a larger return, or the
same return for lower risk. Investors manage risk at a cost – lower expected returns (ER).
19. What is systematic risk? What are the different types of risk that make systematic
market risk?
Systematic risk relates the variance of the investment to the variance of the market.
Systematic risk also refers to the portion of an individual asset’s total variance attributable to the
variability of the total market portfolio. The different types of risks that make the systematic risk
are: Business Risk, Financial Risk, Liquidity Risk, Exchange Rate Risk and Country Risk among
others.
20.a) If nominal rate of return and inflation rate are 12.4% and 5.6% respectively,
what is the real rate of return?
b) If real rate of return and nominal rate of return are 8.5% and 15.4% respectively,
what is the inflation rate?
ANS:
a) Real rate of return = (1+.124)/(1+.056) – 1 = 0.0644 i.e. 6.44%
b) Inflation rate = (1+.154)/(1+.085) – 1 = 0.0636 = 6.36%
21. Write a short note on Interest rate risk.
The variability in a security’s return resulting from changes in the level of interest rates is
referred to as interest rate risk. Interest rate risk affects bonds more directly than common stocks.
As interest rate change, bond prices change in the opposite direction.
22. Define volatility
Volatility is a rate at which the price of a security increases or decreases for a given set of
returns. A statistical measure of the dispersion of returns for a given security or market index.
Volatility can either be measured by using the standard deviation or variance between returns
from that same security or market index.
23. Define beta
Beta is a measure of the systematic risk of a security that cannot be avoided through
diversification. Beta is a relative measure of risk – the risk of an individual stock relative to the
market portfolio of all stocks. Beta measures a security’s volatility or fluctuations in price,
relative to a benchmark, the market portfolio of all stocks. A beta of less than 1 means that the
security will be less volatile than the market. A beta of greater than 1 indicates that the security's
price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically
20% more volatile than the market.
24. What do you mean by hybrid security?
Hybrid securities, often referred to as "hybrids" generally combine both debt and equity
characteristics. The most common type of hybrid security is a convertible bond that has features
of an ordinary bond but is heavily influenced by the price movements of the stock into which it
is convertible.
25. Define security as per SCRA.
'Securities' include (i) shares, scripts stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or other body corporate;
26. Define Stock exchange as per SCRA
'
Stock exchange' means any body of individuals, whether incorporated or not, constituted
for the purpose of assisting, regulating or controlling the business of buying, selling or dealing
in securities.
27. Define Demutualization
Demutualization means the segregation of ownership and management from the trading rights of
the members of a recognized stock exchange in accordance with a scheme approved by the
Securities and Exchange Board of India (SEBI).
28. Define corporatization
Corporatization means the succession of a recognized stock exchange, being a body of
individuals or a society registered under the Societies Registration Act, 1860 by another stock
exchange, being a company incorporated for the purpose of assisting, regulating or controlling
the business of buying, selling or dealing in securities carried on by such individuals or society.