① ∆ Security analysis refers to analyzing the value of securities like shares and other instruments

to assess the business's total value, which will be useful for investors to make decisions. There are
three methods to analyze the value of securities – fundamental, technical, and quantitative analysis.
Security analysis involves diligently determining the intrinsic value of securities, such as stocks and
financial instruments, to help investors make well-informed decisions for optimal returns. Security
analysis serves the pivotal purpose of enhancing individuals' net worth by strategically investing their
earnings in diverse financial instruments to achieve profitable outcomes.

∆ Types of security analysis :- As per the nature of securities, security analysis can broadly be
performed using the following three methods: -

#1 - Fundamental Analysis : The fundamental security analysis is a type of security analysis that is an
evaluation procedure of securities where the primary goal is to calculate the intrinsic value. It studies
the fundamental factors that affect a stock's intrinsic value, such as the company's profitability
statement and position statements, managerial performance, future outlook, present industrial
conditions, and the overall economy.

#2 - Technical Analysis : This type of security analysis is a price forecasting technique that considers
only historical prices, trading volumes, and industry trends to predict the security's future
performance. It studies stock charts by applying various indicators (like MACD, Bollinger Bands, etc.),
assuming every fundamental input has been factored into the price.

#3 - Quantitative Analysis : This security analysis is a supporting methodology for both fundamental
and technical analysis, which evaluates the stock's historical performance through calculations
of basic financial ratios, e.g., Earnings Per Share (EPS), Return on Investments (ROI), or complex
valuations like Discounted Cash Flows (DCF).

∆ PRIMARY MARKET :- The primary market, also referred to as the new issue market, is a segment
of the capital market where issuers, including corporations, governments, or institutions, sell newly
created securities directly to investors. These securities encompass stocks, bonds, and other financial
instruments. The primary market allows issuers to raise capital for various purposes, such as business
expansion, infrastructure development, or debt financing.

∆ Types of Primary Market Offerings :-

1. Initial Public Offering (IPO) : An IPO occurs when a private company offers its shares to the public
for the first time, transitioning into a publicly traded entity. IPO is a significant milestone for
companies, as it provides access to a large pool of capital and enhances visibility in the market.

2. Follow-on Public Offering (FPO) : An FPO is when a publicly traded company issues additional
shares to raise more capital. FPO can be dilutive or non-dilutive. FPO is mostly used to fund
expansion or pay off debt.

3. Qualified Institutional Placement (QIP) : A QIP is a method used by listed companies to raise
capital by issuing securities to qualified institutional buyers (QIB), such as mutual funds or insurance
companies. QIP are quicker and less cumbersome than public offerings, as they do not require
extensive regulatory approvals.

4. Preferential Allotment : In a preferential allotment, a company issues shares or convertible

securities to a specific group of investors, such as promoters or strategic partners, at a
predetermined price. This method is often used to strengthen the company’s financial position or
bring in strategic investors.
∆ Secondary market is where securities of companies are traded among investors. Investors can
freely buy and sell securities without the issuing company’s involvement. The issuing company does
not participate in income generation in these transactions among investors. Additionally, share
valuation is based on the share’s performance in the market.

∆ Types of secondary market :-

1. Stock exchanges : Stock exchanges are organised and regulated platforms where buyers and
sellers meet to trade financial instruments. Examples include the National Stock Exchange (NSE) and
the Bombay Stock Exchange (BSE). These exchanges provide a centralised marketplace with
transparent pricing regulated by the Securities and Exchange Board of India (SEBI).

2. Over-the-counter (OTC) markets : Unlike stock exchanges, over-the-counter markets operate

without a centralised physical location. Trading in OTC markets is conducted directly between buyers
and sellers, facilitated by market makers. OTC markets are commonly used for trading bonds,
derivatives, and some stocks that may not meet the listing requirements of formal exchanges.

∆ Types of investors :- The financial market is composed of different types of investors.

1. Angel investors : Angel investors are high-net-worth individuals who invest capital into start-ups in
exchange for equity stakes in the company. Angel investors are generally experienced investors or
industry professionals who can also offer valuable expertise, guidance, and mentorship to the start-
up company. Since this type of investing happens at the nascent stage of the business, angel
investing involves a high risk quotient as well.

