This document provides a review of literature on risk management in the Indian capital markets. It summarizes various studies and analyses conducted on identifying types of risks when investing in corporate securities, guidelines for selecting companies to invest in based on risk-return analysis, and ways to measure and manage different market risks. The literature highlights the importance of fundamental analysis and equity research for individual investors to identify undervalued stocks with an adequate margin of safety.
A research study on investors behaviour regarding choice of asset allocation ...SubmissionResearchpa
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This document discusses asset allocation and factors that influence investors' choices. It begins by defining asset allocation as balancing risk and reward by distributing investments across asset classes like equities, fixed income, and cash. Key factors in selecting an asset allocation include time horizon, risk tolerance, and goals. Diversification across asset classes reduces risk through offsetting performance. The document then examines various investor profiles defined by characteristics like age, wealth source, personality. Loss aversion and framing effects can influence decisions by making investors reluctant to realize losses or consider choices separately.
This document provides details about exchange traded currency options and international risk management. It begins with a literature review that discusses the main risks companies face from international operations, including transaction, translation, and economic risks. It finds that forward contracts are highly favored for hedging due to their ability to reduce uncertainty. The document then outlines call and put currency options, the Garman-Kohlhagen pricing model, and assumptions of the model. It provides diagrams of option payoffs and discusses how premiums decrease closer to expiration. The conclusion states that while options are important for hedging, forward contracts are generally preferred due to reduced overall uncertainty.
Hedging is an investment strategy employed to reduce risk from market fluctuations. It involves taking offsetting positions, such as holding securities that move inversely to other investments in a portfolio. The goal of hedging is to limit losses without significantly reducing potential gains. Common hedging instruments include futures, options, and diversifying asset types. While hedging reduces risk, it provides no guarantee and perfect hedges are difficult to achieve.
The document summarizes Seth Klarman's book "Margin of Safety" which discusses value investing principles. It covers topics like where most investors go wrong by speculating instead of investing, how Wall Street works against individual investors, issues with institutional investing, and the myths of junk bonds in the 1980s. The book advocates for a value investing approach focused on obtaining a margin of safety through rigorous analysis to find undervalued securities trading significantly below their intrinsic value.
Biased Shorts: Short sellers’ Disposition Effect and Limits to ArbitrageTrading Game Pty Ltd
Â
Abstract: We investigate whether short sellers are subject to the disposition effect using a novel dataset that allows to identify the closing of short positions. Consistent with the disposition effect, short sellers are more likely to close a position the higher their capital gains.
Furthermore, stocks with high short sale capital gains experience negative returns, suggesting that their disposition effect has an effect on stock prices. A trading strategy based on this finding achieves significant three-factor alphas. Overall, short sellers’ behavioral biases limit their ability to arbitrage away the mispricing caused by the disposition effect of other market participants.
Hedge funds are private investment vehicles that invest in publicly traded securities to hedge risk for investors. They are structured as limited partnerships with high net worth individuals and institutions as investors. Hedge funds aim to produce absolute returns regardless of market performance through various strategies like arbitrage, emerging markets, short selling, and macroeconomic analysis. Successful hedge funds have generated high returns compared to mutual funds, leading to rapid growth in assets under management since the 1990s.
48407540 project-report-on-portfolio-management-mgt-727 (1)Ritesh Kumar Patro
Â
This document provides an overview of portfolio management. It discusses key concepts like portfolio construction, types of assets, and the portfolio management process. The main points are:
1) Portfolio construction involves setting objectives, defining a policy, applying a strategy, selecting assets, and assessing performance. The main asset classes are cash, bonds, equities, derivatives, and property.
2) Portfolio management deals with security analysis, portfolio analysis, selection, revision, and evaluation. The goal is to maximize returns for a given level of risk through diversification.
3) Derivatives like futures and options derive their value from underlying assets and allow investors to take long or short positions to profit from price movements.
Behavioural Finance - An Introspection Of Investor PsychologyTrading Game Pty Ltd
Â
Investors always try to make rational decision while analyzing and interpreting information collected from various sources for different investment avenues to arrive at an optimal investment decision. But at the same time they are influenced by various psychological factors that influence them internally and bias their investment decision. Linter (1998) studied the various factors that influence internally the informed investment decision and included them under the discipline of behavioural finance. Behavioural finance studies how people make investment decision and influenced by internal factors and bias. The main purpose of the paper is to assess impact of behavioural factors over mutual fund investment decision made by investors in Raipur city.
A research study on investors behaviour regarding choice of asset allocation ...SubmissionResearchpa
Â
This document discusses asset allocation and factors that influence investors' choices. It begins by defining asset allocation as balancing risk and reward by distributing investments across asset classes like equities, fixed income, and cash. Key factors in selecting an asset allocation include time horizon, risk tolerance, and goals. Diversification across asset classes reduces risk through offsetting performance. The document then examines various investor profiles defined by characteristics like age, wealth source, personality. Loss aversion and framing effects can influence decisions by making investors reluctant to realize losses or consider choices separately.
This document provides details about exchange traded currency options and international risk management. It begins with a literature review that discusses the main risks companies face from international operations, including transaction, translation, and economic risks. It finds that forward contracts are highly favored for hedging due to their ability to reduce uncertainty. The document then outlines call and put currency options, the Garman-Kohlhagen pricing model, and assumptions of the model. It provides diagrams of option payoffs and discusses how premiums decrease closer to expiration. The conclusion states that while options are important for hedging, forward contracts are generally preferred due to reduced overall uncertainty.
Hedging is an investment strategy employed to reduce risk from market fluctuations. It involves taking offsetting positions, such as holding securities that move inversely to other investments in a portfolio. The goal of hedging is to limit losses without significantly reducing potential gains. Common hedging instruments include futures, options, and diversifying asset types. While hedging reduces risk, it provides no guarantee and perfect hedges are difficult to achieve.
The document summarizes Seth Klarman's book "Margin of Safety" which discusses value investing principles. It covers topics like where most investors go wrong by speculating instead of investing, how Wall Street works against individual investors, issues with institutional investing, and the myths of junk bonds in the 1980s. The book advocates for a value investing approach focused on obtaining a margin of safety through rigorous analysis to find undervalued securities trading significantly below their intrinsic value.
Biased Shorts: Short sellers’ Disposition Effect and Limits to ArbitrageTrading Game Pty Ltd
Â
Abstract: We investigate whether short sellers are subject to the disposition effect using a novel dataset that allows to identify the closing of short positions. Consistent with the disposition effect, short sellers are more likely to close a position the higher their capital gains.
Furthermore, stocks with high short sale capital gains experience negative returns, suggesting that their disposition effect has an effect on stock prices. A trading strategy based on this finding achieves significant three-factor alphas. Overall, short sellers’ behavioral biases limit their ability to arbitrage away the mispricing caused by the disposition effect of other market participants.
Hedge funds are private investment vehicles that invest in publicly traded securities to hedge risk for investors. They are structured as limited partnerships with high net worth individuals and institutions as investors. Hedge funds aim to produce absolute returns regardless of market performance through various strategies like arbitrage, emerging markets, short selling, and macroeconomic analysis. Successful hedge funds have generated high returns compared to mutual funds, leading to rapid growth in assets under management since the 1990s.
48407540 project-report-on-portfolio-management-mgt-727 (1)Ritesh Kumar Patro
Â
This document provides an overview of portfolio management. It discusses key concepts like portfolio construction, types of assets, and the portfolio management process. The main points are:
1) Portfolio construction involves setting objectives, defining a policy, applying a strategy, selecting assets, and assessing performance. The main asset classes are cash, bonds, equities, derivatives, and property.
2) Portfolio management deals with security analysis, portfolio analysis, selection, revision, and evaluation. The goal is to maximize returns for a given level of risk through diversification.
