This document provides an overview of investment concepts including: - The different types of financial and real assets that make up an investor's portfolio, such as stocks, bonds, real estate, and commodities. - Key considerations for investors like risk, returns, diversification, and the tradeoff between risk and return. - The different players and structures in capital markets, including stock exchanges, market indices, and margin trading. - Concepts of fundamental analysis, technical analysis, and valuation methods that investors use to evaluate assets. The document covers these concepts across 15 modules in detail with examples and calculations. It is intended as an introductory resource for understanding the landscape of investment opportunities and analysis.

1. CONTENTS
Module 1: Introduction to the Landscape of Investment
1.1. Investment 3
1.1.1. Meaning and Definition of Investment 3
1.1.2. Nature and Characteristics of Investment Decision 4
1.1.3. Objectives of Investment 6
1.1.4. Need and Importance of Investment 6
1.1.5. Constraints of Investment 7
1.1.6. Investment Process 8
1.1.7. Common Errors in Investment 9
1.1.8. Types of Investor 10
1.1.9. Qualities of Investors 12
1.1.10. Qualities for Successful Investing 13
1.1.11. Investment and Speculation 13
1.1.12. Investment and Gambling 14
1.2. Investment Alternatives 15
1.3. Financial assets 15
1.3.1. Security/Marketable Financial Assets 16
1.3.1.1. Equity Shares 16
1.3.1.2. Preference Shares 16
1.3.1.3. Bonds or Fixed Income Securities 17
1.3.1.4. Derivatives – Innovative Products 17
1.3.2. Non Security/Non-Marketable Financial Assets 18
1.3.2.1. Bank Deposits 18
1.3.2.1.1. Characteristics of Bank Deposits 18
1.3.2.1.2. Various Kinds of Bank Deposits/Accounts 18
1.3.2.2. Other Deposits 19
1.3.2.3. Money Market Instruments 25
1.3.2.4. Mutual Funds 25
1.3.2.5. Life Insurance 25
1.4. Real Assets 26
1.4.1. Real Estate 26
1.4.2. Precious Objects 29
1.5. Capital Market 30
1.5.1. Development of Indian Capital Market 30
1.5.2. Capital Market Reforms 31
1.6. Securities/Stock Trading 32
1.6.1. Introduction 32
1.6.2. Order Size and Time Limit 33
1.6.3. Types of Orders 33
1.6.4. Nature of Transaction in Security Trading 34
1.6.5. Types of Transaction 35
1.6.6. Transaction Costs 36
1.6.7. Clearing Process 37
1.6.8. Settlement of Contracts 38
1.7. Electronic Trading 39
1.7.1. Meaning of Electronic Trading 39

2. 1.7.1.1. Benefits of Electronic Trading 39
1.8. Margin Trading 40
1.8.1. Meaning of Margin Trading 40
1.8.2. Types of Margin 41
1.8.3. Margin Account 42
1.8.4. Mechanism of Margin Trading 44
1.8.5. Advantages of Margin Trading 45
1.8.6. Disadvantages of Margin Trading 45
1.9. World Market 45
1.9.1. Major World Stock Market 45
1.9.2. Types of Securities Traded in World Market 48
1.10. Stock Market Indices 48
1.10.1. Sensex 49
1.10.1.1. Objectives of Sensex 49
1.10.1.2. BSE Sensex 49
1.10.1.3. BSE Sensitive Index 50
1.10.2. Sensex Construction 51
1.10.2.1. Sensex - Scrip Selection Criteria 51
1.10.2.2. Sensex Calculation Methodology 52
1.10.2.2.1. Free-float Methodology 52
1.10.2.3. BSE – 100 Index 53
1.10.2.4. BSE-200 54
1.10.2.5. BSE-500 Index and Sectoral indices 54
1.10.2.6. BSE Bankex 54
1.10.2.7. Dollex-30 55
1.10.2.8. Dollex-200 55
1.10.3. Nifty 55
1.10.3.1. NSE 50 Index – Construction 56
1.10.3.2. CNX Nifty Junior 57
1.10.3.3. S&P CNX 500 57
1.11. Commodity Indices 58
1.11.1. MCX Commodity Indices 58
1.11.2. NCDEX Commodity Indices 60
1.12. Risk 61
1.12.1. Concept of Risk 61
1.12.2. Causes of Risks 61
1.12.3. Sources/Types/Classification of Total Risks 62
1.12.3.1. Systematic Risk 62
1.12.3.2. Unsystematic Risk 63
1.12.3.3. Systematic Risk versus Unsystematic Risk 66
1.12.4. Management Risk 66
1.12.5. Market Risk 67
1.12.6. Interest Rate Risk 69
1.12.6.1. Mitigating Interest Rate Risk 69
1.12.6.2. Calculating Interest Rate Risk 69
1.12.6.3. Types of Interest Rate Risk 70
1.12.7. Inflation Risk/Purchasing Power Risk 70
1.12.8. Credit Risk/Default Risk 72
1.12.8.1. Assessing Default Risk 72
1.12.8.2. Mitigating Default Risk 73

