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GNDU QUESTION PAPERS 2022
BBA 6
th
SEMESTER
SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT
Time Allowed: 3 Hours Maximum Marks: 50
Note: Aempt Five quesons in all, selecng at least One queson from each secon. The
Fih queson may be aempted from any secon. All quesons carry equal marks.
SECTION-A
1. Explain the concept of risk. What are various stascal methods to measure risk?
2. Explain various methods of markeng of securies in detail.
SECTION-B
3. Dierenate between technical analysis and fundamental analysis. Would you advise an
investor to use only technical analysis for investment decision making
4. Crically examine the features of Capital Asset Pricing Model. What are the
assumpons of this model?
SECTION-C
5. Dene investment. What are various investment objecves?
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6. Explain the concept of mutual funds. What is the dierence between porolio
management and mutual funds ?
SECTION-D
7. Porolio management is a combinaon of the securies which will give maximum
return with minimum risk. Why/why not?
8. What do you mean by porolio selecon problem ? What is its signicance ?
GNDU Answer PAPERS 2022
BBA 6
th
SEMESTER
SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT
Time Allowed: 3 Hours Maximum Marks: 50
Note: Aempt Five quesons in all, selecng at least One queson from each secon. The
Fih queson may be aempted from any secon. All quesons carry equal marks.
SECTION-A
1. Explain the concept of risk. What are various stascal methods to measure risk?
Ans: 1. What is Risk?
In simple words, risk means the possibility of loss or uncertainty of returns.
Whenever we make a decision about the future—like investing, starting a business, or even
choosing a career—we face risk because the future is unknown.
Example:
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• If you invest ₹10,000 in a stock, it may grow to ₹15,000 (profit)
• Or it may fall to ₹7,000 (loss)
Since you don’t know the exact outcome, there is risk involved.
2. Key Features of Risk
To understand risk better, remember these important points:
• Uncertainty: Risk exists because the future is unpredictable
• Possibility of Loss: There is always a chance of negative outcomes
• Variability: Outcomes can differ from expectations
• Decision-based: Risk arises when we make choices
In short:
Higher uncertainty = Higher risk
3. Types of Risk (Basic Idea)
Before measuring risk, it's useful to know that risk can be of different types:
• Business Risk: Loss due to poor business performance
• Financial Risk: Risk from loans or debt
• Market Risk: Changes in stock prices
• Personal Risk: Illness, accidents, etc.
4. Statistical Methods to Measure Risk
Now comes the important part:
How do we measure risk?
Since risk is about uncertainty, we use statistics to measure how much outcomes vary.
(1) Range (Simplest Method)
Range shows the difference between the highest and lowest possible outcomes.
Formula:
Range = Maximum Value – Minimum Value
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Example:
Returns are: 5%, 10%, 15%
Range = 15% – 5% = 10%
Meaning:
Higher range = Higher risk
✔ Easy to calculate
But not very accurate (ignores other values)
(2) Variance (More Accurate Method)
Variance measures how far each value is from the average (mean).
𝜎
2
=
∑(𝑥−𝑥ˉ)
2
𝑛
Meaning:
• If values are spread out → High variance → High risk
• If values are close → Low variance → Low risk
✔ Uses all data
Slightly complex
(3) Standard Deviation (Most Popular Method)
This is the square root of variance and is widely used in finance.
𝜎=
√
∑(𝑥−𝑥ˉ)
2
𝑛
Meaning:
• Higher standard deviation = Higher risk
• Lower standard deviation = More stable returns
✔ Most reliable and commonly used
✔ Easy to interpret compared to variance
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(4) Coefficient of Variation (CV)
This method compares risk relative to return.
𝐶𝑉=
𝜎
𝑥ˉ
×100
Meaning:
• Lower CV = Better (less risk per unit of return)
• Higher CV = More risk
✔ Useful for comparing different investments
(5) Beta (β) – Market Risk Measure
Beta measures how much an investment reacts to market changes.
• β = 1 → Same as market
• β > 1 → More risky than market
• β < 1 → Less risky
Example:
If the market rises 10% and your stock rises 15%, it has high beta (more risk).
(6) Probability Distribution
This method studies the likelihood of different outcomes.