3) Derivatives like futures and options derive their value from underlying assets and allow investors to take long or short positions to profit from price movements.
Behavioural Finance - An Introspection Of Investor PsychologyTrading Game Pty Ltd
Â
Investors always try to make rational decision while analyzing and interpreting information collected from various sources for different investment avenues to arrive at an optimal investment decision. But at the same time they are influenced by various psychological factors that influence them internally and bias their investment decision. Linter (1998) studied the various factors that influence internally the informed investment decision and included them under the discipline of behavioural finance. Behavioural finance studies how people make investment decision and influenced by internal factors and bias. The main purpose of the paper is to assess impact of behavioural factors over mutual fund investment decision made by investors in Raipur city.
This document proposes a Risk Adjusted Margin of Safety (RAMS) approach to quantifying the appropriate discount (margin of safety) to apply when valuing common stocks. RAMS is calculated using five risk factors: 1) market risk, 2) leverage risk, 3) accounting quality risk, 4) cash flow risk, and 5) growth sensitivity. Each risk factor is weighted equally and the sum is used to determine the RAMS discount from intrinsic value to calculate the purchase price. The RAMS approach aims to provide a quantitative and customized margin of safety for each stock based on its unique risk profile. An example application to a company is provided to illustrate how RAMS can inform buy/sell decisions.
Derivatives are financial instruments whose value is derived from an underlying asset such as a commodity, currency, or stock. A derivative is a contract between two parties that specifies conditions to buy or sell the underlying asset at a future date. There are several types of derivatives including forwards, futures, options, and swaps. Forwards are customized contracts negotiated between two parties, while futures are standardized contracts traded on an exchange. Derivatives are used by hedgers to reduce risk, speculators to seek profits, and arbitrageurs to exploit pricing discrepancies across markets.
Fisher black and the revolutionary idea of financeFuturum2
Â
This document provides a summary of and commentary on several books related to finance and economics, linking them to Fisher Black's Capital Asset Pricing Model (CAPM). It discusses how Fisher Black was introduced to CAPM and how it became his primary focus. It then summarizes key points and relationships between the books, including how they relate to CAPM concepts like risk and equilibrium. One critique is that the book on Fisher Black barely mentions Markowitz, who was influential in the development of CAPM along with Tobin. Overall, the document analyzes how several books connect to CAPM and Fisher Black's work developing this influential idea.
This document summarizes a research article that analyzes the influence of characteristics of mutual funds on investment decisions. It begins with background on mutual funds and how they pool savings from individual investors. The study aims to understand what factors drive people's decisions to invest in mutual funds by looking specifically at how characteristics of the mutual funds themselves influence those decisions. The hypotheses are that there is a positive relationship between mutual fund characteristics and investment decisions, or there is not. The methodology uses both secondary data from literature and primary data collection to test this.
This document provides an overview of derivatives and the derivatives market in India. It begins with definitions of derivatives and describes their key characteristics, including that their value is derived from an underlying asset. It then discusses the major types of derivatives - forwards and futures - and compares their features. Forwards are customized bilateral contracts while futures are standardized exchange-traded contracts. The document also outlines the major players in the derivatives market, including hedgers, speculators, and arbitrageurs. Finally, it discusses margin requirements and daily marking to market in futures contracts to manage risk.
Unit 1 introduction to investment & portfolio managementShaik Mohammad Imran
Â
The document provides an introduction to investment and portfolio management. It defines key terms like individual investor, investment, economic investment, and financial investment. It discusses the different objectives of investment such as financial objectives, personal objectives, and objectives based on the investor's approach like short-term vs long-term priorities. It also covers the concepts of portfolio, the investment process of setting policies, analyzing investments, creating a diversified portfolio, revising it over time, and evaluating performance. It distinguishes between investment and speculation.
The document outlines the five key concepts of structured investing:
1) Accept market efficiency and focus on low-cost institutional asset classes rather than active management.
2) Take risks worth taking like investing in global stocks across large and small cap sizes and value factors.
3) Customize portfolios for individual goals through one of 270 model portfolios.
4) Effectively diversify across asset classes, geographies, securities, and styles to reduce risk.
5) Exercise patience and discipline by maintaining a long-term perspective and rebalancing periodically.
This brochure describes funds operated by East West Advisors that feature principal protection against trading losses. The funds purchase investment grade bonds using 70% of assets to provide principal protection at maturity. The remaining 30% is used for commodity trading which could lose value, but the bonds are intended to cover any losses. However, there is no guarantee principal will be protected if the bonds default. The funds aim to provide non-correlated diversification, uncapped growth potential, and principal protection through their hybrid structure of bonds and commodity trading.
Investment Analysis and Portfolio ManagementBabasab Patil
Â
This document summarizes key points about investment analysis and portfolio management. It discusses the module website resources, gains and losses from past investments, markets and security types, brokers, returns and risks, and the investment process. The essential topics covered are types of markets and securities, factors that influence investment returns and risks, and the basic steps in analyzing investments and constructing a portfolio.
This document provides an overview of alternative investments. It defines alternative investments as those outside traditional stocks, bonds and cash, including real assets like real estate and commodities, as well as alternative strategies that use unconventional approaches like leverage and short selling. The document discusses common myths about alternatives being too risky, illiquid, and only accessible to institutions. It then summarizes the main categories of alternative strategies, including market directional, corporate restructuring, relative value, opportunistic, and private equity strategies.
1. The document provides an introduction to investments, discussing key concepts like primary and secondary markets, securities, and the objectives and process of investment.
2. It defines investment as the commitment of money or resources with the goal of earning future benefits. Individuals invest by saving money instead of spending it currently to gain larger consumption later.
3. The main objectives of investment are increasing returns, reducing risk, and providing liquidity, protection against inflation, and safety of capital. The investment process involves formulating a policy, analyzing opportunities, valuing assets, constructing a diversified portfolio, and regularly evaluating performance.
FX Risk Aversion in International InvestmentsStacey Troup
Â
This document discusses ways to minimize foreign currency risk for investments and business dealings. It provides an overview of hedge funds, including what they are, their structure as either 3(c)(1) or 3(c)(7) funds, and who qualifies as an investor. Various hedging strategies are examined, including investing in global macro funds, currency exchange traded funds (ETFs), and using derivative hedges like currency forwards, futures, and options contracts. The growth of derivatives markets in helping mitigate foreign exchange risk is also noted.
Country risk management handout, diversification by Gloria Armesto, Kasey Phi...Alina_90
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This document discusses country risk management in global financial markets. It recommends diversifying investments across different countries, markets (developed, emerging, frontier), and asset classes (stocks, bonds, etc.) to minimize risk. Country-specific risks like economic or political instability, natural disasters, and market volatility can be reduced through international diversification. The document also discusses hedging strategies using derivatives to counter exposure to security price movements in specific countries. Constant monitoring of a portfolio is needed as country risk levels change over time.
This document provides an overview of the history and major works in the field of behavioural finance. It discusses early works from the late 19th/early 20th century exploring the psychology of markets. Major developments include prospect theory by Kahneman and Tversky in the 1970s, which found people overweight small probabilities and are loss averse. Their work on heuristics and biases also showed how psychology influences judgments. Behavioural concepts like mental accounting and overreaction have since helped explain apparent market inefficiencies. The field continues to incorporate psychological findings to better understand financial decision making.
ISA portfolios are designed to help investors navigate significant and
unstable movements in financial markets to obtain potentially increased
returns. Portfolio results are achieved through disciplined risk management,
situational awareness, global diversification and dynamic asset allocation.
