Security Analysis – CA Final SFM Study Material is designed strictly as per the latest syllabus and exam pattern.
Security Analysis – CA Final SFM Study Material
Part – 1 (Theory)
Question 1.
Mention the various techniques used in economic analysis. [May 2011] [4 Marks]
Answer:
While making investment decisions, two approaches can be used. The first is the fundamental Analysis and the second is the technical analysis. In fundamental analysis the intrinsic value of the equity stock is determined by making a forecast of earnings and dividends of stock and discounting them at an appropriate rate considering the risk. One of the key variables that an investor must monitor in order to carry out fundamental analysis is Economic analysis.
Techniques used in Economic analysis :
Some of the techniques used for economic analysis are:
(a) Anticipatory Surveys : They help investors to form an opinion about the future state of the economy. It incorporates expert opinion on construction activities, expenditure on plant and machinery, levels of inventory – all having a definite bearing on economic activities. The future spending habits of consumers are taken into account.
(b) Barometer/Indicator Approach : Various indicators are used to find out how the economy shall perform in the future. The indicators have been classified as under:
- Leading Indicators: They lead the economic activity in terms of their outcome. They relate to the time series data of the variables that reach high/low points in advance of economic activity.
- Roughly Coincidental Indicators: They reach their peaks and troughs at approximately the same time in economy.
- Lagging Indicators: They are time series data of variables that lag behind in their consequences vis-a-vis economy. They reach their turning points after the economy has reached its own already.
(c) Economic Model Building Approach: The steps used are as follows:
- Hypothesize total economic demand by measuring total income (GNP) based on political stability, rate of inflation, changes in eco- „ nomic levels.
- Forecasting the GNP by estimating levels of various components viz. consumption expenditure, gross private domestic investment, government purchases of goods/services, net exports, etc.
- After forecasting individual components of GNP, add them up, to obtain the forecasted GNP.
- Comparison is made of total GNP thus arrived at with that from an independent agency for the forecast of GNP and then the overall forecast is tested for consistency. This is carried out for ensuring that both the total forecast and the component wise forecast fit together in a reasonable manner.
Part – 2 (Numerical Problems)
Question 1.
The closing value of Sensex for the month of October, 2007 is given below:
You are required to test the weak form of efficient market hypothesis by applying the run test at 5% and 10% level of significance.
Following value can be used
Value of t at 5% is 2.101 at 18 degrees of freedom.
Value of t at 10% is 1.734 at 18 degrees of freedom.
Value of t at 5% is 2.086 at 20 degrees of freedom.
Value of t at 10% is 1.725 at 20 degrees of freedom. [Nov. 2008] [8 Marks]
Answer:
Total of sign of price changes (r) = 08
No. of Positive changes = n1 = 11
No. of Negative changes = n2 = 08
Since too few runs in the case would indicate that the movement of prices is not random. We employ a two-tailed test for the randomness of prices.
Test at 5% level of significance at t.05 using t – table at 18 degrees of freedom.
The lower limit.
= μ – txσr∧
= 10.26 – 2.101 × 2.06 = 5.932
Upper limit
= μ + t × σr
= 10.26 + 2.101 × 2.06
= 14.588
At 10% level of significance at 18 degrees of freedom Lower limit
= 10.26 – 1.734 × 2.06
= 6.688
Upper limit
= 10.26 + 1.734 × 2.06
= 13.832 C
As seen, the value of r lies between these limits. Hence, the market exhibits weak form of efficiency.
Question 2.
Closing values of BSE Sensex from 6th to 17th day of the month of January of the year 200X were as follows:
Calculate Exponential Moving Average (EMA) of Sensex during the above period. The 30 days simple moving average of Sensex can be assumed as 15,000. The value of exponent for 30 days EMA is 0.062. Give detailed analysis on the basis of your calculations. [May 2018] [Nov. 2009] [6 Marks]
Answer:
Conclusion: The market is bullish. The market is likely to remain bullish for short-term to medium term. On the basis of this indicator (EMA), the investors/ brokers can take long position.
Question 3.
Closing Values of BSE Sensex from 6th to 17th day of the month of January of the year 20xx were as follows :
Calculate Exponential Moving Average (EMA) of Sensex during the above period. The 30 days simple moving average of Sensex can be assumed as 35,000. The value of exponent for 30 days EMA is 0.064.
Provide analyzed conclusion on the basis of your calculations.
(Calculations should be up to three decimal points.) [Nov. 2019] [8 Marks] Ans.
Conclusion: The market is bullish. The market is likely to remain bullish for short-term to medium term. On the basis of this indicator (EMA), the investors/ brokers can take long position.
Question 4.
Given the data below: apply an auto-correlation test for finding whether the market is weakly efficient. Use time lag of 10 days: [Practice Question]
| Trading days | Closing Sensex | Trading days | Closing Sensex |
| 1 | 13450 | 11 | 13250 |
| 2 | 13440 | 12 | 13290 |
| 3 | 13430 | 13 | 13330 |
| 4 | 13380 | 14 | 13290 |
| 5 | 13370 | 15 | 13300 |
| 6 | 13340 | 16 | 13320 |
| 7 | 13330 | 17 | 13330 |
| 8 | 13335 | 18 | 13340 |
| 9 | 13310 | 19 | 13320 |
| 10 | 13270 | 20 | 13340 |
Answer:
Calculation of changes in index values (with time lag of 10 Days)
Calculation of coefficient of correlation:
As r does not tend to zero, the market is not weak.