{"id":19000,"date":"2023-03-29T10:11:19","date_gmt":"2023-03-29T04:41:19","guid":{"rendered":"https:\/\/gstguntur.com\/?p=19000"},"modified":"2023-03-29T10:11:19","modified_gmt":"2023-03-29T04:41:19","slug":"portfolio-management-ca-final-sfm-study-material","status":"publish","type":"post","link":"https:\/\/gstguntur.com\/portfolio-management-ca-final-sfm-study-material\/","title":{"rendered":"Portfolio Management \u2013 CA Final SFM Study Material"},"content":{"rendered":"

Portfolio Management \u2013 CA Final SFM Study Material<\/a>\u00a0is designed strictly as per the latest syllabus and exam pattern.<\/p>\n

Portfolio Management \u2013 CA Final SFM Study Material<\/h2>\n

Part – 1 (Theory)<\/strong><\/p>\n

Question 1.
\nDiscuss the various kinds of Systematic and Unsystematic risk? [Practice Question]
\nAnswer:
\nThere are two types of risk – systematic (or non-diversifiable) and un-systematic (or diversifiable) relevant for investment – also, called as general and specific risk.<\/p>\n

Types of Systematic Risk:
\ni. Market risk: Even if the earning power of the corporate sector and the interest rate structure remain more or less unchanged, prices of securi-ties, equity shares in particular, tend to fluctuate. Major cause appears to be changing psychology of the investors. The irrationality in the security markets may cause losses unrelated to the basic risks. These losses are the result of changes in the general tenor of the market and are called market risks.<\/p>\n

ii. Interest Rate Risk: The change in the interest rate has a bearing on the welfare of the investors. As the interest rate goes up, the market price of existing fixed income securities falls and vice versa. This happens because the buyer of a fixed income security would not buy it at its face value if its interest rate is lower than the prevailing interest rate on a similar security.<\/p>\n

iii. Social or Regulatory Risk: The social or regulatory risk arises, where an otherwise profitable investment is impaired as a result of adverse legislation, harsh regulatory climate, or in extreme instance nationalization by a socialistic government.<\/p>\n

iv. Purchasing Power Risk: Inflation or rise in prices lead to rise in costs of production, lower margins, wage rises and profit squeezing etc. The return expected by investors will change due to change in real value of returns.<\/p>\n

Types of Unsystematic Risk:
\ni. Business Risk: As a holder of corporate securities (equity shares or debentures) one is exposed to the risk of poor business performance. This \u201d may be caused by a variety of factors like heightened competition, emergence of new technologies, development of substitute products, shifts in consumer preferences, inadequate supply of essential inputs, changes in government policies etc. But quite often the principal factor may be inept and incompetent management.<\/p>\n

ii. Financial Risk: This relates to the method of financing, adopted by the company, high leverage leading to larger debt servicing problem or short term liquidity problems due to bad debts, delayed receivables and fall in current assets or rise in current liabilities.<\/p>\n

iii. Default Risk: Default risk refer to the risk accruing from the fact that a borrower may not pay interest and\/or principal on time. Except in the<\/p>\n

Question 2.
\nDiscuss the capital Asset pricing Model (CAPM) and its relevant assumptions [May 2018] [5 marks]
\nAnswer:
\nCapital Asset Pricing Model: The mechanical complexity of the Markowitz\u2019s Portfolio model kept both practitioners and academics away from adopting the concept for practical use. Its intuitive logic, however, spurred the creativity of a number of researchers who began examining the stock market implications that would arise if all investors used this model. As a result what is referred to as the Capital Asset Pricing Model (CAPM), was developed.<\/p>\n

The capital Asset pricing model was developed by Sharpe, Mossin and Lintner in 1960. The model explains the relationship between the expected return, non-diversifiable risk and the valuation of securities. It considers the required rate of return of a security on the basis of its contribution to total risk. It is based on the premise that the diversifiable risk of a security is eliminated when more and more securities are added to the portfolio. However, the systematic risk cannot be diversified and is or related with that of the market portfolio. As per CAPM,
\nExpected return on security = Rf<\/sub> + Beta (Rm<\/sub> – Rf<\/sub>).<\/p>\n

Assumptions of CAPM:<\/p>\n