Paradigm Shift Investing In Illiquid Assets Nov 2008Xavier_Timmermans
Â
This document discusses the advantages of investing in illiquid assets. It argues that illiquidity can provide higher returns through an illiquidity premium. During times of crisis, like the current credit crunch, the illiquidity premium increases significantly as investors demand liquidity. The document examines why some investors accept restricted liquidity in hedge funds, private equity, and credit markets to target higher returns. However, it also notes that illiquidity can increase risks for hedge funds during periods of market stress when liquidity is needed.
The activities of large, internationally active financial institutions have grown increasingly
Complex and diverse in recent years.This increasing complexity has necessarily been accompanied by a process of innovation in how these institutions measure and monitor their exposure to different kinds of risk. One set of risk management techniques that has attracted a great deal of attention over the past several years, both among practitioners and regulators, is "stress testing", which can be loosely defined as the examination of the potential effects on a firm’s financial condition of a set of specified changes in risk factors, corresponding to exceptional but plausible events. A concept of security analysis and portfolio management services has been very famous and old among various institutions. This report represents practices application of portfolio management techniques in the portfolio section. Portfolio management is an integrated and exhaustive of fundamental and technical methods which are used for calculation of annul return and earnings per share for the portfolio. Modern portfolio theory suggests that the traditional approach to portfolio analysis, selection and management may yield less than optimum results. Hence a more scientific approach is required, based on estimates of risk and return of the portfolio and the attitudes of the investor toward a risk-return trade-off stemming from the analysis of the individual Securities.
The document provides an overview of risk management techniques in the capital markets such as derivatives, hedging, and portfolio management. It discusses key concepts like systematic and unsystematic risk, and tools used to reduce risk like diversification. The summary also introduces some of the major stock exchanges in India like NSE and BSE, and describes the products and services offered by Unicon Securities related to trading equities, commodities, and distributing financial products.
This document discusses an analysis of investors' risk perceptions towards mutual fund services. It begins with an abstract that outlines the goal of understanding investors' perceptions and expectations to support financial decision making for mutual funds.
The introduction provides background on mutual funds and how they have diversified their product offerings over time. However, these changes still need to align with investors' expectations. The literature review covers previous research on investors' rationality regarding risk-return tradeoffs, investment expectations, and financial innovations in mutual funds.
The document then discusses potential service quality gaps for mutual funds, including ambiguity in investors' expectations and gaps in designing fund services. It introduces the concept of a "tolerance zone" to depict investors' acceptable levels of
This document proposes a Risk Adjusted Margin of Safety (RAMS) approach to quantifying the appropriate discount (margin of safety) to apply when valuing common stocks. RAMS is calculated using five risk factors: 1) market risk, 2) leverage risk, 3) accounting quality risk, 4) cash flow risk, and 5) growth sensitivity. Each risk factor is weighted equally and the sum is used to determine the RAMS discount from intrinsic value to calculate the purchase price. The RAMS approach aims to provide a quantitative and customized margin of safety for each stock based on its unique risk profile. An example application to a company is provided to illustrate how RAMS can inform buy/sell decisions.
Derivatives are financial instruments whose value is derived from an underlying asset such as a commodity, currency, or stock. A derivative is a contract between two parties that specifies conditions to buy or sell the underlying asset at a future date. There are several types of derivatives including forwards, futures, options, and swaps. Forwards are customized contracts negotiated between two parties, while futures are standardized contracts traded on an exchange. Derivatives are used by hedgers to reduce risk, speculators to seek profits, and arbitrageurs to exploit pricing discrepancies across markets.
Fisher black and the revolutionary idea of financeFuturum2
Â
This document provides a summary of and commentary on several books related to finance and economics, linking them to Fisher Black's Capital Asset Pricing Model (CAPM). It discusses how Fisher Black was introduced to CAPM and how it became his primary focus. It then summarizes key points and relationships between the books, including how they relate to CAPM concepts like risk and equilibrium. One critique is that the book on Fisher Black barely mentions Markowitz, who was influential in the development of CAPM along with Tobin. Overall, the document analyzes how several books connect to CAPM and Fisher Black's work developing this influential idea.
This document summarizes a research article that analyzes the influence of characteristics of mutual funds on investment decisions. It begins with background on mutual funds and how they pool savings from individual investors. The study aims to understand what factors drive people's decisions to invest in mutual funds by looking specifically at how characteristics of the mutual funds themselves influence those decisions. The hypotheses are that there is a positive relationship between mutual fund characteristics and investment decisions, or there is not. The methodology uses both secondary data from literature and primary data collection to test this.
This document provides an overview of derivatives and the derivatives market in India. It begins with definitions of derivatives and describes their key characteristics, including that their value is derived from an underlying asset. It then discusses the major types of derivatives - forwards and futures - and compares their features. Forwards are customized bilateral contracts while futures are standardized exchange-traded contracts. The document also outlines the major players in the derivatives market, including hedgers, speculators, and arbitrageurs. Finally, it discusses margin requirements and daily marking to market in futures contracts to manage risk.
Unit 1 introduction to investment & portfolio managementShaik Mohammad Imran
Â
The document provides an introduction to investment and portfolio management. It defines key terms like individual investor, investment, economic investment, and financial investment. It discusses the different objectives of investment such as financial objectives, personal objectives, and objectives based on the investor's approach like short-term vs long-term priorities. It also covers the concepts of portfolio, the investment process of setting policies, analyzing investments, creating a diversified portfolio, revising it over time, and evaluating performance. It distinguishes between investment and speculation.
The document outlines the five key concepts of structured investing:
1) Accept market efficiency and focus on low-cost institutional asset classes rather than active management.
2) Take risks worth taking like investing in global stocks across large and small cap sizes and value factors.
3) Customize portfolios for individual goals through one of 270 model portfolios.
4) Effectively diversify across asset classes, geographies, securities, and styles to reduce risk.
5) Exercise patience and discipline by maintaining a long-term perspective and rebalancing periodically.
This brochure describes funds operated by East West Advisors that feature principal protection against trading losses. The funds purchase investment grade bonds using 70% of assets to provide principal protection at maturity. The remaining 30% is used for commodity trading which could lose value, but the bonds are intended to cover any losses. However, there is no guarantee principal will be protected if the bonds default. The funds aim to provide non-correlated diversification, uncapped growth potential, and principal protection through their hybrid structure of bonds and commodity trading.
Investment Analysis and Portfolio ManagementBabasab Patil
Â
This document summarizes key points about investment analysis and portfolio management. It discusses the module website resources, gains and losses from past investments, markets and security types, brokers, returns and risks, and the investment process. The essential topics covered are types of markets and securities, factors that influence investment returns and risks, and the basic steps in analyzing investments and constructing a portfolio.
This document provides an overview of alternative investments. It defines alternative investments as those outside traditional stocks, bonds and cash, including real assets like real estate and commodities, as well as alternative strategies that use unconventional approaches like leverage and short selling. The document discusses common myths about alternatives being too risky, illiquid, and only accessible to institutions. It then summarizes the main categories of alternative strategies, including market directional, corporate restructuring, relative value, opportunistic, and private equity strategies.
1. The document provides an introduction to investments, discussing key concepts like primary and secondary markets, securities, and the objectives and process of investment.
2. It defines investment as the commitment of money or resources with the goal of earning future benefits. Individuals invest by saving money instead of spending it currently to gain larger consumption later.
3. The main objectives of investment are increasing returns, reducing risk, and providing liquidity, protection against inflation, and safety of capital. The investment process involves formulating a policy, analyzing opportunities, valuing assets, constructing a diversified portfolio, and regularly evaluating performance.