Example:
• 20% chance of loss
• 50% chance of moderate gain
• 30% chance of high gain
✔ Helps in understanding all possible outcomes
5. Simple Summary
Let’s quickly revise:
• Risk = Uncertainty + Possibility of Loss
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• It is present in every financial decision
• It is measured using statistical tools
Main Methods:
• Range → Basic idea
• Variance → Spread of data
• Standard Deviation → Most important
• Coefficient of Variation → Comparison tool
• Beta → Market risk
• Probability → Chances of outcomes
Conclusion
Risk is a natural part of life and decision-making. Whether you are investing money, starting
a business, or making career choices, you cannot avoid risk—but you can understand and
measure it.
Statistical methods like standard deviation and variance help us turn uncertainty into
numbers, making it easier to compare options and make better decisions.
2. Explain various methods of markeng of securies in detail.
Ans: Methods of Marketing Securities
When a company needs money to expand, modernize, or launch new projects, it often turns
to the capital market. Marketing securities means selling shares, debentures, or bonds to
investors. Let’s explore the major methods in detail:
1. Pure Prospectus Method
• The company issues a detailed prospectus explaining its business, financials, and
purpose of raising funds.
• Investors can directly subscribe to shares.
• Advantage: Transparent and informative.
• Disadvantage: Costly and time-consuming due to legal formalities.
2. Offer for Sale Method
• The company sells securities to intermediaries (like brokers or financial institutions),
who then resell them to the public.
• Advantage: Reduces burden on the company.
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• Disadvantage: Investors may pay higher prices due to middlemen.
3. Private Placement Method
• Securities are sold directly to select investors such as banks, insurance companies, or
wealthy individuals.
• Advantage: Quick and less expensive.
• Disadvantage: Limited to a small group, not accessible to the general public.
4. Initial Public Offer (IPO)
• The company invites the public to buy shares for the first time.
• Advantage: Raises large funds, increases visibility.
• Disadvantage: Requires strict compliance with regulations.
5. Rights Issue Method
• Existing shareholders are given the “right” to buy additional shares at a discounted
price.
• Advantage: Rewards loyal shareholders.
• Disadvantage: New investors cannot participate.
6. Bonus Issue Method
• Free shares are issued to existing shareholders from company reserves.
• Advantage: Boosts shareholder confidence.
• Disadvantage: No fresh funds are raised.
7. Book-Building Method
• Investors bid for shares within a price range, and the final price is decided based on
demand.
• Advantage: Reflects true market demand.
• Disadvantage: Complex process requiring expert management.
8. Stock Option Method
• Employees are given the option to buy company shares at a fixed price.
• Advantage: Motivates employees, aligns their interests with company growth.
• Disadvantage: Limited to employees, not a fundraising tool for the public.
9. Bought-Out Deals Method
• An investment institution buys the entire issue from the company and later sells it to
the public.
• Advantage: Immediate funds for the company.
• Disadvantage: Company loses control over pricing and timing.
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Advantages of Multiple Methods
• Flexibility: Companies can choose based on their needs.
• Accessibility: Different methods reach different investor groups.
• Efficiency: Some methods are faster, others more transparent.
Disadvantages
• Complexity: Legal and regulatory hurdles.
• Costs: Prospectus and IPOs are expensive.
• Limited Reach: Private placements exclude small investors.
Conclusion
Marketing securities is like choosing the best way to sell a product. Sometimes you go
directly to customers (prospectus, IPO), sometimes through dealers (offer for sale, bought-
out deals), and sometimes you reward loyal customers (rights and bonus issues). Each
method has its own purpose, advantages, and drawbacks.
SECTION-B
3. Dierenate between technical analysis and fundamental analysis. Would you advise an
investor to use only technical analysis for investment decision making
Ans: What is Fundamental Analysis?
Fundamental analysis focuses on the real value of a company.
It tries to answer:
“Is this company actually strong and worth investing in?”
An investor studies things like:
• Company profits and revenue
• Assets and liabilities
• Management quality
• Industry growth
• Economic conditions
Example:
If a company is making good profits, growing steadily, and has strong management, it is
considered a good long-term investment.
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In simple words:
Fundamental analysis = Studying the “health” of the company
What is Technical Analysis?
Technical analysis focuses on price movements and charts, not the company itself.
It tries to answer:
“When is the right time to buy or sell?”