3. 1.13. Measuring Risk 74
1.13.1. Introduction 74
1.13.1.1. Standard Deviation 75
1.13.1.2. Variance 76
1.13.2. Methods of Risk Management 77
1.14. Returns 78
1.14.1. Meaning of Return 78
1.14.2. Types of Return 78
1.14.2.1. Real Return and Nominal Return 78
1.14.2.2. Nominal Return 79
1.14.2.3. Historical/Past Return 80
1.14.2.4. Expected/Future Return 80
1.14.3. Components of Return 81
1.14.4. Measuring Return 81
1.14.4.1. Traditional Methods of Measurement 81
1.14.4.2. Modern Methods of Measurements 83
1.14.5. Relationship between Risk and Return 84
1.14.6. Risk Return Trade-Off 85
1.14.7. Portfolio Risk 86
1.14.8. Power of Diversification 86
1.15. Miscellaneous Problems 87
Module 2: Security Analysis and Valuation
2.1. Security Analysis 102
2.1.1. Introduction 102
2.2. Fundamental Analysis 103
2.2.1. Concept of Fundamental Analysis 103
2.2.2. Strengths of Fundamental Analysis 103
2.2.3. Weaknesses of Fundamental Analysis 104
2.2.4. Top-Down Approach/Economy-Industry-Company Approach 104
2.3. Economic Analysis 105
2.3.1. Introduction 105
2.3.2. Concept of Environment 106
2.3.3. Types of Economic Forecasting 108
2.3.4. Economy and Trade Cycles 108
2.3.5. Economic Forecasting Techniques 109
2.3.6. Factors Affecting Economic Forecasting 111
2.3.7. Significance of Economic Analysis 113
2.4. Industry Analysis 114
2.4.1. Introduction 114
2.4.2. Characteristics of Industry Analysis 114
2.4.3. Need for Industry Analysis 116
2.4.4. Classification of Industries 117
2.4.5. Factors Influencing Industry Analysis 118
2.4.6. Frameworks of Industry Analysis 119
2.4.6.1. Industry Life Cycle Stages (Product Life Cycle Theory) 119
2.4.6.2. SWOT Analysis of Industry 120
2.4.7. Industry Forecasting Methods 121
2.4.8. Problems of Industry 123

4. 2.5. Company Analysis 123
2.5.1. Introduction 123
2.5.2. Nature and Style of Management 124
2.5.3. Framework of Company Analysis 125
2.5.3.1. Financial Indicators 125
2.5.3.1.1. Ratio Analysis 126
2.5.3.1.2. Statement of Cashflows 128
2.5.3.2. Non-Financial Indicators 129
2.5.4. Sources of Information – Trouble Shots of Financial Statements 130
2.5.5. Company Forecasting Methods 132
2.6. Technical Analysis 135
2.6.1. Concept 135
2.6.2. Assumptions of Technical Analysis 135
2.6.3. Factors Considered in Technical Analysis 136
2.6.4. Criticisms of Technical Analysis 136
2.6.5. Distinctions between Fundamental and Technical Analysis 138
2.6.6. Superiority of Technical Analysis 138
2.6.7. Tools And Application of Technical Analysis 138
2.7. Price Indicators 139
2.7.1. Price Indicators of Market 139
2.7.1.1. Dow Theory 139
2.7.1.1.1. Criticisms of Dow Theory 143
2.7.1.2. Elliot Wave Theory 143
2.7.1.3. Breadth of Market 145
2.7.1.4. New Highs and New Lows 145
2.7.1.5. Market Sentiment Indicators 146
2.7.1.6. Confidence Indicator (Disparity Index) 146
2.7.1.7. Most Active List 147
2.7.2. Price Indicators of Individual Stock 147
2.7.2.1. Charting Techniques 147
2.7.2.2. Moving Average Analysis (MAA) 149
2.7.2.3. Relative Strength Analysis 151
2.8. Volume Indicators 151
2.8.1. Volume Indicators of Market 151
2.8.2. Volume Indicators of Individual Stock 152
2.9. Other Indicators of Market 154
2.10. Valuation 155
2.10.1. Introduction 155
2.10.2. Scope of Valuation 155
2.11. Valuation Of Preference Shares 156
2.12. Equity Valuation 157
2.13. Equity Valuation Models 157
2.13.1. Discounted Cash-flow Technique 158
2.13.1.1. Dividend Discount Models 158
2.13.1.1.1. Single-Period Valuation Model 159
2.13.1.1.2. Multi-Period Valuation Model 160
2.13.1.1.3. Zero Growth Model 160
2.13.1.1.4. Constant Growth Model (Gordon Model) 161
2.13.1.1.5. Two-Stage Growth Model 161
2.13.1.1.6. H-Model 164

