This document outlines the course Securities Analysis and Portfolio Management. The objectives of the course are to provide students with frameworks for evaluating investment avenues and managing funds. It will cover various financial instruments, markets, regulations, and portfolio management techniques. The course is divided into 6 units that will cover topics such as fixed income securities, security analysis methods, modern portfolio theories, and portfolio strategies. Students will learn to analyze investments and manage portfolios effectively.

1. SECURITIES ANALYSIS
III Semester M.Com
and
PORTFOLIO MANAGEMENT

2. SECUTIY
ANALYSIS AND
PORTFOLIO
MANAGEMENT
To provide students with a conceptual framework of
evaluating various investment avenues.
To provide students with a conceptual and analytical
framework of different financial.
instruments, markets, regulations, their risk and returns
and strategies in managing funds.
To familiarize students with portfolio management
techniques that challenges a financial manager.
To give an overview of the global markets and their
impact on the domestic markets
Why learn this Subject?
Objectives

3. SECUTIY
ANALYSIS
AND
PORTFOLIO
MANAGEMEN
T
Course
Preview
Unit 1 Introduction to Investments 10 Hours
Investment management, nature and scope, investment avenues, types of
financial assets and real assets, Security return and risk – Systematic and
unsystematic risk; sources of risk, Measurement of risk and return; courses of
investment information; Profile of Indian investors.
Unit 2 Fixed Income Securities 10 Hours
Fixed income securities – bonds, preference shares-sources of risk, valuation,
duration of bond-theory of interest rates-yield curve; Bond innovations and their
valuation; Analysis of variable income securities.
Unit 3 Methods of Security Analysis 15 Hours
Fundamental analysis – analysis of economy, industry analysis, company
analysis – financial and non-financial; Equity valuation models - options, futures,
forwards, warrants and their valuations; Technical analysis – Dow theory;
Efficient market hypothesis and its implications.
Unit 4 Introduction to Portfolio Management 05 Hours
Meaning of portfolio management; portfolio analysis; Importance; Portfolio
objectives; Portfolio management process; selection of securities.
Unit 5 Modern Portfolio Theories
Portfolio theory; Markowitz model; Sharpe’s single index model; Efficient frontier
with lending and borrowing, optimal portfolio, capital asset pricing model;
Arbitrage pricing theory, two factor and multifactor models.
Unit 6 Portfolio Management Strategies & Portfolio Evaluation 08 Hours
Bond Portfolio management strategies; Equity portfolio management strategies,
strategies using derivatives, hedging; Portfolio revision – rebalancing plans,
Portfolio evaluation- Sharpe’s index, Treynor’s measure and Jenson’s measure.

4. SECUTIY
ANALYSIS
AND
PORTFOLIO
MANAGEMEN
T
Reference Books
♠ Alexender & Bailey. (2001). Fundamentals of Investments. New Delhi:
PHI .
♠ Bhalla V K. (2008). Investment Management. New Delhi: S Chand &
Co.
♠ Fischer and Jordan (2006). Security Analysis and Portfolio
Management. New Delhi: Prentice- Hall.
♠ Prasanna Chandra.(2011). Investment Analysis and Portfolio
Management .New Delhi: Mcgraw-Hill.
♠ Preeti Singh. (2000). Investment Management. New Delhi: HPH .
♠ Punithavathy Pandian .(2010). Security Analysis and Portfolio
Management. New Delhi: Vikas Publishing House.
♠ SudhindraBhat.(2011). Security Analysis and Portfolio Management.
New Delhi: Excel Books.
Finance portals
 Moneycontrol.Com
 Btvin.Com
 Profit.Ndtv.Com
 Indiainfoline.Com
 Apnapaisa.Com

5. Unit : 1
INTRODUCTION
TO INVESTMENTS

6. What is
Investment?
In simple terms, Investment refers to process of investing
money in financial or real assets for profit or material result.
 Investment made in buying financial instruments such as
new shares, bonds, securities, etc. is considered as a
Financial Investment. Investment made in plant and
equipment, land and building and other infrastructure facilities
is considered as Real Investment.
 Investment decisions refers to application of funds in long-term
assets in anticipation of future benefits and maximization
of long-term profitability.
Investment refers to
a money
commitment of
some sort.