An investor studies:
• Price charts
• Trends (uptrend, downtrend)
• Patterns (like head & shoulders)
• Indicators (RSI, MACD, moving averages)
Example:
If a stock price is rising continuously and showing a strong trend, a technical analyst may
say:
“Buy now, momentum is strong.”
In simple words:
Technical analysis = Studying “market behavior” and price patterns
Key Differences (Easy Comparison)
Basis
Fundamental Analysis
Technical Analysis
Focus
Company value
Price & charts
Purpose
Long-term investment
Short-term trading
Data used
Financial statements, economy
Charts, patterns
Question
“Is this a good company?”
“Is this the right time?”
Time horizon
Long-term
Short-term
Which One is Better?
Now comes the important part of your question.
Should an investor rely only on technical analysis?
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The simple answer is:
No, relying only on technical analysis is not advisable.
Let’s understand why.
Why Only Technical Analysis is Risky
1. It ignores real company value
A stock may look good on charts, but the company might be weak.
Example:
A company with poor financial health may still show a temporary price rise.
2. Market emotions can mislead
Technical analysis is based on market psychology, which can change quickly.
Prices may rise due to hype, not real strength.
3. No long-term security
Technical analysis is mostly useful for short-term trading, not long-term wealth creation.
Why Fundamental Analysis is Important
Fundamental analysis helps you:
✔ Invest in strong companies
✔ Reduce long-term risk
✔ Build wealth over time
Great investors like Warren Buffett mainly use fundamental analysis.
The Best Approach (Smart Strategy)
Instead of choosing one, smart investors use both together.
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This is called a combined approach:
• Use Fundamental Analysis → to choose the right company
• Use Technical Analysis → to decide the right time to buy/sell
Example:
• You find a strong company (fundamental)
• Then wait for a good entry point using charts (technical)
Final Conclusion
• Fundamental analysis tells you “what to buy”
• Technical analysis tells you “when to buy”
So, relying only on technical analysis is not a wise decision, especially for long-term
investors.
4. Crically examine the features of Capital Asset Pricing Model. What are the
assumpons of this model?
Ans: Understanding CAPM
The Capital Asset Pricing Model (CAPM) is a formula that helps investors decide whether a
stock or asset is worth investing in, given its risk compared to the overall market.
The formula is:
𝐸(𝑅
𝑖
)=𝑅
𝑓
+𝛽
𝑖
(𝑅
𝑚
−𝑅
𝑓
)
Where:
• 𝐸(𝑅
𝑖
)= Expected return on the asset
• 𝑅
𝑓
= Risk-free rate (like government bonds)
• 𝛽
𝑖
= Beta (measures how risky the asset is compared to the market)
• 𝑅
𝑚
= Expected market return
In simple terms, CAPM says: Your return should equal the safe return plus extra
compensation for taking risk.
Features of CAPM
1. Risk-Return Relationship
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o CAPM directly connects risk (beta) with expected return.
o Higher risk → higher expected return.
2. Beta as a Key Measure
o Beta shows how sensitive a stock is to market movements.
o Example: A beta of 1.5 means the stock is 50% more volatile than the market.
3. Market-Oriented
o CAPM assumes investors compare every asset to the overall market portfolio.
4. Simplicity
o Provides a straightforward formula for calculating expected returns.
5. Cost of Equity Estimation
o CAPM is widely used by companies to estimate the cost of equity when
making investment decisions.
6. Focus on Systematic Risk
o CAPM only considers systematic risk (market-wide risk), not unsystematic risk
(company-specific risk).
Assumptions of CAPM
CAPM is built on several assumptions, which make it elegant but also unrealistic:
1. Investors are Rational and Risk-Averse
o Assumes all investors make logical decisions and prefer less risk.
2. Perfect Capital Market
o No transaction costs, taxes, or restrictions.
3. Homogeneous Expectations
o All investors have the same expectations about returns, risks, and future
performance.
4. Risk-Free Borrowing and Lending
o Investors can borrow or lend unlimited money at the risk-free rate.
5. Single Period Investment Horizon
o Assumes investors plan for only one period (like one year).
6. Market Portfolio is Efficient
o Assumes all investors hold a mix of assets that perfectly represents the
market.
7. Only Systematic Risk Matters
o Company-specific risks can be diversified away, so only market risk affects
returns.
