NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Capital Market and Portfolio Management

Dec 2022 Examination

Answer (1) –

Introduction: Capital Market

Generally, a stock exchange is a capital market because that is where stocks,

shares, and bonds are traded. A marketplace for financial investments which are
either direct or indirect claims on capital is known as the capital market. It includes all
lending and borrowing activities, whether or not they are supported by the formation
of a negotiable financial instrument, and is broader than the securities market. The
capital market comprises the complex of long-term funds, which are gathered and
made accessible to the private sector, the public sector, and citizens. It includes the
transfer of securities that are currently in circulation. The capital market is extremely
vulnerable to threats due to the political system's dynamics, the implementation of
governmental regulations, the new tax system, etc. Equities, insurance, foreign
exchange, and other financial instruments are a few examples of capital market
instruments. The capital market assists the investor in acquiring significant amounts
of money, particularly when the nation's economy is doing very well. The primary
market and secondary market are two broad categories for the capital market.
Organizations offer new securities to the primary market in order to raise long-term
capital. Stocks and bonds will be included in these securities. In contrast, secondary
market place is the area of the stock market where existing securities are traded.
These markets essentially meet the organisations' short-term needs.

Concept and application: Steps to follow to start trading in the capital market

Before trading in the capital market, you should have a clear understanding of what
you are doing. You should also have a clear investment plan and strategy.
Additionally, you should research the different companies and investment vehicles
available to you. Finally, you should consult with a financial advisor to ensure that
you are making the best possible decisions.

The act of purchasing and selling stocks on stock exchanges is known as trading
mechanics. The following steps are involved in trading mechanics:

1. Make an order –
An investor must use a broker member to make an order in order to purchase
or sell shares. The investor's desired price and share quantity are entered by
the broker.

2. Order matching –
Trades are immediately matched at the system's best bid/offer price. When
the orders match, a trade notification containing the specifics of each broker's
share of the transaction and the information about the counterparty they must
settle against is delivered both of the buyers and sellers brokers. The best
purchase and sell orders are compatible. A partial match between an order
and another order could lead to several trades. The highest priced buy order
and the lowest priced sell order are the best in an order matching system.

3. Breaking up of orders –
Order division: On the order system, orders may be divided into separate
portions at the same or different prices. Order visibility can be restricted,
preventing the system from accepting the order to purchase or sell the
following block of shares until the first order has been verified.

4. Modify orders –
Throughout the trading system's open market hours, buy and sell orders may
be added, changed, or eliminated. However, as soon as the bids are
matched, the deal is immediately transmitted to the brokers for settlement on
the investor's behalf.

There are few basic steps mentioned below to start trading in Capital Market –

1. Screening the right stocks –

You can locate thousands of shares listed on the NSE and BSE. It is
impractical to examine every stock and identify opportunities for profit. So it
will be beneficial for you to screen and filter the top stocks. There are online
screeners that can assist you in selecting the best options. You can be certain
that it will bring you profit once you have chosen the best.
 2. Select companies, which you know –
There are numerous reputable Indian and international businesses that you
may screen and filter. So, keep eyes on their profit margin and returns from
investor-purchased shares. Discover and comprehend the company's
operations. You must only invest in stocks of companies with a solid
reputation in the marketplace. To gain a comprehensive picture, look at the
profit growth and return on equity.

3. Open all required accounts –

As previously stated, do use a stock market broker to help you open all the
necessary accounts. They are:

 Trading Accounts at Banks: Online and Offline Trading

 Demat Account
When trading shares on the stock market, these accounts are crucial.

4. Finding Low debt levels –

Investing with a high degree of debt carries a substantial risk. Debt to Equity
Ratio and Current Ratio are important considerations. You may determine
how strongly the company relies on borrowed cash to cover its short-term
needs using these two ratios. Before investing in the company's shares, you
should research how it manages its debt.

5. Using Financial Ratios (ROE & EOCE) to identify right stocks –

The wealthiest man, Warren Buffett uses these two financial ratios, Return on
Equity and Return on Capital Employed. RoE is a measure of how much of a
company's net income is given back to shareholders as value. This makes it
easier for investors to utilise different metrics to determine a company's
profitability. In contrast hand, RoCE is the main indicator of how effectively
businesses use their capital to generate profits. Using both of these strategies
will aid in understanding-
How successful is the business?
How well it utilises resources?