FX Risk Aversion in International InvestmentsStacey Troup
Â
This document discusses ways to minimize foreign currency risk for investments and business dealings. It provides an overview of hedge funds, including what they are, their structure as either 3(c)(1) or 3(c)(7) funds, and who qualifies as an investor. Various hedging strategies are examined, including investing in global macro funds, currency exchange traded funds (ETFs), and using derivative hedges like currency forwards, futures, and options contracts. The growth of derivatives markets in helping mitigate foreign exchange risk is also noted.
Country risk management handout, diversification by Gloria Armesto, Kasey Phi...Alina_90
Â
This document discusses country risk management in global financial markets. It recommends diversifying investments across different countries, markets (developed, emerging, frontier), and asset classes (stocks, bonds, etc.) to minimize risk. Country-specific risks like economic or political instability, natural disasters, and market volatility can be reduced through international diversification. The document also discusses hedging strategies using derivatives to counter exposure to security price movements in specific countries. Constant monitoring of a portfolio is needed as country risk levels change over time.
This document provides an overview of the history and major works in the field of behavioural finance. It discusses early works from the late 19th/early 20th century exploring the psychology of markets. Major developments include prospect theory by Kahneman and Tversky in the 1970s, which found people overweight small probabilities and are loss averse. Their work on heuristics and biases also showed how psychology influences judgments. Behavioural concepts like mental accounting and overreaction have since helped explain apparent market inefficiencies. The field continues to incorporate psychological findings to better understand financial decision making.
ISA portfolios are designed to help investors navigate significant and
unstable movements in financial markets to obtain potentially increased
returns. Portfolio results are achieved through disciplined risk management,
situational awareness, global diversification and dynamic asset allocation.
Paradigm Shift Investing In Illiquid Assets Nov 2008Xavier_Timmermans
Â
This document discusses the advantages of investing in illiquid assets. It argues that illiquidity can provide higher returns through an illiquidity premium. During times of crisis, like the current credit crunch, the illiquidity premium increases significantly as investors demand liquidity. The document examines why some investors accept restricted liquidity in hedge funds, private equity, and credit markets to target higher returns. However, it also notes that illiquidity can increase risks for hedge funds during periods of market stress when liquidity is needed.
The activities of large, internationally active financial institutions have grown increasingly
Complex and diverse in recent years.This increasing complexity has necessarily been accompanied by a process of innovation in how these institutions measure and monitor their exposure to different kinds of risk. One set of risk management techniques that has attracted a great deal of attention over the past several years, both among practitioners and regulators, is "stress testing", which can be loosely defined as the examination of the potential effects on a firm’s financial condition of a set of specified changes in risk factors, corresponding to exceptional but plausible events. A concept of security analysis and portfolio management services has been very famous and old among various institutions. This report represents practices application of portfolio management techniques in the portfolio section. Portfolio management is an integrated and exhaustive of fundamental and technical methods which are used for calculation of annul return and earnings per share for the portfolio. Modern portfolio theory suggests that the traditional approach to portfolio analysis, selection and management may yield less than optimum results. Hence a more scientific approach is required, based on estimates of risk and return of the portfolio and the attitudes of the investor toward a risk-return trade-off stemming from the analysis of the individual Securities.
The document provides an overview of risk management techniques in the capital markets such as derivatives, hedging, and portfolio management. It discusses key concepts like systematic and unsystematic risk, and tools used to reduce risk like diversification. The summary also introduces some of the major stock exchanges in India like NSE and BSE, and describes the products and services offered by Unicon Securities related to trading equities, commodities, and distributing financial products.
This document discusses an analysis of investors' risk perceptions towards mutual fund services. It begins with an abstract that outlines the goal of understanding investors' perceptions and expectations to support financial decision making for mutual funds.
The introduction provides background on mutual funds and how they have diversified their product offerings over time. However, these changes still need to align with investors' expectations. The literature review covers previous research on investors' rationality regarding risk-return tradeoffs, investment expectations, and financial innovations in mutual funds.
The document then discusses potential service quality gaps for mutual funds, including ambiguity in investors' expectations and gaps in designing fund services. It introduces the concept of a "tolerance zone" to depict investors' acceptable levels of
This document summarizes a research paper that examines factors affecting investment behavior among young professionals aged 25-35. It conducted a survey of 200 young investors in Lucknow, India to understand their preferences and decision-making processes. The key findings were:
1) The most important factors guiding investment decisions for young investors were safety of funds and diversification.
2) The majority invested for both growth and income, with others focusing on financial stability or tax savings.
3) Statistical analysis found investment behavior to be independent of age, gender, and income among young investors.
The document provides an introduction to securities. It defines securities as any financial asset that can be traded, including stocks, bonds, and derivatives. It describes the key characteristics of securities markets, including that they allow governments and companies to raise long-term capital by issuing debt and equity securities. The capital market is where these long-term securities are traded. Within the capital market, the primary market involves new securities being issued, while the secondary market involves existing securities being traded. The document also discusses dematerialization, which allows physical stock certificates to be converted into electronic holdings.
5_Saurabh-Agarwal-Sarita v.pdf a study on portfolio management & financial se...vaghasiyadixa1
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This research report about portfolio management & financial sector including all the requirements of making research report as per University required.
A Literature Review On Analyzing Investors Perceptions Towards Mutual FundsJeff Brooks
Â
- The document discusses investors' perceptions towards mutual funds based on a literature review. It summarizes several past studies that have analyzed how demographic factors like gender and age, as well as risk tolerance, influence perceptions of mutual funds.
- Some key findings from past research mentioned include that women are generally more risk-averse than men when it comes to financial investments. Other factors like education level, wealth, and marital status have shown inconsistent impacts on risk tolerance.
- Most investors prefer mutual funds that provide tax benefits, consistent past performance, and transparency around net asset values. Their confidence in mutual funds can be impacted by perceptions of fund management and market regulation.
The document discusses portfolio management and mutual funds. It provides an introduction to portfolio management, explaining that investing in a group of securities called a portfolio helps reduce risk without sacrificing returns. It then discusses types of mutual fund schemes, including open-ended funds that are available for subscription all year and closed-end funds that have a specified maturity period. The document also defines what a mutual fund is and how it works, pooling money from investors to invest in stocks, bonds and other securities.
The document discusses portfolio management and mutual funds. It provides an introduction to portfolio management, explaining that investing in a group of securities called a portfolio helps reduce risk without sacrificing returns. It then discusses types of mutual fund schemes, including open-ended funds that are available for subscription all year and closed-end funds that have a specified maturity period. The document also defines what a mutual fund is, explaining that it is a trust that pools savings from investors to invest in stocks, bonds, and other securities.
1. The document discusses the growth and development of derivatives markets in India, including key milestones like SEBI permitting derivatives trading on Indian stock exchanges in 2000 and the introduction of various derivatives products over subsequent years.
2. It provides background on regulations governing derivatives trading in India and the objectives of regulation, including protecting investors and market integrity.
3. The document outlines the objectives of the study, which include understanding the Indian derivatives market scenario, analyzing whether derivatives have achieved their purpose, and suggesting methods based on observations. It discusses the scope and limitations of the study.
Investment products vary in risk, return and duration. So do investor objectives. Successfully matching financial instruments with financial plans takes skill, know how and ability.
1. The document discusses fundamental analysis of securities, which examines key financial ratios and metrics to evaluate the financial health and value of stocks.
2. It outlines various types of investments including cash, debt securities, stocks, mutual funds, derivatives, commodities, and real estate.
3. The document then describes several tools used in fundamental analysis, such as earnings per share, price-to-earnings ratio, projected earnings growth, price-to-sales, price-to-book value, dividend payout ratio, and return on equity. These ratios are used to analyze the value and potential returns of different securities.