2. Venture capitalists : Venture capitalists or VC investors are private equity investors who usually
invest in early-stage companies with high growth and good revenue generation potential. They
receive an equity stake in the company in exchange for the capital invested and remain invested in
the company until it attains a significant market position. Venture capital firms pool money from
different investors, companies, and funds to invest in companies.

3. P2P lending :- Peer-to-peer lending, or P2P lending, is a type of financing in which the loan
amount is secured from other individual investors. Instead of traditional financial middlemen like
banks, the P2P platform acts as the intermediary in such cases. Through P2P lending, small
businesses can raise capital at potentially lower interest rates while investors benefit from higher
returns.

4. Personal investors : A personal investor is an individual investing their own funds in various
investment vehicles like stocks, bonds, mutual funds, and ETFs to achieve their own financial goals.
These investors are often called retail investors. They aim to invest in money markets to attain
potentially better returns than traditional instruments like FDs and RDs.

∆ Stock market index :- It is an indicator that shows all the major changes in India's stock market.
The same stocks are selected from amongst the securities already grouped and listed on the stock
exchange to develop an index. However, the selection criteria are based upon the type of industry,
the company's size, and its market capitalization.

This indicator is used to minimize the mess up and indicate the proper position of the market.
Changes in the price of underlying assets impact the overall value of the index. If the price goes
upwards, the stock index will rise, and if they go downwards, the stock will fall.
∆ Types of stock market indices :-
● Benchmark Indices :- Nifty 50 – a collection of top 50 best-performing stocks and BSE Sensex – a
collection of top 30 best-performing stocks are indictors of the National Stock Exchange and Bombay
Stock Exchange, respectively. This collection of stocks are known as benchmark indices respectively
because they use the best practices to regulate the companies they pick. Hence they are known as
the best point of reference for the working of markets in general.
● Sectoral Indices : Both BSE and NSE have some good indicators that measure companies falling
under one specific sector. Indices like S&P BSE Healthcare and NSE Pharma are considered good
indicators of their respective changes in the pharmaceutical sector. However, both the exchanges
don't have to have corresponding indices for all the sectors, but this is generally a significant cause.
● Market-Cap Based Indices : Few indices choose companies based on their market capitalization.
Market capitalization means the market value of any public traded company in the stock exchange.
Indices like S&P BSE and NSE small cap 50 are a collection of companies that have a lower market
capitalization in accordance with the rules set by the Security Exchange Board of India (SEBI).

∆ Stock market quotation :- A stock market quotation is the price at which a stock is currently
being bought and sold on an exchange, along with other key data like the last traded price, trading
volume, and price changes. It serves as a real-time snapshot of a security's market value, providing
vital information for investors to make buy or sell decisions. At its core, a stock quote is the market's
live "price tag" for a listed company's equity, incorporating supply-demand activity and trading
sentiments of market participants.

∆ Securities Market Intermediaries :-

1. Merchant Bankers : Merchant bankers are pivotal in the primary market, assisting companies in
raising capital. They manage the issuance process, meeting all regulatory requirements. Merchant
bankers perform due diligence, verifying the accuracy of the information provided in the offer
documents to protect investors. They must have a substantial net worth to support their activities,
enabling them to handle the scale of operations in managing public issues.

2. Underwriters : Underwriters provide a critical service by guaranteeing the sale of a company's

securities. They purchase unsold shares in a public offering, thus minimizing the risk for issuers.
Underwriters must register with SEBI and adhere to strict regulatory standards. Their role is crucial in
the success of new issues, as they provide a safety net for issuers and add credibility to the issuance
process.

3. Stock Brokers : Stock brokers facilitate the buying and selling of securities in the secondary
market. They are the link between investors and the stock exchanges, providing access to the trading
platforms. Stock brokers must register with SEBI and comply with regulations to maintain market
integrity and protect investors. Their role includes executing trades, providing investment advice, and
conducting transactions efficiently and transparently.