5. 2.13.1.2. Present Value of Free Cashflow to Equity 165
2.13.1.3. Present Value of Operating Free Cashflow 167
2.13.2. Balance Sheet Valuation 168
2.13.3. Price-Earnings Ratios 169
2.13.4. Other Comparative Valuation Ratios 170
2.13.4.1. Price-Book (P/B) Ratio 170
2.13.4.2. Price-Sales (P/S) Ratio 171
2.14. Efficient Market Theory 172
2.14.1. Introduction 172
2.14.2. Meaning of Efficient Market Hypothesis 173
2.14.3. Assumptions of Efficient Market Hypothesis 174
2.14.4. Forms of Efficient Market Hypothesis 174
2.14.5. Random Walk Theory 175
2.14.5.1. Implications of Random Walk Theory 176
2.14.5.2. Limitations of Random Walk Theory 177
2.14.6. Empirical Tests 177
2.14.6.1. Empirical Tests of Weak Form 177
2.14.6.2. Empirical Tests of Semi-Strong Form 179
2.14.6.3. Empirical Tests of Strong Form 180
2.14.7. Implications of EMH for Investment Decisions 180
2.15. Behavioral Finance 182
2.15.1. Introduction 182
2.15.2. Biases in Behavioral Finance 182
2.15.3. Prospect Theory of Behavioral Finance 183
2.15.4. Behavioral Portfolios 184
2.16. Miscellaneous Problems 185
Module 3: Fixed-Income Securities and Derivatives
3.1. Bond/ Fixed Income Securities 191
3.1.1. Meaning of Bond/Fixed Income Instrument 191
3.1.2. Features of Bonds/Fixed Income Instruments 191
3.1.3. Types of Bonds/ Fixed Income Instrument 192
3.1.4. Investment Process in Bonds 195
3.1.5. Bond Risk 196
3.1.6. Bond Price 197
3.1.7. Reasons for Issuing Bonds 198
3.1.8. Valuation of Bond 199
3.1.9. Bond Yield 200
3.1.10. Bond Pricing Theorems 202
3.2. Structuring Terms/ Term Structure Of Interest Rates 204
3.2.1. Types of Term Structure of Interest Rates/ Yield Curve 205
3.2.2. Causes of Term Structure/Term Structure Finance 206
3.3. Duration 208
3.3.1. Properties of Duration 210
3.3.2. Determinants of Duration 211
3.3.3. Modified Duration 212
3.3.4. Convexity 214
3.3.5. Applications of Convexity and Duration 215
3.4. Derivatives 216