Behavioral finance proposes that psychology influences investment decisions and market outcomes. Unlike standard finance theory which assumes rational investors, behavioral finance recognizes that investors are not always rational and make decisions based on imperfect information. Some key concepts in behavioral finance include loss aversion, anchoring, herding behavior, and overconfidence. Behavioral biases like narrow framing and regret avoidance can also impact decisions. While arbitrage should eliminate irrational behavior, limits to arbitrage like fundamental risk and implementation costs allow anomalies to persist. Technical analysis uses patterns in stock prices based on the idea that prices adjust gradually to new information.
Behavioral finance proposes that psychology influences investment decisions and market outcomes. Unlike standard finance theory which assumes rational investors, behavioral finance recognizes that investors are not always rational and make decisions based on imperfect information. Some key concepts in behavioral finance include loss aversion, anchoring, herding behavior, and overconfidence. Behavioral biases like narrow framing and regret avoidance can also impact decisions. While arbitrage should eliminate irrational behavior, limits to arbitrage like fundamental risk and implementation costs allow anomalies to persist. Technical analysis uses patterns in stock prices based on the idea that prices adjust gradually to new information.
This document summarizes a research article that analyzes the performance of mutual fund schemes in India. It discusses how the mutual fund industry in India grew significantly in the pre-recession period from 2006-2007 due to overall GDP growth and positive investor sentiment. However, during the recession period of 2008-2009, the industry witnessed a decline as markets fell. After the recession, the industry struggled to regain its previous growth. The document also examines the use of principal component analysis to identify relevant variables that influence mutual fund performance.
This document summarizes a research paper that analyzed share price movements in the National Stock Exchange of India (NSE) from 2007 to 2012. The study used tools like moving averages, beta analysis, and correlation to examine share price volatility in different sectors. It found that share prices grew continuously over the five-year period without major peaks or declines. The analysis suggested that macroeconomic factors like GDP and inflation could impact future equity returns in the Indian stock market. The full paper provides details on the methodology, literature review, analysis tools used, and discusses how various sectors performed.
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1. CHAPTER II
REVIEW OF THE LITERATURE
The Indian capital market has changed dramatically over the last few years, especially
since 1990. Changes have also been taking place in government regulations and technology. The
expectations of the investors are also changing. The only inherent feature of the capital market,
which has not changed is the ‘risk’ involved in investing in corporate securities. Managing the
risk is emerging as an important function of both large scale and small-scale investors.
Risk management of investing in corporate securities is under active and extensive
discussion among academicians and capital market operators. Surveys and research analyses
have been conducted by institutions and academicians on risk management. The mutual fund
companies in India have conducted specific studies on the 'risk element' of investing in
corporate securities.
Grewal S.S and Navjot Grewall (1984) revealed some basic investment rules a n d
rules for selling shares. They warned the investors not to buy unlisted shares, as Stock
Exchanges d o not permit trading in unlisted shares. Another rule that they specify is not to buy
inactive shares, ie, shares in which transactions take place rarely. The main reason why shares
are inactive is because there are no buyers for them. They are mostly shares of companies,
which are not doing well. A third rule according to them is not to buy shares in closely-held
companies because these shares tend to be less active than those of widely held ones since
they have a fewer number of shareholders.
They caution not to hold the shares for a long period, expecting a high price, but to sell
whenever one earns a reasonable reward. Jack Clark Francis2 (1986) revealed the importance of
the rate of return in investments and reviewed the possibility of default and bankruptcy risk.
He opined that in an uncertain world, investors cannot predict exactly what rate of return an
investment will yield. However he suggested that the investors can formulate a probability
distribution of the possible rates of return. He also opined that an investor who purchases
corporate securities must face the possibility of default and bankruptcy by the issuer. Financial
analysts can foresee bankruptcy. He disclosed some easily observable warnings of a firm's
failure, which could be noticed by the investors to avoid such a risk.
Preethi Singh3(1986) disclosed the basic rules for selecting the company to invest in. She
opined that understanding and measuring return m d risk is fundamental to the investment
process. According to her, most investors are 'risk averse'. To have a higher return the
investor has to face greater risks. She concludes that risk is fundamental to the process of
investment. Every investor should have a n understanding of the various pitfalls of
investments. The investor should carefully analyse the financial statements with special
reference to solvency, profitability, EPS, and efficiency of the company.
2. David.L.Scott a n d William Edward4 (1990) reviewed the important risks of
owning common stocks and the ways to minimise these risks. They commented that the
severity of financial risk depends on how heavily a business relies o n debt. Financial risk is
relatively easy to minimise if a n investor sticks to the common stocks of companies that
employ small amounts of debt. They suggested that a relatively easy way to ensure some
degree of liquidity is to restrict investment in stocks having a history of adequate trading
volume. Investors concerned about business risk can reduce it by selecting common stocks of
firms that are diversified in several unrelated industries.
Lewis Mandells (1992) reviewed the nature of market risk, which according to him is
very much 'global'. He revealed that certain risks that are so global that they affect the entire
investment market. Even the stocks a n d bonds of the well-managed companies face market
risk. He concluded that market risk is influenced by factors that cannot be predicted accurately
like economic conditions, political events, mass psychological factors, etc. Market risk is the
systemic risk that affects all securities simultaneously and it cannot be reduced through
diversification.
Nabhi Kumar Jain6 (1992) specified certain tips for buying shares for holding and also
for selling shares. H e advised the investors to buy shares of a growing company of a
growing industry. Buy shares by diversifying in a number of growth companies operating in a
different but equally fast growing sector of the economy. He suggested selling the shares the
moment company has or almost reached the peak of its growth. Also, sell the shares the
moment you realise you have made a mistake in the initial selection of the shares. The only
option to decide when to buy a n d sell high priced shares is to identify the individual merit or
demerit of each of the shares in the portfolio and arrive a t a decision.
Carter Randal7 (1992) offered to investors the underlying principles of winning on
the stock market. He emphasised o n long- term vision and a plan to reach the goals. He
advised the investors that to be successful, they should never be pessimists. He revealed that
- though there has been a major economic crisis almost every year, it remains true that
patient investors have consistently made money in the equities market. He concluded that
investing in the stock market should be an un-emotional endeavour and suggested that
investors should own a stock if they believe it would perform well. L.C.Gupta8 (1992) revealed
the findings of his study that there is existence of wild speculation in the Indian stock market.
The over speculative character of the Indian stock market is reflected in extremely high
concentration of the market activity in a handful of shares to the neglect of the remaining
shares and absolutely high trading velocities of the speculative counters. He opined that,
short- term speculation, if excessive, could lead to "artificial price". An artificial price is one
which is not justified by prospective earnings, dividends, financial strength and assets or which
is brought about by speculators through rumours, manipulations, etc. He concluded that such
artificial prices are bound to crash sometime or other as history has repeated and proved.
3. Yasaswy N.J.9 (1993) disclosed how 'turnaround stocks' offer big profits to bold
investors and also the risks involved in investing in such stocks. Turnaround stocks are stocks
with extraordinary potential and are relatively under priced at a given point of time. He also
revealed that when the economy is in recession and the fundamentals are weak, the stock market,
being a barometer of the economy, also tends to be depressed. A depressed stock market is an
ideal hunting ground for 'bargain hunters', who are aggressive investors. Sooner or later
recovery takes place which may take a very long time. He concluded that the investors' watch
work is 'caution' as he may lose if the turnaround strategy does not work out as anticipated.
Sunil Damodar'o (1993) evaluated the 'Derivatives' especially the 'futures' as a tool for
short-term risk control. He opined that derivatives have become an indispensable tool for
finance managers whose prime objective is to manage or reduce the risk inherent in their
portfolios. He disclosed that the over-riding feature of 'financial futures' in risk management is
that these instruments tend to be most valuable when risk control is needed for a short- term,
ie, for a year or less. They tend to be cheapest and easily available for protecting against or
benefiting from short term price. Their low execution costs also make them very suitable for
frequent and short term trading to manage risk, more effectively.