Criticisms of CAPM
While CAPM is elegant, it faces criticism:
• Unrealistic Assumptions: Real markets have taxes, transaction costs, and irrational
investors.
• Beta Limitations: Beta may not fully capture risk; past volatility doesn’t always
predict future risk.
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• Empirical Weakness: Studies show CAPM predictions often don’t match actual
returns.
• Ignores Other Factors: Models like the Fama-French three-factor model include size
and value effects, which CAPM overlooks.
Wrapping It Up
CAPM is like a compass—it points you in the right direction by linking risk and return, but it
doesn’t guarantee you’ll reach your destination. Its features make it simple and widely
used, but its assumptions limit its accuracy in real-world markets.
SECTION-C
5. Dene investment. What are various investment objecves?
Ans: What is Investment?
Imagine you have some extra money. Instead of keeping it idle at home, you decide to use it
in a way that it grows over time. This act of putting your money into something with the
expectation of earning profit or income in the future is called investment.
In simple words:
Investment means using your money today so that it can increase in value tomorrow.
For example:
• Depositing money in a bank
• Buying shares or mutual funds
• Purchasing land or property
• Investing in gold
All these are forms of investment because they are expected to give returns in the future.
Why Do People Invest?
Money kept idle loses its value over time due to inflation (rising prices). So, people invest to
grow their money, achieve financial goals, and secure their future.
Various Objectives of Investment
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Every person invests with some purpose. These purposes are called investment objectives.
Let’s understand the major ones in a simple and interesting way:
1. Safety of Capital
The first and most important objective is protecting your money.
People want to ensure that the money they invest does not get lost. That’s why many prefer
safe options like bank deposits or government bonds.
Example: A retired person prefers fixed deposits because they are safe.
2. Regular Income
Some people invest to earn a steady flow of income.
This is especially important for people who depend on investments for their daily expenses.
Example:
• Interest from bank deposits
• Dividends from shares
• Rent from property
3. Capital Growth (Wealth Creation)
Another important objective is to increase the value of money over time.
Here, the focus is not just on regular income but on making the investment grow in value.
Example:
Buying shares at ₹100 and selling them later at ₹200.
This is common among young investors who have time and can take risks.
4. Liquidity
Liquidity means how quickly you can convert your investment into cash.
People prefer investments that can be easily sold or withdrawn when needed.
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Example:
• Savings accounts (high liquidity)
• Real estate (low liquidity)
5. Tax Saving
Some investments help in reducing tax liability.
People choose such options to save money on taxes while also earning returns.
Example:
• PPF (Public Provident Fund)
• ELSS (Equity Linked Saving Scheme)
6. Protection Against Inflation
Inflation reduces the purchasing power of money.
So, investors choose options that grow faster than inflation.
Example:
Investing in stocks or real estate can help beat inflation.
7. Risk Minimization
Every investment involves some level of risk.
Many investors aim to reduce risk by diversifying their investments.
Example:
Instead of investing all money in shares, they divide it among shares, bonds, and gold.
8. Future Financial Security
People invest to secure their future needs like:
• Retirement
• Children’s education
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• Marriage expenses
Investment helps in planning for these long-term goals.
Conclusion
Investment is not just about earning money—it is about planning your financial future
wisely.
Different people have different objectives:
• Some want safety
• Some want growth
• Some want regular income
A good investor understands their goals and chooses investments accordingly.
6. Explain the concept of mutual funds. What is the dierence between porolio
management and mutual funds ?
Ans: What is a Mutual Fund?
A mutual fund is like a big basket of investments. Many investors contribute money, and a
professional fund manager invests that pool into stocks, bonds, or other securities.
• How it works: You buy “units” of the fund, and your money is combined with others.
• Who manages it: A fund manager decides where to invest.
• Example: If you invest in an equity mutual fund, your money might be spread across
50 different companies’ shares.
Think of it like joining a buffet—you pay for your plate, and you get access to a wide variety
of dishes (investments) without having to cook yourself.
Features of Mutual Funds
1. Diversification
o Your money is spread across many investments, reducing risk.
2. Professional Management
o Experts handle the buying and selling decisions.
3. Liquidity
o You can usually sell your units and get your money back quickly.
4. Accessibility
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o Even small investors can participate with modest amounts.