6. 3.4.1. Meaning and Definition of Derivatives 216
3.4.2. Features of Derivatives 216
3.4.3. Role/Functions of Derivatives 217
3.4.4. Types of Derivatives 219
3.4.5. Structure of Derivative Markets 220
3.4.5.1. Financial Derivatives Market 221
3.4.5.2. Commodities Futures Market 222
3.4.6. Participants in Derivatives Market 222
3.4.7. Valuation of Derivatives 222
3.4.8. Advantages of Derivatives 224
3.4.9. Disadvantages of Derivatives 224
3.5. Options 225
3.5.1. Meaning of Options 225
3.5.2. Option Terminology 226
3.5.3. Uses of Options 226
3.5.4. Types of Options 227
3.5.5. American Options & European Options 228
3.5.6. Options Strategies 229
3.5.6.1. Bullish Strategies 229
3.5.6.2. Bearish Strategies 235
3.5.6.3. Neutral Strategies 239
3.5.7. Options Trading 245
3.5.8. Options Pricing 247
3.5.8.1. Factors Determining Option Price 247
3.5.8.2. Pricing of Call Options at Expiration 249
3.5.8.3. Pricing of Put Options at Expiration 250
3.5.8.4. Pricing of Call Options before Expiration 250
3.5.8.5. Pricing of Put Options before Expiration 251
3.6. Option Valuation 253
3.6.1. Binomial Options Pricing Model 253
3.6.1.1. Assumptions of Binomial Options Pricing Model 253
3.6.1.2. Advantages of Binomial Option Pricing Model 254
3.6.1.3. Disadvantages of Binomial Option Pricing Model 254
3.6.1.4. Types of Binomial Option Pricing Model 254
3.6.1.5. Single Period Binomial Model 254
3.6.1.5.1. Binomial Option Pricing Model (BOPM) for Call 255
3.6.1.5.2. Binomial Option Pricing Model (BOPM) for Puts 258
3.6.1.6. Two-Period Binomial Model 259
3.6.2. Black-Scholes Option Pricing Model (BSOPM) 261
3.6.2.1. Assumptions of Black and Scholes Model 262
3.6.2.2. Advantage of Black & Scholes Model 263
3.6.2.3. Disadvantage of Black & Scholes Model 263
3.7. Futures 263
3.7.1. Meaning of Futures 263
3.7.2. Characteristics of Futures Contract/ Futures Terminology 264
3.7.3. Futures Market 265
3.7.4. Types of Futures 265
3.7.5. Trading of Futures 266
3.7.6. Strategies for Using Futures 267
3.7.7. Futures Pricing 270

7. 3.7.7.1. Pricing by Arbitrage 270
3.7.7.2. Cost-of-Carry Model 271
3.7.8. Advantages of Futures 273
3.7.9. Disadvantages of Futures 274
3.7.10. Difference between Futures and Options 274
3.8. Swaps 275
3.8.1. Introduction 275
3.8.2. Features of Swaps 275
3.8.3. Types of Swaps 276
3.8.4. Components of Swap Price 278
3.9. Miscellaneous Problems 279
Module 4: Portfolio Management
4.1. Portfolio Management 284
4.1.1. Meaning of Portfolio Management 284
4.1.2. Phases of Portfolio Management 284
4.1.3. Qualities of a Portfolio Manager (PM) 287
4.1.4. Types of Portfolio Management 288
4.1.5. Benefits of Portfolio Management 289
4.2. Portfolio Analysis 290
4.2.1. Meaning of Portfolio Theory 290
4.2.2. Portfolio Risk and Return 290
4.2.2.1. Expected Return on Portfolio 290
4.2.2.2. Portfolio Risk 291
4.2.3. Power of Diversification/ Reduction of Risk through 292
Diversification
4.2.4. Portfolio Risk in Two Asset Model 295
4.2.5. Portfolio Risk in n-Asset Model 295
4.3. Portfolio Construction 297
4.3.1. Inputs for Portfolio Construction 298
4.3.2. Inputs for Optimum Portfolio Construction 299
4.4. Portfolio Selection 299
4.4.1. Approaches in Portfolio Selection 300
4.4.1.1. Traditional Approach 300
4.4.1.2. Modern Approach 302
4.4.2. Factors Influencing Portfolio Selection 303
4.5. Markowitz Portfolio Theory 303
4.5.1. Assumptions of Markowitz Theory 304
4.5.2. Construction of Optimum Portfolio 307
4.5.3. Efficient Frontier/Portfolio 307
4.5.3.1. Feasible Frontier for Different Degrees of Correlation 308
4.5.3.2. Efficient Frontier for the n-Security Case 309
4.6. Single Index Model 310
4.6.1. Assumptions of Single Index Model 310
4.6.2. Uses of Single Index Model 311
4.7. Capital Market Theory 311
4.8. Capital Asset Pricing Model (CAPM) 311
4.8.1. Introduction 311
4.8.2. Assumptions of CAPM 313