Yasaswy J.N." (1993) evaluated the quantum of risks involved in different types of
stocks. Defensive stocks are low risk stocks and hence the returns a r e relatively low but
steady. Cyclical stocks involve higher risks and hence the rewards are higher when
compared to the growth stocks. Growth stocks belong to the medium risk category and they
offer medium returns which are much better. than defensive stocks, but less than the cyclical
stocks. The market price of growth stocks does fluctuate, sometimes even violently during short
periods of boom and bust. He emphasised the financial and organisational strength of
growth stocks, which recover soon, though they may hit bad patches once in a way.
Donald E Fischer and Ronald J. Jordan12 (1994) analysed the relation between risk,
investor preferences and investor behaviour. The risk return measures on portfolios are the
main determinants of an investor's attitude towards them. Most investors seek more return for
additional risk assumed. The conservative investor requires large increase in return for
assuming small increases in risk. The more aggressive investor will accept smaller increases
in return for large increases in risk. They concluded that the psychology of the stock market
is based on how investors form judgements about uncertain future events and how they react
to these judgements.
R.Venkataramani.l"l994) disclosed the uses and dangers of derivatives. The derivative
products can lead us to a dangerous position if its full implications are not clearly understood.
Being off- balance shekt in nature, more and more derivative products are traded than the cash
market products and they suffer heavily due to their sensitive nature. He brought to the notice
of the investors the 'Over the counter product' (OTC) which are traded across the counters of a
bank. OTC products (eg. Options and futures) are tailor made for the particular need of a
4. customer and serve as a perfect hedge. He emphasised the use of futures as an instrument of
hedge, for it is of low cost.
K.Sivakumar. '"1994) disclosed new parameters that will help investors identify the
best company to invest in. He opined that Economic Value Added (EVA) is more powerful
than other conventional tools for investment decision making like EPS and price earning ratio.
EVA looks at how capital raised by the company from all sources has been put to use. Higher
the EVA, higher the returns to the shareholder. A company with a higher EVA is likely to
show a higher increase in the market price of its shares. To be effective in comparing
companies, he suggested that EVA per share (EVAPS) must be calculated. It indicates the
super profit per share that is available to the investor. The higher the EVAPS, the higher is the
likely appreciation in the value in future. He also revealed a startling result of EVA
calculation of companies in which 200 companies show a negative value addition that includes
some blue chip companies in the Indian Stock Market.
Pattabhi Ram.V.15 (1995) emphasised the need for doing fundamental analysis'and
doing Equity Research (ER) before selecting shares for investment. He opined that the investor
should look for value with a margin of safety in relation to price. The margin of safety is the
gap between price and value. He revealed that the Indian stock market is an inefficient market
because of the absence of good communication network, rampant price rigging, the absence of
free and instantaneous flow of information, professional broking and so on. He concluded that
in such inefficient market, equity research will produce better results as there will be frequent
mismatch between price and value that provides opportunities to the long-term value oriented
investor. He added that in the Indian stock market investment returns would improve only
through quality equity research.
Philippe Jhorion and Sarkis Joseph Khouryl6 (1996) reviewed international factors of
risks and their effect o n financial markets. H e opined that domestic investment is a subset
of the global asset allocation decision and that it is impossible to evaluate the risk of
domestic securities without reference to international factors. Investors must be aware of
factors driving stock prices and the interaction between movements in stock prices and
exchange rates. According to them the financial markets have become very much volatile over
the last decade due to the unpredictable speedy changes like oil price shocks, drive
towards economic and monetary unification in Europe, the wide scale conversion of
communist countries to free market policies etc. They emphasized the need f o r tightly
controlled risk management measures to guard against the unpredictable behavior of financial
markets.
S.Rajagopal.l7 (1996) commented o n risk management in relation to banks. He
opined that good risk management is good banking. A professional approach to Risk
Management will safeguard the interests of the banking institution in the long run. He
described risk identification as a n a r t of combining intuition with formal information.
5. And risk measurement is the estimation of the size, probability and timing of a potential loss
under various scenarios.
Charles.P.Jonesl8 (1996) reviewed how to estimate security return and risk. To
estimate returns, the investors must estimate cash flows the securities are likely to provide. Also,
investors must be able to quantify and measure risk using variance or standard deviation.
Variance or standard deviation is the accepted measure of variability for both realised returns a
n d expected returns. He suggested that the investors should use it as the situation dictates. He
revealed that over the past 1 2 years, returns in stocks, bonds, etc. have been normal. Blue
chip stocks have returned a n average of more than 1 6% per year. He warned that the
investors who believe that these rates will continue in the future also, will be in trouble. He
also warned the investors not to allow themselves to become victimised by "investment
gurus".
V.T.Godse.19 (1996) revealed the two separate but simultaneous processes involved
in risk management. The first process is determining risk profile and the second relates to
the risk management process itself. Deciding risk profile is synonymous with drawing a risk
picture and involves the following steps.
1. Identifying and prioritising the inherent risks
2. Measuring and scoring inherent risks.
3. Establishing standards for each risk component
4. Evaluating and controlling the quality of managerial controls.
5. Developing risk tolerance levels.
H e opined that such an elaborate risk management process is relevant in the Indian
context. The process would facilitate better understanding of risks and their management.
Aswath Damodaran20 (1996) reviewed the ingredients for a good risk and return
model. According to him a good risk a n d return model should-
a. Come u p with a measure for risk that is universal
b. Specify what types of risks are rewarded and what types are not.
c. Standardise risk measures, to enable analysis and comparison.
d . Translate the risk measure into an expected return. He opined that a risk measure, to
be useful, has to apply to all investments whether stocks or bonds or real estate. He also stated
that one of the objectives of measuring risk is to come up with a n estimate of a n
6. expected return for a n investment. This expected return would help to decide whether the
investment is a 'good' or 'bad' one.
Basudev Sen21 (1997) disclosed the implications of risk management in the changed
environment a n d the factors constraining the speed of risk management technology up-
gradation. He opined that the perception and management of risk is crucial for players a n d
regulators in a market oriented economy. Investment managers have started upgrading their
risk management practices and systems. They have strengthened the internal control systems
including internal audit and they are increasingly using equity research of better quality. He
observed that risk measurement and estimation problems constrain the speed of up-gradation.
Also, inadequate availability of skills in using quantitative risk management models and lack
of risk hedging investments for the domestic investors are major constraints. He concluded
that with the beginning of a derivative market, new instruments of risk hedging would
become available.
Bhalla V.K." (1997) reviewed the various factors influencing the equity price and price
eamings ratio. He is of the opinion that equity prices are affected primarily by financial risk
considerations that, in turn, affect earnings and dividends. He also stated that market risk in
equity is much greater than in bonds, and it influences the price also. He disclosed that many
analysts follow price earnings (P/E) ratio to value equity, which is equal to market price divided
by eamings per share. He observed that inflationary expectations and higher interest rates tend
to reduce P/E ratios whereas growth companies tend to have higher P/E ratios. He suggested
that an investor should examine the trend of P/E ratios over time for each company.
Ghosh T.P.2q1998) reviewed the various types of risks in relation to the different
institutions. He opined that 'Managing risk' has different meanings for banks, financial
institutions, and non- banking financial companies and manufacturing companies. In the
case of manufacturing companies, the risk is traditionally classified as business risk and
financial risk. Banks, financial institutions and non- banking financial co;npanies are prone to
various types of risks important of which are interest rate risk, market risk, foreign exchange
risk, liquidity risk, country and sovereign risk and insolvency risk. Suseela SubramanyaV
(1998) commented on the risk management processes of banks. She revealed that banks
need to d o proper risk identification, classify risks and develop the necessary technical
and managerial expertise to assume risks. Embracing scientific risk management practices will
not only improve the profits and credit management processes of banks, but will also enable
them to nurture and develop mutually beneficial relationships with customers. She concluded
that the better the risk information and control system the more risk a bank can assume
prudently and profitably.