4. Bankers to an Issue : Bankers to an issue handle the financial transactions related to securities
issuance. They collect application money, process refunds, and manage the allocation of shares.
These services are critical for the efficient execution of public issues. SEBI regulations ensure that
only qualified and registered banks can act as bankers to an issue, maintaining the integrity of the
process. By adhering to regulatory standards set by SEBI, these intermediaries safeguard the
interests of investors and issuers. This regulatory framework fosters trust and confidence in the
securities markets, supporting economic growth and development.
∆ Types of depositories :- In India, there are two depositories, namely the National Securities Depository
Limited (NSDL) and the Central Depository Services Limited (CDSL). Both NSDL and CDSL are government-
registered share depositories that offer similar services of storing and trading securities in electronic form

1. NSDL: NSDL is the oldest depository in India, established in 1996. It offers depository services to investors,
issuers, and intermediaries in the lndian securities market. NSDL provides services such as dematerialisation of
securities, re materialisation, pledge and hypothecation of securities, and electronic settlement of securities
trades. It has more than 2 crore active customers and 278 depository participants.

2. CDSL: CDSL, on the other hand, was established in 1999. It provides convenient, dependable, and secured
depository services to the Indian securities market. CDSL offers services such as dematerialisation of securities,
dematerialisation, transfers between depositories, off-market transfers, lending of securities, nomination
services, collateral, and mortgage of securities. It has 599 depository participants registered with it.

∆ Types of Government Securities :-

1. Treasury bills, or T-bills, are short-term debt instruments issued by a government to raise money
for its short-term needs. They are considered a low-risk investment because they are backed by the
government and are sold at a discount to their face value, with the investor earning the difference
upon maturity. T-bills have maturities ranging from a few weeks to one year (e.g., 91, 182, or 364
days).

2. Cash Management Bills (CMBs) are short-term debt instruments governments issue to manage
temporary cash flow mismatches. These bills are similar to Treasury Bills (T-Bills) but have a shorter
maturity period, ranging from a few days to a few weeks. The government issues CMBs on an as-
needed basis, making them a flexible tool for handling immediate liquidity needs.

3. State Development Loans (SDLs) are bonds issued by Indian state governments to borrow funds
from the open market. This debt finances a fiscal deficit when a state's expenditures exceed its
revenues, and the money is used for development projects like infrastructure, education, and
healthcare. The Reserve Bank of India (RBI) manages the auction and settlement of these bonds.

4. Inflation-indexed bonds (IIBs) are government securities that protect investors from the erosion
of purchasing power caused by inflation by adjusting both the principal and interest payments based
on an inflation index, such as the Consumer Price Index (CPI). This means the principal value of the
bond increases with inflation, and future interest payments are calculated on this new, higher
principal, ensuring a stable "real" rate of return.

5. Floating-rate bond is a debt instrument with an interest rate that is not fixed but adjusts
periodically based on a benchmark or reference rate. This variable interest rate is known as a
coupon. When the benchmark rate rises, the bond's interest payments also increase, and when the
benchmark rate falls, the interest payments decrease. Floating Rate Bonds operate by linking their
interest payments to benchmark rates.

Corporate debt market is where companies issue and trade debt instruments, like bonds and
commercial paper, to raise capital. These instruments are also known as fixed-income securities
because they provide investors with a fixed or variable stream of interest payments over a specified
period. This market is a critical part of the broader financial ecosystem, providing businesses with a
financing alternative to bank loans and equity.
② ∆ Instrument of Corporate Debt Market :-
1. Corporate Bonds : Corporate bonds are debt securities issued by companies to raise money for
short-term and long-term needs. They offer a higher return compared to G-Secs but come with more
risk. Thus, you are advised to assess the respective company’s financial state before investing. You
can always choose the right corporate bond as per your risk appetite by checking the credit rating of
the bond.

2. Secured bonds are backed by specific company assets, such as real estate or equipment. This
collateral reduces the risk for the investor and generally allows the company to offer a lower interest
rate. Mortgage bonds and equipment trust certificates are types of secured bonds.

3. Commercial Paper (CP) is a short-term, unsecured promissory note issued by corporations to meet
their immediate, short-term funding needs, such as working capital. It is typically issued at a discount
and redeemed at face value, with a maximum maturity of 270 days.