7. Difference between Savings and Investment
Difference Savings Investment
Meaning Saving money means keeping aside a
part of your income regularly in order
to deal with unexpected expenses.
Investment means putting your saved
money in various products in order to earn
returns and grow your wealth.
Time Savings are usually used to meet your
short term needs. People save in
order to deal with emergency
situations and meet unexpected
expenses.
However, investment generally entails a
longer horizon of six months or more. It is
designed to provide returns and grow your
money over a period of time.
Risk and
reward
savings stored in a safety vault are
very safe, they will not generate any
returns over the years. Even if money
is kept in a savings account, it will
provide a negligible rate of return.
money invested in various products like
stocks, mutual funds, gold, etc. is subject to
more risks, but has the potential to grow
over time. If invested wisely, your money
can grow manifold over years.
Liquidity savings are the most liquid assets, as
they can be accessed at any time.
It takes a few days for the money to reach
your bank account after you decide to sell
your investments.

8. CLASSIFICATIO
N OF
INVESTMENT
• A: On the Basis of Physical Investments
• House
• Land
• Building
• Gold and Silver
• Precious stones
Investment refers to a
money commitment of
some sort.
• B: On the Basis of Financial Investment
• Marketable and Transferable investments
• Non-Marketable Investments
B.1: Marketable and Transferable investments
• Shares
• Debentures
• Bonds
• Government Securities
• Derivatives
B.2: Marketable and Transferable investments
• Bank Deposits
• Provident and Pension Funds
• Insurance Certificates
• Post office Deposits
• National Saving Certificates
• Company Deposits

9. Share
• Features and rights of equity share holders
Residual claim
Voting rights
Ownership rights
Pre-emptive right (Right issue)
Par value The capital of a company is
divided into shares. Each
share forms a unit of
ownership of a company
and is offered for sale so as
to raise capital for the
company.
Merits
1. Easily transferable
2. Liability
3. Profit potential
4. Purchasing power risk
De-merits
1. Uncertain and Irregular Income
2. Capital loss During Depression Period
3. Loss on Liquidation

10. Preference
Shares
Preference shares are
those, which enjoy
preferential rights.
• Features and rights of equity share holders
Dividends
Voting rights
Ownership rights
 Pre-emptive right (Right issue)
 Par value
 Retirement of debt through sinking fund
 Convertibility
 Hybrid
De-merits
1. No Voting Right
2. Fixed Income
3. No claim over surplus
4. No Guarantee of Assets
Merits
1. Regular Fixed Income
2. Lesser Capital Losses
3. Preferential Rights
4. Voting Right for Safety of Interest.
5. Fair Security
Preference shares. Sec.
85(1) of the Companies
Act defines preference
shares as those shares
which carry preferential
rights as the payment of
dividend at a fixed rate
and as to repayment of
capital in case of winding
up of the company.
Classification of preference shares
1. Cumulative or non cumulative
2. Participating or Non-participating
3. Redeemable or Non-Redeemable
4. Convertible or Non-convertible

11. Classification of Equity Shares
According to Stock Market
Stock market has classified equity shares as follows:
Type Key feature
Blue chip
shares
Share of large, well established and financially strong companies
shares with an impressive record of earnings and dividends.
Growth
shares
Enjoy an above average rate of growth as well as profitability.
Income
shares
fairly stable operations, relatively limited growth opportunities, and
high dividend payout ratios.
Cyclical
shares
A Cyclical stock is a stock highly correlated to the economic activity.
Defensive
shares
Relatively unaffected by the ups and downs in general business
conditions.
Speculative
shares
tend to fluctuate widely because there is a lot of speculative trading
in them.

12. Concept of Debentures in India
• According to Indian Company’s Act, 1956, defined the
term ‘Debentures.’
• Debentures includes debenture stock, bonds and any
other securities of a company, whether constituting a
charge on the assets of the company or not, in
common parlance, debenture is an instrument issued
by a company under its common seal, acknowledging
its debt to the holder, and containing an undertaking to
repay the debt on or after a specified period and to pay
interest on the debt at a fixed rate at regular intervals,
usually, half yearly, until the debt is repaid.
• The person to whom the debentures are issued are
called debenture holders. The debenture holders are
not the owners of the company. They are just the loan
creditors of the company.