Terry.J.Watsham2j (1998) discusses the nature of the risks associated with derivative
instruments, how to measure those risks and how to manage them. He stated that risk is
the quantified uncertainty regarding the undesirable change in the value of a financial
7. commitment. He opined that an organisation using derivatives would be exposed to risks from
a number of sources, which are identified as market risk, credit or defduit risk, operational risk
and legal risk. H e revealed that there is 'systemic risk' that the default by one market
participant will precipitate a failure among many participants because of the inter-relationship
between the participants.
Ghose.T.P.26 (1998) reviewed VAR (Value at Risk). There a r e two steps in measuring
market risk, the first step is computation of the DEAR, (The Daily Earning at Risk) the second
step is the computation of the VAR. He also reviewed the measurement of price sensitivity.
He stated that price sensitivity could be measured by modified duration (MD) or by cash
flow approach.
Mall C.P. and S i g h J.P.27 (1998) emphasised the importance of diversification and
introducing flexibility to reduce risk. They stated that diversification reduces risks on the one
hand and increases the possibility of large gains on the other. They also reviewed insurance as
a way-out for reducing the risk. The immense schemes help transfer of risks to the insurance
companies, especially applicable in agricultural business.
Avijit Banerjee28 (1998) reviewed Fundamental Analysis and Technical Analysis to
analyse the worthiness of the individual securities needed to be acquired for portfolio
construction. The Fundamental Analysis aims to compare the Intrinsic Value (I..V) with the
prevailing market price (M.P) and to take decisions whether to buy, sell or hold the investments.
The fundamentals of the economy, industry and company determine the value of a security. If
the 1.V is greater than the M.P., the stock is under priced and should be purchased. He observed
that the Fundamental Analysis could never forecast the M.P. of a stock at any particular
point of time. Technical Analysis removes this weakness. Technical Analysis detects the most
appropriate time to buy o r sell the stock. It aims to avoid the pitfalls of wrong timing in the
investment decisions. He also stated that the modern portfolio literature suggests 'beta' value p
as the most acceptable measure of risk of a scrip. The securities having low P should be
selected for constructing a portfolio in order to minimise the risks.
Juan H Pujadas 29 (1999) commented on the models of measuring risks. He opined
that the models of measuring risk are only as good as the assumptions underlying them. They
are not realities, but models. Commenting o n default risk in India, he stated that many
defaults are not reported. H e is of the opinion that default risks are not handled properly.
Ashutosh Bishnoi 30 (1999) commented on the risk involved in the gilt funds. He
argued that the gilt funds are not risk free and investors should watch out for interest rate and
management risk. Whenever one invests, the return o n investment represents a risk
premium. The general rule is the higher the risk; the higher will be the risk premium. Logically,
'zero risk' investments should carry zero or near zero returns. Obviously, the gilt funds, having a
n approximately 11% annual return must carry reasonable risk. He also commented on the
8. effect of short-term volatility o n the retail investors. The retail investors in any market find
it difficult to live through the short-term volatility. He concluded the article by suggesting that
in the gilt market the way to minimise the impact of volatility is to invest more when the
market falls.
Suresh G Lalwani " (1999) emphasised the need for risk management in the
securities market with particular emphasis o n the price risk. He commented that the
securities market is a 'vicious animal' and there is more than a fair chance that far from
improving, the situation could deteriorate.
Seema Shukla 32 (1999) is of the view that the risk can be managed whether i t be
political, commercial or technological. But 'mathematical risk management' has not yet been
fully applied across all sectors of companies, the concept is still evolving world-wide.
She commented that risk management comes into focus d u e to the uncertainty that
prevails in the business environment. It has developed more in countries whose economies
are deregulated and privatised, as opposed to economies like India, which are in the process
of opening up. However, once risks are identified, they are measured and managed, She
concluded that the risk function has to form the basis for decision- making.
Indu Salian3q1999) reviewed risk management of the financial sector. She opined
that managing financial risk systematically and professionally becomes an important task,
however difficult it may be. A11 risks are to be monitored within reasonable limits. He
revealed that tested risk control systems are today available virtually off the shelf and can
be made universally applicable with a little bit of judgement and modification. While
discussing on financial sector reforms introduced in 1992-93 and its effect o n risk
management, he revealed that reforms would necessarily have transition risks and volatility.
And margins will get squeezed and the cushion to absorb risk will get reduced. Then
management of risk requires strong risk control. He concluded that if we are able to manage
the transition phase of the reforms and upgrade our infrastructure for improved risk management
capabilities, we a r e certain to come out ahead.
Seema Shukla " (1999) disclosed the changing face of risk by comparing the old
paradigm and the new paradigm. The old paradigm is that risk assessment is an AD-HOC
activity that is done whenever managers believe there is a need to d o it. But the new
paradigm is that risk assessment is a continuous activity. The old pattern of risk
management was to inspect and detect business risk a n d then react. But the new pattern is to
anticipate and prevent business risk a t the source and then monitor business risk controls
continuously. She distinguished between business risks and financial risks. In managing the
business risk, one looks a t the risk reward profile to maximise reward based on the risk
appetite. She opined that one can run a business by minimising financial risk, but the business
risk itself could be high. She clears the air by stating that business risk is technology risk,
9. political risk, geography risk, the changing preference of customers, economic risk, etc. whereas
financial risk is currency risk, interest rate risk, commodities risk etc. To manage these risks, the
first step is to identify the risks and determine the source of those risks. There is no way to
manage something that cannot be measured, so the next step involves getting a measure of the
significance and likelihood of occurrence. She concluded by emphasising the need to prioritise
the risks, as it is impossible to throw resources o n all kinds of risks.
Arun Jethmalani 3 (1999) reviewed the existence and measurement of risk
involved in investing in corporate securities of shares and debentures. He commended that
risk is usually determined , based on the likely variance of returns. It is more difficult to
compare risks within the same class of investments. He is of the opinion that the investors
accept the risk measurement made by the credit rating agencies, but it was questioned after the
Asian crisis. Historically, stocks have been considered the most risky of financial instruments.
He revealed that the stocks have always outperformed bonds over the long term. He also
commented on the 'diversification theory' concluding that holding a small number of non-
correlated stocks can provide adequate risk reduction. A debt-oriented portfolio may reduce
short- term uncertainty, but will definitely reduce long-term returns. He argued that the 'safe
debt related investments' would never make an investor rich. He also revealed that too many
diversifications tend to reduce the chances of big gains, while doing little to reduce risk. Equity
investing is risky, if the money will be needed a few months down the line. He concluded
his article by commenting that risk is not measurable or quantifiable. But risk is calculated
on the basis of historic volatility. Returns are proportional to the risks, and investments should
be based on the investors' ability to bear the risks, he advised.
A.Se1varaj.x (1999) reviewed the strategies for combating risk. A risk management
programme should encompass all parts of the organisation and all types of potential risks. Risk
management is , essential and one should be aware of how to strategically organise a n
effective programme. He revealed that to safeguard a business against risk, it is necessary to
know the various kinds of risks that the business faces. There are risks in everything and the
degree of risk may vary. He recommended certain strategies for combating risks. When risks
must be born, prudence lies in the reduction of the area of uncertainty within which a business is
operating. He opined that since most of these risks proceed largely from ignorance, they
could be avoided by understanding them properly.