Conclusion –

As we can conclude trading in capital market is not as simple as it seen, to start

Investing in the stock market you have to adopt a systematic approach which helps
you to receive a decent return when you sell or buy the shares. Consult industry
professionals to understand the market by gaining knowledge form them and make
wise investments to create a wonderful trading journey.
Answer (2) –

Introduction: Expected Return and Standard Deviation

Expected return –

The anticipated profit or loss on an investment with known historical RoR or rates of
return rates is known as the expected. It is determined by dividing possible results by
the likelihood that they will occur, adding the results, and then subtracting the results.
In both corporate operations and financial analysis, including the well-known models
of modern portfolio theory, expected return calculations play a crucial role . The
expected return is a technique used to assess whether the average net result of an
investment is positive or negative.

Standard Deviation –

How far an investment portfolio's returns differ from its probability distribution's mean
is determined by looking at its standard deviation. Simply put, it informs investors of
the amount by which their investment will differ from their anticipated return. As a
result, by taking into account past volatility, traders can use this indicator to evaluate
an investment's or a portfolio's yearly return.

The standard deviation is a useful tool for calculating market and asset volatility. This
enables the manager or investor to forecast patterns in the performance of the
investment. The variance among prices and the mean is bigger when the standard
deviation is higher. Simply said, a high standard deviation indicates a higher level of
risk and reward in an investment, which increases volatility.

Concept and Application: Calculating risk and return involved in the stocks as
per economical behaviour –

As we know we are calculating returns and risk for two stock so here we have to use
weightage to calculate total return so the weightage for both B1 and B2 is in total 1
and we divide the weightage according to invested made among them which is 5000
in B1 and 5000 in B2. And it clarifies that the ratio of investing is 1:1 so the
weightage is 0.5for B1 and 0.5 for B2.

1. When you invested 5000 in B1

Economic behaviour Total return Probability

High growth 0.5 × 90 = 45 0.45
Low growth 0.5 × 98 = 49 0.25
Stagnation 0.5 × 106 = 53 0.2
Recession 0.5 × 122 = 61 0.1
Calculation of expected return and risk for B1 –

E(R) = ∑ Return × Probability

E(R) = 45×0.45 + 49×0.25 + 53×0.2 + 61×0.1

E(R) = 20.25 + 12.25 + 10.6 + 6.1

E(R) = 49.2%

E(R) = 49.2 × 100 = Rs. 4920

The standard deviation of return would be –

Standard deviation will determine risk.

SD = 4.97 × 100 = 497

2. When you invested 5000 in B2

Economic behaviour Total return Probability

High growth 0.5 × 120 = 60 0.45
Low growth 0.5 × 104 = 52 0.25
Stagnation 0.5 × 72 = 36 0.2
Recession 0.5 × 48 = 24 0.1

Calculation of expected return and risk for B2 –

E(R) = ∑ Return × Probability

E(R) = 60×0.45 + 52×0.25 + 36×0.2 + 24×0.1

E(R) = 27 + 13 + 7.2 + 2.4

E(R) = 49.6%

E(R) = 49.6 × 100 = Rs. 4960

The standard deviation of return would be –

Standard deviation will determine risk.

SD = 12.35 × 100 = 1235

As per the above calculation where we find expected return and risk of both stock B1
and B2 are as:

Case of stock B1 –

 The expected return of B1 when 5000 invested is = 49.2%

 Whereas the risk involved in the stock calculated through SD is = 4.97%

Case of stock B2 –

 The expected return of B2 when 5000 invested is = 49.6%

 Whereas the risk involved in the stock calculated through SD is = 12.35%
In this instance, we can see that the expected return on B1 is a little lower than the
expected return on B2, but when we compare the two stocks' levels of risk, we find
that B2 is significantly higher than B1 in terms of risk. So, given that there isn't much
of a difference in the returns between the two stocks, I'd choose to invest in Stock
B1. However, Stock B1 has the advantage of being less risky than Stock B2, which
is why I'd prefer to choose B1.

As we all know, everyone wants to take on less risks because they don't want to lose
their money. We all know that the market is unpredictable and that we cannot
anticipate the future, so it is advisable to protect your wealth by taking less risks and
expecting reasonable returns rather than a stock with large rewards but huge risk.
Answer 3 (a) –

Introduction: Technical and Fundamental Analysis –

Technical Analysis:

Technical analysis is a method of predicting future price movements of a security

based on an examination of past price movements. Technical analysts believe that
all relevant information is reflected in a security's price, and therefore believe that
studying price movements can be useful in forecasting.

Fundamental Analysis:

A way of assessing an asset by seeking to determine its intrinsic value is

fundamental analysis. To ascertain a security's true value, fundamental analysts look
at elements including a company's financial statements as well as broader social,
political, and economic events.

Concept and Application: Difference between Fundamental and Technical

Analysis –

The two types of investment methodologies, fundamental analysis and technical

analysis, have different underlying assumptions. According to fundamental analysis,
a company's stock price is a good indicator of its financial health. As a result,
financial statement analysis is essential to fundamental analysis. A company's
assets, liabilities, revenues, and expenses are taken into account by fundamental
analysis to forecast stock values. Fundamental analysis also takes into account the
company's prospects, general market conditions, and industry prospects when
determining a stock's intrinsic value. As a result, it is clear that fundamental analysis
involves examining a company's total financial performance in order to forecast
future stock values.