13. Debenture
A type of debt instrument
that is not secured by
physical assets or
collateral.
Merits
1. Higher rates of financial return
2. Choice of converting
3. Fixed interest
4. Transferable
De-merits
1. Credit Risk
2. Bankruptcy
3. Unsecured
Classification of Debentures
1. Convertible debentures
2. Non-convertible debentures

14. Corporate
FDs
• The deposit placed by investors with companies for a fixed term
carrying a prescribed rate of interest is called Company Fixed
Deposit.
• Financial institutions and Non-Banking Finance Companies
(NBFCs) also accept such deposits. Deposits thus mobilized are
governed by the Companies Act under Section 58A.
• These deposits are unsecured, i.e., if the company defaults, the
investor cannot sell the documents to recover his capital, thus
making them a risky investment option.
Companies that find it
difficult to get loans from
banks raise money from
the public.
1. Company fixed deposits offer better interest rates than
banks
2. Additional risk
3. Company fixed deposits are rated by Rating Agencies
4. TDS on Company Fixed Deposits
5. You could keep a shorter horizon
1. Cumulative
2. Non-Cumulative

15. Bonds
A debt investment
in which an
investor loans
money to an entity
(corporate or
governmental) that
borrows the funds
for a defined
period of time at a
fixed interest rate.
Features of Bonds
1. Indenture
2. Covenants: Affirmative & Negative
3. Maturity
4. Par Value
5. Coupon Rate
Types of Bonds
1. Serial Bonds
2. Sinking Fund bonds
3. Registered bonds
4. Mortgage bond
5. Collateral trust bonds
6. Convertible bonds
7. Zero-coupon bonds
8. Callable Bonds

16. Symbols Rating Definition Remarks
CRISIL AAA Highest Safety Timely servicing of financial obligations-lowest
credit risk.
CRISIL AA High Safety Timely servicing of financial obligations
very- low credit risk.
CRISIL A Adequate safety Adequate degree of safety- low credit risk.
CRISIL BBB Moderate Safety carry moderate credit risk.
CRISIL BB Moderate Risk risk of default -financial obligations
CRISIL B High Risk
CRISIL C Very High Risk
CRISIL D Default

18. Fixed
Deposits
• The main features of fixed deposit account are as
follows:
• Tenure ranges between six months to 10 years
• Guaranteed Returns
• Interest income monthly, quarterly or annually.
• Reinvest interest income and gain the influence of
compounding
• Partial or full withdrawal facility is available with penalty
interest rates
• Loan against deposits
• Senior citizens get higher coupon rates in the range of 0.25 -
100 %.
The term 'fixed
deposit' means
that the deposit
is fixed and is
repayable only
after a specific
period is over.
Pros Cons
Safety Lower rate of returns
Regular Income Taxes
Saves tax inflation
Convenience Risk
Deposit Insurance
& Credit Guarantee
Scheme of India

19. Recurring deposits
• Recurring deposits are special kind of Term Deposits and are suitable for people
who do not have lump sum amount of savings, but are ready to save a small
amount every month.
Difference Fixed Recurring
Rate of Return Approximately 8%-8.5%
for a period of 1 year
Approximately 8%-8.5% for
a period of 1 year
Additional
Benefits
Loan facility available Loan facility available
Tenure Tenure ranges from 7
days to 10 years
Tenure ranges from 1 years
to 10 years
Minimum
investment
Rs. 10,000 (may differ
from Bank to Bank)
Rs. 100
Maximum
investment
No limit No Limit
Premature
withdrawal
Interest penalty levied,
varies from Bank to Bank
Interest penalty levied,
varies from Bank to Bank
Tax benefit Incase of a Tax saver FD,
a tax exemption u/s 80c
is applicable
No tax benefit
Interest Income Taxable and subject to Taxable but no TDS

21. MONEY MARKET
INVESTMENTS

22. It provides a parking place to employ short term surplus
funds.
It is a market purely for short term funds or financial
assets called near money.
It deals with debt instrument which have a maturity of less
than one year at the time of issue are called money market
instruments.
Money market instruments are highly liquid and have
negligible risk.
The money market is dominated by the government,
financial institutions, banks and corporates.
Features of a
Money Market