Mukul Gupta 37 (1999) described the risk management framework as the building
blocks for Enterprise Risk Management ERM is the systems and procedures designed to
deal with multiple types of risks. The objectives of E.R.M are to obtain information and
analyse data so that uncertainty is turned into quantifiable risk and appropriate management
action can be taken to mitigate the risk. He opined that it is necessary to understand the three
main building blocks to the risk measurement and management process that are Analytics,
Business process and Technology. By analytics is meant the capability of developing the
mathematical tools to measure various forms of risks. By processes is meant the knowledge
10. of business opportunities and the way business is conducted. Technology is the experience in
implementing the hardware and software required to facilitate the risk management
information system. He concluded that a successfully implemented E.R.M could be used both
for a defensive or a n offensive approach.
R.B.1 Guidelines for Risk Management system in banks"8 (1999) broadly cover
management of credit, market and operational risks. According to the guidelines, the
management of credit risk should receive the prime attention of the top management. The
guidelines also mention that it would be desirable to adopt international standards o n
providing explicit capital cushion for the market risk to which banks are exposed. Rajagopala
Nair and Elsamma Joseph " ((2000) revealed the various risks experienced by investors in
corporate securities and the measures adopted for reducing risks. They opined that calculated risk
might reduce the intensity of loss of investing in corporate securities. As per their study, many
investors are holding shares of those companies that are non-existent at present. They
opined that investors may accept risks inherent in equity, but they may not be willing to
reconcile to the risk of fraud. Promoters should not be allowed to loot the genuine investors
by their fraudulent acts. They observed that political uncertainties and frequent changes in
the govt. have put the investors in a n embarrassing state of mind. They stated that most of the
investors follow the policy of 'wait and watch' the political situation before making a n
investment decision.
Akash Josh90 (2000) reviewed the utility of derivatives in reducing risks. He opined
that derivatives allow a n investor to hedge or reduce risks. But they tend to confound
investors d u e to their esoteric nature. The leverage that the derivatives offer to any trader,
investor or speculator is tremendous. By the use of derivatives the volatility of the market
also gets neutralised. He concIuded the article by stating that while the discerning one stands to
gain from it, a person who fails to read it right could land u p burning his fingers.
Charls Schwab-" (2000) revealed very practical, authoritative and easy-to-follow tips
and suggestions for good investment in the stock market. According to him growth is the
heart of successful investment. He suggested that before investing, one should be clear about
the goal.. He opined that the biggest risk is not in investing but in doing nothing and watching
inflation eating away the savings. A very useful suggestion of the author is not to draw upon
the income from investment but to reinvest it. A low risk approach will yield low return. So the
author urged the investor to be aggressive, subject to his personal limits.
CRISIL Report o n Risk Management42 (2000) stated that the loss potential from market
risk will increase in the absence of strong risk management tools. The banks which adopt a
pro-active approach to upgrading risk management skills which are currently unsophisticated
as compared to internationally best practices, would have a competitive edge in future. The
report commented that in the increasingly deregulated and competitive environment, the risk
management strategies of banks would hold the key to differentiation in their credit worthiness.
11. Raghavan R.S. 4 3 (2000) reviewed the need for a risk management system, which
should be a daily practice in banks. H e opined that bank management should take upon in
serious terms, risk management systems, which should be a daily practice in their
operations. He is very much sur e that the task is of very high magnitude, the
commitment to the exercise should be visible, failure may be suicidal as we are exposed to
market risks a t international level, which is not under our control a s it was in the insulated
economy till sometime back. Suresh.G.Lalwani and Ravindra Gersappa 4"(2000) emphasised
the need for a greater consciousness of the risks attached to a fixed income securi-ties
portfolio, as the market in a situation of crunch can suddenly turn illiquid. Some concrete steps
to put in place a mechanism to evaluate and seek to control the market risk would be necessary.
They opined that the pursuit of profits often leads to a degree of recklessness that
conveniently disregards the direct correlation between risk and profits. They concluded that
a risk management mechanism could be looked as a tool to instil discipline in any trading
activity. It is a surveillance tool for constant monitoring of the market prices so as to forewarn
against the unacceptable levels of risk on positions maintained.
Raghavan.R.S.-Lj (2000) commented on the risk perceptions and the risk measure
parameters. He opined that risk measures are related to the return measurements. While risks
can only be contained and cannot be eliminated altogether, there is no doubt that some risks have
to be taken to get adequate returns. Returns can be increased or made quicker by taking more
financial and operating risks. But the environmental risks typically d o not increase returns
but serve as constraints on return and risk decisions. ~e concluded that the process of
retaining the levels of risks within the desirable levels must be practiced in the daily
operations.
Vijay Soodd6 (2000) revealed the risks faced by banks and financial institutions and
the degree of risk faced by them. According to him, risk management is gathering momentum
at a time when there is increasing pressure on banks and F.1.S to better manage their assets and
improve their balance sheet. He opined that the greater the volatility of expected returns, the
higher is the risk. The essence of risk management is to reduce the volatility. Report by the
I.ES47 (The Investigation Enforcement a n d Surveillance) Department of the SEBI (2000)
states that in spite of some instances of high volatility, the Indian markets have remained
stable and safe. I t is observed that the Indian securities market has been witnessing a
downtrend and instances of volatility. But the downtrend and the fall in the sensex are in
consonance with the fall in the indices of the major capital markets around the world.
According to the Report, the downtrend in the sensex could be attributed to-
1. Rise in the oil prices in the global markets leading to increase in oil pool deficit.
2. Downward pressure on the Indian Rupee.
3. Fears of economic slow down a s indicated by the key economy indicators.
12. 4. Revival of competitive economies such as Malaysia and possibility of shifting some
foreign investments to these countries etc. The report concluded that the risk containment
measures along with the proactive measures taken by the SEBI from time to time has ensured
that the level of safety remained adequate and there were no constraints on the settlement
process.
Jayanth M ThakurJ"2000) disclosed the implications of derivatives. The use of
derivatives can be for safeguarding oneself against risks. I t is widely recognised by all
including the SEBI committee on derivatives that a substantial degree of speculative
activity in a market for derivatives is necessary and without this, a good market in
derivatives cannot function. He revealed that the basic purpose of providing a system for
trading in derivatives is to enable a person to protect himself against the risk of fluctuations in
the market prices. This is known as hedging. But h e argued that it might lead to the bankruptcy
of the grantor of a n option to buy as he takes a huge risk since the price could go upward to an
unlimited extent a n d still he would have to deliver the shares.
13. SHARPE RATIO
DESCRIPTION:
Sharpe Ratio
The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability ratio is a
measure of the mean return per unit of risk in an investment asset or a trading strategy.
This ratio was developed by William Forsyth Sharpe in 1966. Sharpe originally called it
the "reward-to-variability" ratio in before it began being called the Sharpe Ratio by later
academics and financial professionals. Recently, the (original) Sharpe ratio has often been
challenged with regard to its appropriateness as a fund performance measure during evaluation
periods of declining markets (Scholz 2007).
What Does Sharpe Ratio Mean?
A ratio developed by Nobel laureate William F. Sharpe that is used to measure risk
adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate, such as that
of the 10-year U.S. Treasury bond, from the rate of return of a portfolio and then dividing the
result by the standard deviation of the portfolio returns.
The Sharpe ratio indicates whether a portfolio's returns are due to smart investment
decisions or are a result of excess risk. This measurement is very useful because although one
portfolio or fund can reap higher returns than its peers, it is a good investment only if those
higher returns are not a result of taking on too much additional risk. The greater a portfolio's
Sharpe ratio is, the better its risk-adjusted performance has been. A variation of the Sharpe ratio
is the Sortino ratio, which removes the effects of upward price movements on standard deviation
to measure only return against downward price volatility.