5. Transparency
o Funds regularly publish reports showing where your money is invested.
What is Portfolio Management?
Portfolio management is more personalized. Instead of pooling money with others, you hire
a portfolio manager to design and manage your individual investment portfolio.
• How it works: The manager studies your financial goals, risk appetite, and
preferences, then creates a tailored investment plan.
• Who manages it: A portfolio manager or advisory firm works directly with you.
• Example: If you want a mix of safe bonds and a few high-growth stocks, your
manager will build that exact portfolio for you.
Think of it like having a personal chef—you tell them your tastes, and they cook meals just
for you.
Features of Portfolio Management
1. Customization
o Investments are tailored to your specific needs.
2. Direct Ownership
o You own the securities directly, unlike mutual funds where you own “units.”
3. Flexibility
o You can change your portfolio anytime based on your goals.
4. Expert Guidance
o Managers provide advice and adjust strategies as markets change.
5. Higher Costs
o Personalized service often comes with higher fees compared to mutual funds.
Key Differences Between Mutual Funds and Portfolio Management
Aspect
Mutual Funds
Portfolio Management
Ownership
Investors own units of the
fund
Investors directly own securities
Customization
Standardized for all investors
Tailored to individual needs
Investment Size
Suitable for small investors
Usually requires larger
investments
Management Style
Collective, one-size-fits-all
Personalized, one-on-one
Cost
Lower fees
Higher fees due to customization
Risk
Diversification
Built-in diversification
Depends on investor’s choices
Advantages of Mutual Funds
• Easy entry for beginners.
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• Lower costs compared to personalized services.
• Diversification reduces risk.
• Highly regulated, ensuring safety and transparency.
Disadvantages of Mutual Funds
• Limited control—you can’t decide where exactly your money goes.
• Returns depend on the fund manager’s skill.
• Standardized approach may not suit unique goals.
Advantages of Portfolio Management
• Tailored to your financial goals.
• Direct ownership of securities.
• Flexibility to adjust investments anytime.
• Personalized advice and strategies.
Disadvantages of Portfolio Management
• Higher costs and fees.
• Requires larger investment amounts.
• Success depends heavily on the manager’s expertise.
• Less accessible for small investors.
Wrapping It Up
Mutual funds and portfolio management are two different paths to investing:
• Mutual funds are like a shared buffet—affordable, convenient, and suitable for
beginners.
• Portfolio management is like hiring a personal chef—customized, flexible, but more
expensive.
SECTION-D
7. Porolio management is a combinaon of the securies which will give maximum
return with minimum risk. Why/why not?
Ans: What is Portfolio Management?
Imagine you have some money to invest. Instead of putting all your money into one place
(like only shares or only gold), you spread it across different options—shares, bonds, mutual
funds, etc. This combination is called a portfolio.
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Managing this combination wisely is known as portfolio management.
The main idea is simple:
Don’t put all your eggs in one basket.
The Ideal Goal: Maximum Return + Minimum Risk
In theory, portfolio management aims to:
• Increase returns (profit)
• Reduce risk (loss)
This idea comes from a famous concept in finance called diversification.
For example:
• If one investment performs badly, another might perform well.
• This balance helps protect your overall money.
So yes, portfolio management does try to achieve maximum return with minimum risk.
But Here’s the Reality…
Now comes the important part—this idea is not 100% true in practical life.
Why?
Because of something very important:
Risk and return are directly related.
This means:
• Higher returns usually come with higher risk
• Lower risk usually gives lower returns
So, it is not possible to completely eliminate risk and still get maximum returns.
A Simple Example
Let’s say you have two options:
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1. Government bonds
o Very safe
o Low return
2. Stock market investments
o High return potential
o High risk
Now, if you want maximum return, you must take some risk.
If you want minimum risk, you must accept lower returns.
So, the goal of portfolio management is not perfection, but balance.
What Portfolio Management Actually Does
Instead of achieving “maximum return with minimum risk,” portfolio management aims to:
✔ Optimize returns for a given level of risk
✔ Reduce unnecessary risk through diversification
✔ Match investments with investor goals
This idea is explained by Modern Portfolio Theory (MPT), which says:
You can create an “efficient portfolio” that gives the best possible return for a chosen
level of risk—not zero risk.