4. Certificates of Deposit (CDs) are short-term instruments issued by banks and financial institutions,
though some can be issued by corporations. They offer investors a fixed interest rate for a
predetermined period

∆ Portfolio management is the process of selecting, managing, and overseeing a collection of

investments to meet an individual's or organization's financial goals and risk tolerance. It involves
creating a profitable investment mix, allocating assets across different instruments like stocks and
bonds, and diversifying investments to manage risk and maximize returns. Effective portfolio
management requires comprehensive market knowledge and understanding of trends, asset
allocation, and rebalancing strategies.

∆ Processes of portfolio management :- Portfolio management is a multi-step process that

requires considerable deliberation. The following section outlines the steps involved in it:

• Identifying financial objectives: Portfolio management begins by identifying the investment

objectives. In other words, investors need to pinpoint their investment's purpose- capital
appreciation, income generation, or wealth creation.

• Reviewing capital markets: The next step in the process of portfolio management relates to the
assessment of the capital markets. Researching and evaluating the capital market helps understand
expected return and risk estimates for various asset classes.

• Deciding on asset allocation: To ensure good returns at minimal risk, a sound asset allocation
strategy needs to be ideated. The investor's risk tolerance capacity underpins the asset allocation
ratio or how funds are distributed among various asset classes.

• Selecting the right securities: Securities are selected on the basis of their return potential,
liquidity, and fundamentals. Only securities that align with the investor's risk tolerance, investment
horizon, budget, and liquidity needs are shortlisted. For instance, mutual fund calculators can be
used to estimate returns and understand if the fund should be added to your portfolio.

• Reviewing and revising the portfolio : Portfolio managers regularly review portfolios and revise
them to ensure efficiency and an optimised risk-return balance.

• Rebalancing the portfolio : Managers may rebalance portfolios to ensure maximum returns while
keeping up with changing market conditions. Portfolios may be rebalanced if the asset mix has
diverted significantly from the original mix, resulting in a higher risk exposure.
∆ Capital Asset Pricing Model (CAPM) is a financial model that determines the theoretically
appropriate required rate of return for an asset, based on its risk. It quantifies the relationship
between an asset's risk (measured by beta) and its expected return, providing a framework for
investors to assess risk-adjusted returns. The formula is: Expected Return = Risk-Free Rate + Beta *
(Market Return - Risk-Free Rate).

∆ Limitations of the CAPM model :- While the CAPM is a widely used tool in finance, it's
important to recognise its limitations:

1. Unrealistic assumptions :-
• Market efficiency: CAPM assumes that markets are efficient, meaning all relevant information is
reflected in asset prices. The markets may not always be perfectly efficient, and factors like
behavioural biases or information asymmetry can impact prices.
• Homogeneous expectations: The model assumes that all investors have the same expectations
about future returns and risks. Investors may have diverse views and strategies, leading to variations
in expectations.
• Risk-free rate assumption: The risk-free rate is a cornerstone of the CAPM formula. However, the
choice of the risk-free rate, typically represented by government bond yields, may not always reflect
the true risk-free rate. Additionally, during periods of economic uncertainty, the risk-free rate may
become more challenging to determine.

2. Single-factor model : CAPM relies on a single systematic risk factor (beta) to explain asset returns.
It does not account for additional factors that may influence returns, such as liquidity risk, credit risk,
or other macroeconomic variables. This simplicity may oversimplify the complexity of real-world
markets.

3. Static beta : CAPM assumes that an asset's beta remains constant over time. In reality, beta can
fluctuate due to changes in a company's business operations, market conditions, or other external
factors. This can lead to inaccurate estimations of expected returns.

4. Ignores transaction costs and taxes : CAPM does not account for transaction costs associated with
buying and selling assets or taxes on capital gains. In practice, these costs can significantly impact an
investor's actual return.

∆ Assumptions of CAPM :-
A. Market efficiency : The first and foremost important assumption of the Capital Asset Pricing
Model is its belief that markets are efficient. According to CAPM, the investment market is highly
efficient. This means the market price of different securities reflects all essential information about
the stock or security.

B. Investors’ rationality : Investors’ rationality is also one of the popular assumptions of the CAPM
model. According to the Capital Asset Pricing Model, investors can reasonably or rationally accept or
decline risky investments. It claims that investors have the freedom to choose risk-averse assets by
simply taking systematic risks and diversifying unsystematic risks in investment.