23. TREASURY
BILLS
• Treasury Bills are money market instruments to finance the
short term requirements of the Government of India.
• These are discounted securities and thus are issued at a
discount to face value.
• The return to the investor is the difference between the maturity
value and issue price.
• Treasury Bills are issued for the following tenors 91-days, 182-
days and 364-days Treasury bills.
Benefits of Investment In Treasury Bills
1. No tax deducted at source
2. Zero default risk being sovereign paper
3. Highly liquid money market instrument
4. Better returns especially in the short term
5. Transparency
6. Simplified settlement
7. High degree of tradability

24. Treasury Bills
 Form
 The treasury bills are issued in the form of promissory note in physical form or by
credit to Subsidiary General Ledger (SGL) account or Gilt account in
dematerialized form.
 Minimum Amount of Bids
 Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only
and in multiples thereof.
 Eligibility
 All entities registered in India like banks, financial institutions, Primary Dealers,
firms, companies, corporate bodies, partnership firms, institutions, mutual funds,
Foreign Institutional Investors, State Governments, Provident Funds, trusts,
research organizations, Nepal Rashtra bank and even individuals are eligible to bid
and purchase Treasury bills.
 Repayment
 The treasury bills are repaid at par on the expiry of their tenor at the office of the
Reserve Bank of India, Mumbai.
 Availability
 All the treasury Bills are highly liquid instruments available both in the primary and
secondary market.
 Day Count
 For treasury bills the day count is taken as 365 days for a year.
How to
BUY
treasury
Bills?

25. Yield Calculation
• A cooperative bank wishes to buy 91 Days Treasury on Oct. 12, 20014, Bill Maturing on Dec. 6,
2014. The rate quoted by seller is Rs. 99.1489 per Rs. 100 face values.
The yield of a Treasury Bill is calculated as per the following formula:
YTM
(100-P)x365x100
PxD
Wherein
Y = discounted yield
P= Price
D= Days to maturity
YTM = (100-99.1489) x 365 x 100/(99.1489*55) = 5.70%

26. Salient Features of The Auction
Technique
• The auction of treasury bills is done only at Reserve Bank of India,
Mumbai.
• Bids are submitted in terms of price per Rs 100.
• For example, a bid for 91-day Treasury bill auction could be for Rs
97.50. Auction committee of Reserve Bank of India decides the cut-off
price and results are announced on the same day.
• Bids above the cut-off price receive full allotment; bids at cut-off price
may receive full or partial allotment and bids below the cut-off price are
rejected.

27. Types of Auctions
There are two types of auction for treasury
bills:
1. Multiple Price Based or French Auction: Under this method, all bids equal to
or above the cut-off price are accepted. However, the bidder has to obtain the
treasury bills at the price quoted by him.
2. Uniform Price Based or Dutch auction: Under this system, all the bids equal
to or above the cut-off price are accepted at the cut- off level. However, unlike
the Multiple Price based method, the bidder obtains the treasury bills at the
cut-off price and not the price quoted by him.

28. Working Capital
INADEQUACY OF WC
Under-utilization of capacity
Creditworthiness is hit
Cannot utilize business opportunity
Modernization and Maintenance
Discounts and Perks

29. Money Market Instruments
1. Certificate of deposit - Time deposit, commonly offered to consumers by
banks, thrift institutions, and credit unions.
2. Repurchase agreements - Short-term loans—normally for less than two
weeks and frequently for one day
3. Commercial paper - Unsecured promissory notes with a fixed maturity of
one to 270 days; usually sold at a discount from face value.
4. Treasury bills - Short-term debt obligations of a national government that are
issued to mature in three to twelve months

30. Certificates of Deposit
• Certificate of Deposit (CD) is a negotiable money market instrument and issued in
dematerialized form or as a Usance Promissory Note against funds deposited at a bank
or other eligible financial institution for a specified time period.
• Guidelines for issue of CDs are presently governed by various directives issued by the
Reserve Bank of India (RBI), as amended from time to time.
Difference FD CD
Negotiability No Yes
Return Low High
Rating No Yes
Key Features
1. Eligibility-Who can issue?
2. Aggregate Amount- How much?
3. Denominations-Pricing? multiples of Rs. 1 lakh thereafter.
4. Investors-Who can buy?
5. Maturity 7d-1y
6. Coupon Rate
7. Reserve Requirements
8. Settlement-DVP