8. 4.8.3. Shortcomings of CAPM 314
4.8.4. CML and SML 315
4.8.5. Capital Market Line (CML) 315
4.8.6. Security Market Line (SML) 316
4.8.7. Beta as a Measure of Risk 319
4.8.7.1. Calculation of Beta 320
4.9. Arbitrage Pricing Theory 321
4.9.1. Risk Factor in APT 321
4.9.2. Assumptions of APT 323
4.9.3. Factor Model 323
4.9.3.1. One-Factor Model 323
4.9.3.2. Two-Factor Model 324
4.9.3.3. Multifactor Arbitrage Pricing 325
4.9.4. Arbitrage 326
4.9.4.1. Principle of Arbitrage 326
4.9.5. Arbitrage Portfolios 327
4.9.5.1. Characteristics of Arbitrage Portfolio 327
4.9.6. Relationship of APT with the Capital Asset Pricing Model 328
4.10. Miscellaneous Problems 328
Module 5: Portfolio Evaluation and Revision
5.1. Portfolio Revision 335
5.1.1. Meaning of Portfolio Revision 335
5.1.2. Need for Revision 335
5.1.3. Constraints in Portfolio Revision 336
5.1.4. Portfolio Revision Strategy/Techniques 336
5.1.4.1. Active Revision Strategy 336
5.1.4.2. Passive Revision Strategy 337
5.1.5. Formula Plan 337
5.1.5.1. Assumptions of Formula Plan 338
5.1.5.2. Advantages of Formula Plan 338
5.1.5.3. Disadvantages of Formula Plan 338
5.1.5.4. Types of Formula Plan 339
5.1.5.5. Rupee Cost Averaging Plan 339
5.1.5.5.1. Advantages of Rupee Cost Averaging Plan 340
5.1.5.5.2. Disadvantages of Rupee Cost Averaging Plan 340
5.1.5.6. Constant Value Plan 340
5.1.5.6.1. Advantages of Constant Value Plan 341
5.1.5.6.2. Disadvantages of Constant Value Plan 341
5.1.5.7. Variable Ratio Plan 342
5.1.5.7.1. Advantage of Variable Ratio Plan 343
5.1.5.7.2. Disadvantages of Variable Ratio Plan 343
5.1.5.8. Dollar Cost Averaging Plan 343
5.2. Performance Evaluation Of Portfolio 344
5.2.1. Meaning of Portfolio Evaluation 344
5.2.2. Need for Evaluation 344
5.2.3. Evaluation of Mutual Funds 345
5.2.4. Sharpe’s Ratio 346
5.2.5. Treynor’s Measure 347

9. 5.2.6. Jensen Measure 347
5.2.7. Modigliani & Modigliani Measure (M2 Measure) 349
5.2.8. Fama Measure of Net Selectivity 350
5.2.9. Performance Measurement with Changing Portfolio Composition 351
5.2.10. Factors Affecting Use of Performance Measures 353
5.3. Mutual Funds 353
5.3.1. Meaning and Definition of Mutual Funds 353
5.3.2. Characteristics of Mutual Funds 355
5.3.3. Difference between Mutual Fund and Investment Companies 355
5.3.4. Mutual Funds Superiority vis-à-vis Other Investment Options 356
5.3.5. Types/Classification of Mutual Funds 356
5.3.5.1. General Classification 356
5.3.5.2. Broad Classification 357
5.3.6. Open-Ended Fund/Schemes 366
5.3.7. Close-Ended Fund/Schemes 366
5.3.8. Difference between Open-End and Close-End Fund/Schemes 366
5.3.9. Risks Associated with Mutual Funds 367
5.3.10. Choosing a Mutual Fund 368
5.3.11. Advantages of Mutual Funds 369
5.3.12. Disadvantages in Operation of Mutual Funds 371
5.3.13. SEBI Guidelines for Mutual Funds 373
5.3.14. Structure/Organization of Mutual Funds 374
5.4. Asset Management Company 377
5.4.1. Meaning of Asset Management Company 377
5.4.2. Functions of Asset Management Company 377
5.4.3. Structure of Asset Management Company 378
5.4.4. Restrictions for Asset Management Company 380
5.4.5. SEBI Guidelines on Asset Management Company (AMC) 380
5.5. Miscellaneous Problem 381