SAPM Solution

Risk – Can be quantitatively measured whereas uncertainty – can’t be measured

Standard deviation – Total Volatility-Both Systematic and unsystematic risk, Beta – Measures only systematic risk

Tracking error –

Professional Index construction –

Price spread between BSE and NSE

Volume of transaction between BSE and NSE

Pricing asset – Construct portfolio (Market Portfolio) with systematic risk – Volatility does not matter only systematic risk.

Need some kind of proxy –SENSEX or NIFTY

Market beta =1

Risk free – 91 days T-Bill (because it is always available reflecting inflation and purchasing power)

TAA – Tactical Asset Allocation

SAPM –Requires some sort of quantitative literacy.

CAPM is a theoretical model which does not carry any epsilon

Applied form CAPM is single index model because error term is there incorporated.

Like CAPM APT is theoretical model, therefore multifactor model is the applied form of APT(So error term should be in applied model)

We need to thoroughly understand the summary out put data and be able to interpret the data

Three factor Model - Eugene Fama and Kenneth French (Using Micro Economic variable)

RATIOS	VALUE STOCKS	GROWTH STOCKS
B/M	High	Low
P/E	Low	High
D/P	High	Low

Debt free company is good and enjoy premium in stock market

Efficient Market Hypothesis is nothing but Random walk theory: Efficient market is information reflecting market where technical analysis will not work and speculators can not make alpha return.

Correlation – The relationship between two variables

Auto correlation – Relationship within the variable and it can be used only in Time series data.

Always weak form efficiency is against to Technical analysis moreover the global equity market is weak form efficient

Expiration effect – Day and Weak

Free float Market Capitalization = (Total market capitalization – Promotors Holding +QIB holding)

S&P CNX Nifty - CRISIL and NSE joint venture has got license from S&P

Coupling and decoupling effect

IPO and FPO

Investment banking

Structured obligation – Mortgage (Reason for Sub prime mortgage)

Securitization:

Credit rating agencies :There are five credit rating agencies in India as follows:

CRISIL

CARE –Credit Analysis and Research Limited

Fitch India

ICRA – Investment Information and Credit Rating Agency of India

The above mentioned agencies are rating the instruments only not the companies

Actively Managed funds – Normal Mutual Funds

Passively Managed Funds – Index Funds

Exchange Traded Funds – ETFs

Rupee cost average

Dollar cost Average

ADR-GDR and IDR(Indian Depositories Reserves)

GDR is mainly issued in Luxemburg – London Stock Exchange

GARCH model is a tool to calculate daily standard deviation rather total standard deviation

ECB – External commercial Borrowings from ADB ,IMF and world bank

GDR INDEX – SK INDIA

INDIA VIX Published by NSE

CDO – Collateral Debt Obligation

CLO –Collateral Loan Obligation

Testing CAPM – Fama Macbeth - Time Series Regression or First Pass Regression and Second Pass regression or Cross sectional regression.

Applicability of CAPM in any market is = E(r) – Rf = B(Rm-Rf) so the alpha return will be zero

Bond duration

Convexity is always positive

Few Good Books for Fixed Income Securities:

Fabozzi – Fixed Income Securities

Reily

Suresh Sundaresan

STOCK SELECTION

Key things to be considered in Stock Selection:

Company Analysis :Selecting Value Stocks

P/E Ratio should be low a stock to be value stock(If nom of shares reduced then the earning will be high then the P/E will be low.

So P/CF can be used :Here instead of Price/PAT an alternative method is Price/CF moreover stock market always consider cash flow .

Cash flow from operating activities is good for stock analysis.

Fund based activities & Fee based activities

Therefore:

P/E - P/CF(Three year average cash flow should be taken) ,Debt Free Position

Consistent dividend payment

Participating share by AMC(Assety Management Company)

Having share in other company

EV= Enterprise value (Actual Value of the Company)

EV=MC(Market Capitalisation)+Debt – Cash reserve

EV/VI

EV= Enterprise Value VI = Value Investment(Investment Made in other company)

EV ratio should be lesser to buy the company