31. Commercial Paper (CP)
• A Commercial Paper (CP) is an unsecured, short-term debt instrument
issued by a corporation, typically for meeting short-term liabilities.
• It was introduced in India in 1990.
• It was aimed at providing highly rated corporates with a borrowing
option.
• So while they could borrow from a bank, now with the help of a CP,
they could also borrow from the open market.
• This process is also called Financial Disintermediation or in other
words getting rid of the mediator.

32. RBI Guidelines
Who can issue CP? Corporates, primary dealers (PDs) and the All-India Financial
Institutions (FIs) are eligible to issue CP.
Rating requirement All eligible participants shall obtain the credit rating for issuance of
Commercial Paper.
In what denominations a CP
that can be issued?
CP can be issued in denominations of Rs.5 lakh or multiples thereof.
minimum and maximum
period of maturity
a minimum of 7 days and a maximum of up to one year from the date
of issue
Who can invest in CP? a Individuals, banking companies, other corporate bodies (registered
or incorporated in India) and unincorporated bodies, Non-Resident
Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can
invest in CPs. However, investment by FIIs would be within the limits
set for them by Securities and Exchange Board of India (SEBI) from
time-to-time.
What is the mode of
redemption?
Initially the investor in CP is required to pay only the discounted value
of the CP by means of a crossed account payee cheque to the
account of the issuer through IPA. On maturity of CP.
DVP.

33. REPO
• An agreement with a commitment by the seller (dealer) to buy a security
back from the purchaser (customer) at a specified price at a designated
future date.
• The repurchase price should be greater than the original sale price, the
difference effectively representing interest, sometimes called the repo rate.
• The party that originally buys the securities effectively acts as a lender. The
original seller is effectively acting as a borrower, using their security as
collateral for a secured cash loan at a fixed rate of interest.
• Legal title to the collateral security which is used in repo transaction, passes
to the buyer during the repo period. As a result in case the seller defaults the
buyer does not require to establish right on the collateral security.

34. Gilt Edged Securities
• Gilts, short for Gilt Edged Securities, are securities issued by the
Government with a fixed interest rate for a predetermined length of
time.
• Gilt-edged securities are a high-grade investment with very low risk.
Typically, these are issued by blue chip companies that dependably
meet dividend or interest payments because they are well-established
and financially stable .

35. RISK MANAGEMENT
AND INSURANCE

36. Concept of
RISK
“Risk is defined as the chance of
having a loss due to occurrence of an
event”
“The risk is always associated with the
loss aspects since the word itself has
the association of DANGER OF LOSS”
The definition can be “
PROBABAILITY OF THE
OCCURRENCE OF AN EVENT
RESULTING IN LOSS/ GAIN

37. Types of Risk
Speculative RISK
Results in loss, or break even or
Making a profit
Pure RISK Produces only loss or in some
cases break even.
Fundamental RISK
Particular RISK
Outside the control &
Fall on masses
Exposure to loss from a
situation associated with
specific individual events
Dynamic and Static Risk
1. Personal Risk
 Premature Death
 Dependent Old Age
 Sickness and Disability
 Unemployment
2. Property Risk
 Loss or Damage
 Loss on use of property
 Additional expenses on
loss
3. Liability Risk
 Human Mistake/Civil
Wrong
4. Default Risk

38. Activity
1. Horse race
Speculative
2. Busying stocks
Speculative
3. Real estate
Speculative
4. Diversify on the existing product line
5. Fire at home due to short circuit
6. Natural disasters
7. Betting and Gambling
8. Inflation
9. Hurricane Katrina
10.War
11.Bhopal Gas tragedy
12.Employee violence at Maruti Plant
13.Swine Flu
Speculative
Pure: Property
Fundamental
Speculative
Fundamental
Fundamental
Fundamental
Particular
Particular
Fundamental

39. Types of Life
Insurance
Term Life Insurance
• Increasing/Decreasing term policies
• Convertible Term Assurance Policy
• Level Term Life Insurance
• Renewable term life Insurance
Endowment Insurance
◦ Joint life endowment plan
◦ Money back endowment plan
◦ Marriage endowment plan
Permanent (Whole) Life Insurance
◦ Ordinary whole life plan
◦ Limited payment whole life plan
Unit Linked Plans

40. Term Life
Insurance
• Sum assured is payable only in the event of
death during the term.
• In case of survival, the contract comes to an
end at the end of term.
• Term Life Insurance can be for period as long
as 40 years and as short as 1 year.
• No refund of premium
• Non-participating policies
• Low premium as only death risk is
covered.

