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Transcript
KEY LEARNINGS
CAPITAL MARKETS
Capital markets trade securities with
lives of more than one year
A three-step process
1) The analyst considers prospects for the economy,
given the state of the business cycle.
2) The analyst determines which industries are likely
to fare well in the forecasted economic conditions.
3) The analyst chooses particular companies within
the favored industries

(EIC Analysis)
5
1.
2.
3.
4.
5.
6.
Learn the basic principles of finance.
Set portfolio objectives.
Formulate an investment strategy.
Have a game plan for portfolio revision.
Evaluate performance.
Protect the portfolio when appropriate.
7
Capital gain(loss) return= P1-P0
P0
Total return = Dividend + Capital gain
Average rate of return
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.
Growth
Value
Momentum
STYLES
OF
INVESTMENT
Capital Market
Primary
Market
Stock Market
Secondary
Market
Bond 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”.


For securities, where companies and
governments can raise long-term funds
Components:
◦ Stock markets
◦ Bond markets


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


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.
Experienced sweeping changes
 India’s government bond segment is
comparable
 Innovative products
 Facilitate investment and economic
growth.

Improving
macroeconomic
fundamentals,
A sizeable skilled
labour
force and
Greater integration
with the world
economy
And, despite
its increasing
correlation with
world markets in
recent years (see
chart
2), India still offers
diversification in
global portfolios.
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.
1
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.
2
Although India
does have a
functional legal
system, the
country’s 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.
In total, India’s
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.
Investment positions are undertaken
with the goal of earning some
expected return.
 Diversification is essential…reduce 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

‘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.


Extends to all classes of investments
◦ Bonds
◦ Equities
◦ Indexes
◦ Commodities
◦ Funds
◦ Options
◦ Securities
 Portfolio
analysis is broadly carried
out for each asset at two levels:
◦ Risk aversion
◦ Analyzing returns

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

Markowitz Mean-Variance Analysis
◦ Considers the correlation between
individual securities

Three types of correlation
◦ Perfect positive correlation
◦ Perfect negative correlation
◦ Zero correlation

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 (β)

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

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


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
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





http://www.yeahindia.com/c-india1.htm
http://www.sbidfhi.com/capital-market.htm
http://en.wikipedia.org/wiki/Modern_portfoli
o_theory
http://www.economywatch.com/market/capit
al-market/
Group 2
Akanki Agarwal
Sheetal Shokeen
Varuna Madaan
Amita
Esha Kukreja
Dixit Goyal
Kapial Sharma
Harneet Kaur