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Unit 1 of 4 · M.Com Sem 4

Unit 1: Investment fundamentals

Security Analysis and Portfolio Management notes · PTU syllabus (MCOP402-18)

3 min read11 topics10 exam questions
On this page
  1. Unit summary
  2. Nature, scope and elements of investment
  3. Investment avenues
  4. Approaches to investment analysis
  5. Return and its measurement
  6. Risk: concept and types
  7. Measurement of risk
  8. Financial assets and sources of information
  9. Capital market and public issue procedure
  10. Book building, online IPOs and the green-shoe option
  11. Stock exchange mechanism and development in India
  12. Trading, clearing and settlement mechanism
  13. Key terms
  14. Quick revision
  15. Important questions

Unit summary

Investment analysis is the disciplined study of where, how and when to invest. This unit covers the nature and scope of investment analysis, the elements and avenues of investment, approaches to investment analysis, risk and return concepts and their measurement, types of financial assets and sources of information, the capital market and public issue procedure, and the stock exchange mechanism and its development in India.

After this unit you can

  • Explain the nature, scope, elements and avenues of investment
  • Explain approaches to investment analysis and measure risk and return
  • Describe financial assets and sources of investment information
  • Explain the public issue procedure and stock exchange mechanism in India

PTU syllabus topics

  • Nature and scope of investment analysis
  • elements and avenues of investment
  • approaches to investment analysis
  • risk and return concepts and measurement
  • financial asset types and information sources
  • capital market and public issue procedure
  • stock exchange mechanism and development in India
Key formulasRisk and return

  • Holding period return

    (P1 − P0 + D) / P0

  • Expected return

    Σ (probability × return)

  • Variance

    Σ p (r − E(r))²

  • Beta

    Cov(stock, market) / Var(market)

1

Topic 1

Nature, scope and elements of investment

Investment is the commitment of funds to one or more assets that will be held over some future period in anticipation of a return (Sharpe). In finance, it means buying financial assets (shares, bonds) or real assets (property, gold).

  • Nature: sacrifice of current consumption, return expected, risk involved, time element, liquidity varies.
FrameworkObjectives of investment

  • Return

    Income and capital appreciation

  • Safety

    Protection of principal

  • Liquidity

    Easy conversion into cash

  • Hedge against inflation

    Real returns above inflation

Other objectives: tax benefits, marketability, regular income, wealth creation for goals.

2

Topic 2

Investment avenues

ClassificationInvestment avenues in India
Avenues

  • Financial — marketable

    Equity shares, bonds and debentures, mutual funds, ETFs, government securities, REITs and InvITs

  • Financial — non-marketable

    Bank deposits, post office schemes, PPF, NSC, company FDs, EPF

  • Insurance and pension

    Life insurance, ULIPs, NPS, annuities

  • Real assets

    Real estate, gold and silver (physical, ETFs), art and collectibles

  • Derivatives and alternatives

    Futures, options, commodities, AIFs, crypto assets (high risk, unregulated as securities)

AvenueReturnRiskLiquidity
Equity sharesHighHighHigh (listed)
Bonds/debenturesModerateLow–moderateModerate
Bank FDsLowVery lowModerate
PPFModerate (tax-free)Very lowLow (15-year lock-in)
Real estateModerate–highModerateLow
GoldModerateModerateHigh
3

Topic 3

Approaches to investment analysis

ClassificationApproaches to investment analysis
Approaches

  • Fundamental approach

    Intrinsic value from economy, industry and company analysis

  • Technical approach

    Price and volume patterns predict future prices

  • Efficient market approach

    Prices reflect information; passive investing

  • Psychological (behavioural) approach

    Investor sentiment and biases drive prices

  • Academic (modern portfolio theory)

    Risk–return optimisation, CAPM, APT

4

Topic 4

Return and its measurement

Key formulasReturn measures

  • Holding period return

    (Dividend + (P1 − P0)) ÷ P0 × 100

  • Annualised return (CAGR)

    (Ending value ÷ Beginning value)^(1/n) − 1

  • Expected return

    E(R) = Σ pi × Ri

  • Real return

    (1 + nominal) ÷ (1 + inflation) − 1

Example

Bought a share at ₹200, received dividend ₹6, sold at ₹230 after a year. HPR = (6 + 30) ÷ 200 = 18%.

5

Topic 5

Risk: concept and types

Risk is the possibility that the actual return differs from the expected return.

ClassificationTypes of risk
Total risk

  • Systematic (market, non-diversifiable)

    Interest rate risk, market risk, purchasing power (inflation) risk, exchange rate risk, political risk

  • Unsystematic (specific, diversifiable)

    Business risk, financial risk (leverage), management risk, credit/default risk, liquidity risk

  • Total risk = Systematic risk + Unsystematic risk.
  • Diversification across 15–20 well-chosen securities removes most unsystematic risk; systematic risk remains.
6

Topic 6

Measurement of risk

Key formulasRisk measures

  • Variance

    σ² = Σ pi (Ri − E(R))²

  • Standard deviation

    σ = √variance

  • Historical SD

    √[Σ (R − R̄)² ÷ (n − 1)]

  • Coefficient of variation

    σ ÷ E(R)

  • Beta

    β = Cov(Ri, Rm) ÷ Var(Rm) = ρim σi ÷ σm

  • Covariance

    Cov(A, B) = Σ pi (RA − E(RA))(RB − E(RB))

StateProbabilityReturn of X
Boom0.330%
Normal0.515%
Recession0.2−5%

Example

E(R) = 9 + 7.5 − 1 = 15.5%. Variance = 0.3 (14.5)² + 0.5 (−0.5)² + 0.2 (−20.5)² = 63.08 + 0.13 + 84.05 = 147.25; σ ≈ 12.1%.