41. Types of
Term
Insurance
Increasing Term Insurance
 Life insurance cover under
this plan goes on increasing
periodically over the term in
a predetermined rate. (Riders)
Decreasing Term Insurance
 The sum assured decreases with the
term of the policy. Normally decreasing
term assurance plan is taken out for
mortgaged protection, under which
outstanding loan amount decreases
as time passes as also the sum assured.

42. Types of Term
Insurance
Convertible term assurance policy
Under this plan a policyholder
is entitled to exchange the term
policy for an endowment
insurance or a whole life policy.
Conversion can be done at any
time during the term except last
2 years.
Level Term Life Insurance
The sum assured throughout the term of the
policy does not change.

43. Types of
Term
Insurance
Renewable Term Life Insurance
With renewable term insurance, the insurance
company automatically allows you to renew
your coverage after the term of the policy is
over (generally 5 to 20 years)

44. Endowment
Insurance
• Endowment insurance plans is an investment
oriented plan which not only pays in the event of
death but also in the event of survival at the end of
the term.
• Is a contract underwritten by a life insurance
company to pay a Fixed term plus Accumulated
profits that are declared annually.
• Premium includes 2 elements
-mortality element & investment element
• Minimum age at entry : 12years
• Maximum age at entry: 65 years
• Maximum age at maturity : 75years

45. Types of
Endowment
Insurance
Joint Life Endowment Plan:
Under this plan, two lives can be insured under
one contract.
The sum assured is payable at the end of the
endowment term or death of either of the two.
Money Back Endowment Plan:
In this plan, there is an additional advantage of
receiving a certain amount of money at periodic
intervals during the policy term.

46. Types of
Endowment
Insurance
Marriage Endowment Plan:
This plan has the specific condition that the sum assured
is payable only after the expiry of the term even if death
of the life assured takes place earlier.
Educational Endowment Plan:
These plans are specially designed to meet educational
expense of children at a future date. If the insured parent
dies before the date of maturity the installment is paid in
lump sum with immediate effect which helps to meet the
educational expenses.

47. Permanent(
Whole) Life
Insurance
• Whole life plans are another type of endowment
plan, which cover death for an indefinite period.
• When the policy holder dies, the face value of the
policy, known as a death benefit, is paid to the
person or persons named in the life insurance policy
(the beneficiary or beneficiaries).
• It can be with or without profits.
• If you cancel the policy after a certain amount of time
has passed, the insurance company will surrender
the cash value to you.

48. Types of
Whole Life
Insurance
• Ordinary Whole Life Plan:
• This is a continuous premium payment plan. The
insured pays premium throughout his life. It provides
dual facility of protection plus savings.
• Limited Payment Whole Life Plan:
• It provides the same benefit as above but premiums
are paid for a limited period. Premiums are
sufficiently higher to cover the risk

49. Types of
Whole Life
Insurance
3. Anticipated Whole Life Plans:
 Under this plan, the insured receives a
fixed sum in a periodic interval on his
survival and full sum assured is paid on
death of the policy holder without any
deduction.
 It takes care of family needs after
death of the insured and interim needs
of the insured and his family.

50. Children’s
Life
Insurance
• Since last few years insurance companies have
started offering risk cover plans like limited
payment whole life, and endowment assurance
plan from the age of 12years and money back
plan from age of 13 years(completed).
• New plans have been specifically designed for
children where the risk of the child starts much
earlier say 7 years.

51. Unit Linked
Plans
• It has emerged as one of the fastest growing
insurance products.
• It is a combination of an investment fund( such
as mutual fund) and an insurance policy.
• The premium amount is invested in the stock
market and returns better income on the
maturity period.