Key Factors That Affect Portfolio Management
1. Market conditions – Prices keep changing
2. Economic factors – Inflation, interest rates
3. Investor goals – Short-term vs long-term
4. Risk tolerance – Some people can handle risk, others cannot
Because of these factors, perfect balance is impossible, but smart balance is achievable.
Final Answer: Why / Why Not?
✔ Why (Yes):
• Portfolio management helps reduce risk through diversification
• It improves chances of better returns
• It creates a balanced investment strategy
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Why Not (Limitations):
• Maximum return and minimum risk cannot be achieved together
• Risk cannot be completely eliminated
• Market uncertainty always exists
Conclusion
So, the statement is partially true but not completely correct.
Portfolio management is not about creating a perfect combination with zero risk and
maximum profit. Instead, it is about finding the best possible balance between risk and
return.
8. What do you mean by porolio selecon problem ? What is its signicance ?
Ans: Portfolio Selection Problem: Concept and Significance
Let’s imagine you’ve saved some money and want to invest it. You could buy shares of a
tech company, put some into government bonds, or maybe invest in real estate. But here’s
the catch—you can’t put all your money into one option because that’s risky. At the same
time, you want to maximize your returns. So, how do you decide the right mix of
investments? This dilemma is what we call the portfolio selection problem.
What is the Portfolio Selection Problem?
The portfolio selection problem refers to the challenge investors face when deciding how to
allocate their wealth across different assets (like stocks, bonds, mutual funds, or real estate)
in order to balance risk and return.
• Risk: The chance that your investment may lose value.
• Return: The profit or gain you expect from your investment.
The problem arises because investors want the highest possible return but with the lowest
possible risk. Since risk and return usually move together (higher returns often mean higher
risks), finding the “perfect balance” becomes tricky.
In simple terms, it’s like choosing a diet plan: you want tasty food (returns) but also healthy
options (low risk). The portfolio selection problem is about finding the right mix.
Why Does This Problem Exist?
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1. Uncertainty in Markets
o No one can predict the future perfectly. Prices of stocks, bonds, and
commodities fluctuate.
2. Different Risk Levels
o Some assets are safe (like government bonds), while others are risky (like
start-up stocks).
3. Limited Resources
o Investors have limited money, so they must decide how to distribute it
wisely.
4. Diversification Needs
o Putting all money into one asset is dangerous. Spreading investments
reduces risk but complicates decision-making.
Significance of the Portfolio Selection Problem
The portfolio selection problem is not just academic—it has real-world importance for
investors, companies, and the economy. Let’s explore why it matters:
1. Helps Investors Balance Risk and Return
• Investors don’t want to lose sleep worrying about their money.
• By solving the portfolio selection problem, they can achieve a balance between
safety and profitability.
2. Foundation of Modern Investment Theory
• The concept was formalized by Harry Markowitz in his Modern Portfolio Theory
(MPT).
• He introduced the idea of the “efficient frontier,” where investors can find the best
possible portfolios for given risk levels.
3. Encourages Diversification
• The problem highlights the importance of not putting all eggs in one basket.
• Diversification reduces unsystematic risk (company-specific risk).
4. Guides Financial Institutions
• Banks, mutual funds, and pension funds use portfolio selection models to manage
billions of dollars.
• Their decisions affect the economy as a whole.
5. Supports Strategic Decision-Making
• Helps investors decide whether to invest in equities, bonds, or alternative assets.
• Provides a scientific approach instead of relying on guesswork.
6. Improves Investor Confidence
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• When investors know their portfolio is well-structured, they feel more secure.
• This encourages more participation in financial markets.
Example to Make It Relatable
Imagine two friends, Riya and Arjun:
• Riya invests all her money in one tech company. If the company fails, she loses
everything.
• Arjun spreads his money across tech stocks, government bonds, and real estate.
Even if the tech company fails, his bonds and property still provide stability.
Arjun has solved the portfolio selection problem better than Riya by diversifying and
balancing risk with return.
Conclusion
The portfolio selection problem is the central challenge of investing: how to choose the
right mix of assets to maximize returns while minimizing risk. Its significance lies in shaping
modern investment strategies, encouraging diversification, and guiding both individual
investors and large institutions.
“This paper has been carefully prepared for educaonal purposes. If you noce any
mistakes or have suggesons, feel free to share your feedback.”