C. Homogeneous expectations : The assumptions of the CAPM model, including homogeneous

expectations, are very crucial. This assumption says that there is a linear relationship between the
return on an asset and its diversified risks can lead to a significant change in the market dynamics.
Not only that, but it also consequently, impacts asset price determination and marks it as high-risk.
∆ Markowitz's Modern Portfolio Theory :- Harry Markowitz's Modern Portfolio Theory (MPT) is a
foundational investment framework that provides a mathematical approach to constructing optimal
portfolios. The theory, for which Markowitz won the Nobel Memorial Prize in Economic Sciences in
1990, states that by diversifying investments, it is possible to achieve the highest expected return for
a given level of risk. Simultaneously, the model assures maximization of overall portfolio returns.
Investors are presented with two types of stocks—low-risk, low-return, and high-risk, high-return
stocks. RP = IRF + (RM – IRF)σP/σM

Here, RP = Expected Return, RM = Market Portfolio Return, IRF = Risk-free Rate of Interest
σM = Market’s Standard Deviation, σP = Standard Deviation of Portfolio

∆ Assumptions of MPT :- Markowitz's assumptions are as follows:

• The model assumes that investors are rational and will always behave in a certain manner.

• The model assumes that there are only two different types of assets—low returns and high returns.

• Harry Markowitz argues that markets will always work in a certain direction and will always be
efficient. But this is not always the case.

• Diversification is important. But the theory assumes diversification is the only way to
minimize investment risks.

• The Markowitz model of portfolio assumes that every investor has unlimited access to information
about market changes. In reality, investors often lack the time and expertise to gather relevant data.

• Markowitz assumes that all investors are risk-averse, but that is not universally true.

• The model mentions a bracket of bearable loss—but not all real-world investors can afford that.

∆ Diversification in MPT :- It is an investment strategy that involves spreading your investments

across different assets or securities to reduce risk. The idea behind diversification is that a portfolio
that includes a variety of investments is less likely to be impacted by the performance of any one
investment. This reduces the risk of significant losses and helps to stabilize returns over time.

Markowitz's theory suggests that by investing in a diversified portfolio of assets, investors can reduce
risk without sacrificing returns. The idea is to create a portfolio that includes a mix of investments
that have low or negative correlation with each other. This means that if one investment is
performing poorly, another investment in the portfolio may be performing well, offsetting the losses.

∆ Standard Deviation use in MPT :-

1. Measuring risk: Standard deviation is used to measure the volatility of a portfolio's returns. A
higher standard deviation means the returns are more spread out and unpredictable.

2. Risk-return trade-off: Investors use standard deviation to understand the trade-off between risk
and return. A rational investor will seek a portfolio with the highest possible return for their
acceptable level of risk (standard deviation).

3. Building the efficient frontier: Standard deviation is a key component in plotting the efficient
frontier, which is a graph showing all possible portfolios that offer the highest expected return for a
defined level of risk or the lowest risk for a given level of return.
∆ Arbitrage Pricing Theory (APT) is a financial model that states an asset's expected return can be
predicted using a linear relationship between the asset's expected returns and several
macroeconomic factors. Proposed by Stephen Ross in 1976, it serves as an alternative to the CAPM
and suggests that an asset's price is influenced by various sources of systematic risk, not just the
overall market risk. The theory's core idea is that arbitrage opportunities—risk-free profits—are
impossible in an efficient market.

E(x) = Rf + β1 *(factor 1) + β2 *(factor 2) + …+ βn *(factor n)

where, E(x) = the expected return of an asset n factor = risk premium

Rf = the expected return assuming zero market risk
β = the sensitivity the asset has to the risk factor (beta)

∆ Assumptions of the Arbitrage Pricing Theory (APT) :-

• Returns from assets can be explained using systemic factors.

• No arbitrage opportunities exist in well-diversified portfolios. Arbitrage refers to the action of

buying an asset in the cheaper market and simultaneously selling that asset in the more expensive
market to make a risk-free profit.

• By using diversification, the specific risks can be eliminated from portfolios by the investors.