  • Beta interpretation: β = 1 moves with the market; β > 1 aggressive (more volatile); β < 1 defensive; β estimated by regressing stock returns on market (Nifty) returns — characteristic line.
7

Topic 7

Financial assets and sources of information

  • Types of financial assets: equity shares, preference shares, bonds and debentures, government securities, money market instruments, mutual fund units, ETFs, REITs/InvITs, derivatives, deposits and small savings.
  • Sources of information: company annual reports and filings (stock exchange websites, MCA21), SEBI and RBI publications, CMIE Prowess, Economic Survey and Budget documents, credit rating reports, brokerage research, financial newspapers (Economic Times, Business Standard, Mint), data platforms (NSE, BSE, Moneycontrol, Bloomberg), industry associations (FICCI, CII, NASSCOM).
8

Topic 8

Capital market and public issue procedure

The primary market issues new securities. Methods: public issue (IPO — first issue; FPO — further issue), rights issue, private placement, preferential allotment and qualified institutions placement (QIP). SEBI's ICDR Regulations set eligibility, disclosure in the offer document, minimum promoter contribution and lock-in, and allocation among investor categories (qualified institutional buyers, non-institutional and retail investors).

9

Topic 9

Book building, online IPOs and the green-shoe option

  • Book building discovers the issue price through bids within a price band; the final price is set at the level where demand is strongest (the cut-off price).
  • Online IPOs use the stock exchanges' electronic systems; investors apply through ASBA (Application Supported by Blocked Amount) or UPI, and the money is blocked, not debited, until allotment. Listing now happens within T+3 days of the issue closing.
  • Green-shoe option (over-allotment option): allows the issuer to allot extra shares (up to 15%) to stabilise the post-listing price.
10

Topic 10

Stock exchange mechanism and development in India

ProcessDevelopment of Indian stock exchanges
  1. 1

    1875

    Native Share and Stock Brokers' Association (BSE), Asia's oldest exchange

  2. 2

    1956

    Securities Contracts (Regulation) Act

  3. 3

    1992

    SEBI statutory; NSE set up (trading from 1994)

  4. 4

    1995–96

    BSE On-Line Trading (BOLT); depositories (NSDL)

  5. 5

    2000

    Derivatives trading begins

  6. 6

    2003

    T+2 settlement

  7. 7

    2017–2023

    India INX and NSE IX at GIFT City; T+1 settlement (2023), optional T+0 (2024)

11

Topic 11

Trading, clearing and settlement mechanism

The secondary market trades existing securities on stock exchanges — NSE and BSE.

ProcessTrading and settlement
  1. 1Investor places an order through a broker

    Online trading terminal or app

  2. 2Order matched on the exchange

    Screen-based system

  3. 3Clearing corporation guarantees the trade
  4. 4Settlement

    T+1 in India: securities and funds exchanged

  5. 5Shares credited to the demat account

Listing is admitting a security for trading on an exchange, under the SEBI LODR Regulations (listing obligations and disclosure requirements).

  • Market indices: Sensex (30 stocks, BSE), Nifty 50 (NSE); sectoral and thematic indices.
  • Investor protection: SEBI regulations, Investor Protection Fund, SCORES, circuit breakers, margin requirements, surveillance.

Key terms

Investment avenue
Type of asset in which savings are invested
Fundamental approach
Valuation based on intrinsic value
Holding period return
Total return over the holding period
Book building
Price discovery through bids in a price band
Settlement
Exchange of securities and funds after a trade

Quick revision

  • Elements: return, risk, time; avenues — financial and real assets.
  • Approaches: fundamental, technical, efficient market, behavioural, academic.
  • Return measures and risk measures (SD, beta).
  • Public issue: DRHP, book building, ASBA/UPI, T+3 listing.
  • Exchanges: BSE 1875, NSE 1992; T+1 settlement; indices.

Important exam questions

Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).

Short-answer questions

  1. Q1.State the elements of investment.
  2. Q2.Name the approaches to investment analysis.
  3. Q3.What is systematic risk?
  4. Q4.What is book building?
  5. Q5.State two sources of investment information.
  6. Q6.When was T+1 settlement introduced in India?

Long-answer questions

  1. Q1.Explain the nature, scope and avenues of investment.
  2. Q2.Explain the approaches to investment analysis and the measurement of risk and return.
  3. Q3.Explain the public issue procedure in India.
  4. Q4.Explain the stock exchange mechanism and its development in India.

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