52. Add ons
• Add-on’s or Riders
• Accident and Disability benefit
• Critical illness benefit
• Major surgical assistance
• Level Term Insurance
•Protection Plans
• The Pru Life Guard or Term Level Assurance
• Death Risk Coverage
• No maturity benefits in case of single premium level
term policy
• Add-on’s or Riders as in ICICI Pru Cash Bank

53. HOW MUCH
INSURANCE
DOES A
MAN NEED?
1. Immediate funds requirements upon
after death- medical expenses for
terminal illness, expenses for
performance of last rites and
religious ceremonies etc
2. Children's Education and Marriage
expenses
3. Recurring dependent spouse and
children
4. Funds for paying off debts.

54. Requirements
of Insurable
Risks
1. Sufficient number of homogeneous exposure
2. The loss must occur by chance
3. Risk must be predictable
4. Loss must not be catastrophic
5. Loss must be definite and measurable

55. Legal
Principles of
Insurance
• Should also meet all the requirements of a valid
contract:
• Offer and Acceptance
• Consideration
• Legal Capacity
• Legal Purpose
Insurance - contractual
agreement between the
insurer and the insured.
• Insurance contracts are special type of contracts which
have certain additional distinguishing features associated
with it.
• Insurable Interest
• Indemnity
• Principle of Contribution
• Subrogation (Applicable only to indemnity contracts… not to life
insurance)
• Utmost good faith Utmost good faith
• Principle of Causa Proxima

56. CONCEPT OF RISK
In Investments

57. Concept of Risk
• Concept of Risk The actual returns that an investor receives from a stock
may vary from his expected return and the this probability of variance itself is
the risk.
• Risk is expressed in terms of variability of return. An investor before investing
in securities must properly analyze the risks associated with these securities.
• Sometimes the term risk and uncertainty are used interchangeably but
uncertainty the possible events and probabilities of their occurrence are not
known, whereas in case of risk they are known.
• So, risk and uncertainty are different from each other.

58. Business Entities are Exposed to Many Risks
• Interest Rate Risk Exchange
• Risk Liquidity Risk Default Risk
• Internal Business Risk
• External Business Risk
• Financial Risk
• Market Risk
• Marketability Risk
• Credit Risk
• Operational Risk
• Environmental Risk
• Production Risk
• Events of God
• And many more

59. Types of Risks Types of Risk
Systematic
Risk
Unsystematic
Risk
Systematic Risk:
 Systematic Risk It is the risk that is caused by external factors such as
economic, political and sociological conditions.
 It affects the functioning of the entire market.
 Since these risks arise due to external factors they are beyond the control of
the company affected, and hence are uncontrollable or referred to as
undiversifiable risk.
They are of three types:
1. Market risk
2. Interest rate risk
3. Purchasing power risk

60. Market risk
• Market risk as that portion of the total variability of returns that is caused by the alternating forces
of bull and bear markets.
• When the stock market moves upwards, it is known as bull market. On the other hand, when the
stock market moves downwards, then it is known as bear market.
• The two forces that affect the market are:
1. Tangible events : Earthquake, war, political uncertainty and decrease in the value of money are some
of the examples of tangible events.
2. Intangible events: It is related to market psychology. Political unrest or fall of government affects the
market sentiments. Inflow of foreign funds may make the market psychology positive.

61. Interest Rate Risk
• Interest Rate Risk It is the risk caused by the variations in the market interest rates.
• Prices of debentures, bonds, etc. are mainly affected by the interest rate risk. (as demand for
bonds and debentures varies directly with the ups and downs of the stock market) Extensive use
of borrowed funds in the stock market
• The causes of interest rate risk are as follows:
Changes in the government’s monetary policy
Changes in the interest rate of treasury bills
Changes in the interest rate of government bonds.

62. Purchasing Power Risk:
• Purchasing Power Risk Variations in returns are caused by the loss of purchasing power of
currency.
• So, the purchasing power risk is the probable loss in the purchasing power of the returns to be
received in the future.
• There are mainly two types of inflation:
1. Demand-pull inflation : The demand for goods and services remains higher than the supply.
2. Cost-push inflation : There is a rise in price due to the increase in the cost of production.