Technical analysis, on the other hand, approaches stock performance forecasting

from a completely different angle. In order to identify a pattern in previous price
movements and forecast future stock prices based on this pattern, this technique
considers statistical data on previous price movements of a company's stocks.
Because of this, technical analysis places its entire emphasis on historical stock
price trends rather than a company's financial health.
 Difference Between Fundamental and Technical Analysis
Basis Fundamental Analysis Technical Analysis
1. Function For investing, fundamental For trading, technical
analysis is more analysis seems to be more
appropriate. reliable.
2. Objective Used to determine Used primarily to
whether an asset is priced determine when to enter
correctly or not. and quit the market.
3. Used by Most long-term investors Traders interested in
utilise fundamental short-term price
analysis to determine an fluctuations are the
asset's intrinsic worth. principal users of this.
4. Information Financial statements, Decisions made over a
balance sheets, press short period of time (days,
releases, and other hours, etc.) are based on
information are used to trading volume and
inform decisions. pricing.
5. Application Bonds and derivatives can Can be used with all
also be used, although assets.
stocks are the primary
application.
6. History It was initially proposed in The idea was first
1934. presented forth in 18th
century.
7. Analysed time Long time period (decades Short time period (days,
or years). hours)

Conclusion –

Despite the fact that both of these methods are widely employed, they have varied
effects on certain individuals. There can be no choice that is superior to the other
than either of them. Technical analysis is utilised by traders to make quick judgments
for their short-term investments, while fundamental research is typically employed by
investors who invest their money over a lengthy period of time.
Answer 3 (b) –

Introduction: Fundamentals and Technical Analysis

Fundamental analysis and technical analysis are the two main schools of thought
when it comes to how to approach the markets, on opposing ends of the spectrum.
Both are used by traders and investors for research into and forecasting stock
values. Both have supporters and opponents, just like any investment theory or
method.

Fundamental analysis is a method of evaluating a security in order to estimate its

intrinsic value. This involves looking at factors such as the financial stability of the
company, its earnings, dividends, and other factors that may affect its future
performance. Technical analysis, on the other hand, is a method of analysing past
price data in order to identify trends and make predictions about future price
movements.

Concept and Application:

Fundamental analysis refers to the process of assessing a security on the basis of its
inherent worth. It covers every part of a firm that can be studied, such as the market,
rivalry, management, financial statements, and balance sheet. Fundamental analysts
hold that a company's, market's, or economy's underlying fundamentals will cause
price movements. Long-term aspects like growth ability and the capacity to navigate
economic cycles are of interest to them.

The examination of price movement using technical analysis is done without taking
into account an economy's or company's fundamentals. To evaluate the direction in
which the stock's price is currently moving and its projected future performance,
technical indicators are used. Technical analysts scan stock charts for patterns that
can be used to forecast future price movements, fully aware that some patterns are
more effective than others at doing so.

Both are accurate. Fundamental analysis is necessary to outperform the market

since it is always correct. Additionally, although markets are always efficient, it is
impossible to defeat them without using technical analysis. Because of the dynamics
of competition, no firm can long deviate from the principles. Additionally, the
competitive forces make sure that a company's stock price reacts swiftly to any
public information about it. Therefore, there is never any need to rely on business
policy or insider information to influence prices in your side. While technical analysis
provides you with actionable triggers, fundamental analysis aids in identifying the
underlying demand factors. To become more informed, combine the two.
As per my choice, both fundamental and technical analysis are important at different
periods of time and for different purposes. Investors can use these analyses as per
their choices, needs, preferences, and time periods. Because fundamental analysis
gives us a proper, broad, and long-term analysis of a firm by analysing its financial
statements, management, and other important aspects, it helps long-term investors
invest their money for a longer period of time. Whereas technical analysis is more
important for the traders who trade within a short time period, like intraday players,
because they believe in price action, chart patterns, and technical indicators to trade
in any security or stock, So personally, I believe that the fundamental analysis is
more important to the investors who invest their money for a longer time period, like
five or ten years. Similarly, technical analysis is more important to traders who trade
for shorter periods of time, such as 4-5 hours or days. Hence, no one of the analyses
is better than another; both have importance according to their aspects.

Conclusion –

Both of these strategies are frequently used, although different people respond
differently to them. There isn't a decision that can be made that is better than any of
them. Technical analysis is used by traders to quickly assess their short-term
investments, whereas fundamental research is often used by investors who make
longer-term investments.