∆ Arbitrage Pricing Theory Limitations :-

1. Complexity: APT requires identifying multiple macroeconomic factors and their sensitivities, which
can be subjective and time-consuming, making it challenging for general investors to apply
effectively.
2. Market Efficiency Assumption: APT assumes efficient markets, meaning no arbitrage
opportunities. In real-world markets with inefficiencies, this assumption may not always hold true,
limiting its practical relevance.
3. Lack of Specific Factors: The model does not specify which factors to use, leaving their selection to
analysts, which can introduce subjectivity and inconsistency in its application across different
portfolios.

∆ Systematic risk is the kind of risk that rattles the entire market or financial system. It's not about
one company or sector-it's about external forces that ripple through everything. Whether it's
inflation, interest rate changes, political unrest, or economic slowdowns, systematic risks are broad,
unavoidable, and affect most investments at the same time. This kind of risk is tough to sidestep. You
can't beat it by just spreading your money across sectors. Instead, you need broader strategies like
asset allocation or hedging to manage its effects. In such cases, diversifying across asset classes
becomes critical mixing equity, debt, and liquid options can soften the blow of market-wide
disruptions.

∆ Unsystematic risk Unsystematic risk is the possibility of a loss due to a company-specific or

industry-specific issue, such as poor management, a product recall, or a labor strike. Also known
as diversifiable risk, it can be managed by diversifying an investment portfolio across different
companies, sectors, and asset classes, unlike systematic risk which affects the entire market.

Luckily, unsystematic risk is something investors can control. The key is diversification. By spreading
your money across different companies, sectors, or even asset classes, you can lower the chances of
a single failure dragging down your whole portfolio.
④ ∆ Treynor ratio measures an investment's risk-adjusted return by showing how much excess
return it generates for every unit of systematic, or market, risk taken. Created by economist Jack
Treynor, it is best suited for evaluating well-diversified portfolios where unsystematic (company-
specific) risk is considered negligible. The ratio indicates how efficiently a portfolio compensates an
investor for the risk assumed. A higher Treynor ratio is better, as it indicates a greater return for the
amount of market risk taken.

The Treynor ratio is calculated as follows: 𝑻𝒓𝒆𝒚𝒏𝒐𝒓𝑹𝒂𝒕𝒊𝒐 = (𝑹𝒑 − 𝑹𝒇)/𝜷𝒑

𝑅𝑝 is the return of the portfolio.

𝑅𝑓 is the risk-free rate of return, often proxied by the return on government securities like Treasury
bills.
𝛽𝑝 (Beta) is the portfolio's beta, which measures its sensitivity to overall market movements.

∆ Sharpe ratio measures an investment's risk-adjusted return, indicating how much excess return it
generates for each unit of total risk. A higher ratio suggests a better return for the level of risk
assumed. It is useful for comparing different investments, such as mutual funds, with varying levels
of risk.

The Sharpe ratio is calculated as follows: 𝑺𝒉𝒂𝒓𝒑𝒆𝑹𝒂𝒕𝒊𝒐 = (𝑹𝒑 − 𝑹𝒇)/𝝈𝒑

𝑅𝑝 is the return of the portfolio.

𝑅𝑓 is the risk-free rate of return, typically based on government securities.
𝜎𝑝 (standard deviation) is the portfolio's total volatility or risk

∆ Jensen's measure, also known as Jensen's alpha, is a risk-adjusted performance metric that
calculates how much an investment's actual return exceeds or falls short of its expected return,
based on the Capital Asset Pricing Model (CAPM). It is primarily used to evaluate the performance of
fund managers and to determine if they are generating "alpha," or excess returns, for their clients.

𝜶 = 𝑹𝒑 − [𝑹𝒇 + 𝜷𝒑(𝑹𝒎 − 𝑹𝒇)]

𝑅𝑝 = The actual return of the portfolio.

𝑅𝑓 = The risk-free rate of return, typically based on government bond yields.
𝛽𝑝 = The portfolio's beta, which measures its volatility relative to the overall market.
𝑅𝑚 = The return of the market benchmark.

∆ Capital Market Line (CML) is a theoretical line that represents the optimal risk-return
combinations for portfolios of assets that include both risky assets and a risk-free asset. It shows all
possible efficient portfolios, meaning they offer the highest expected return for a given level of risk,
and is graphed with risk on the x-axis and expected return on the y-axis. The CML is a special case of
the Capital Allocation Line (CAL) where the risky portfolio is the market portfolio, and its slope is
the Sharpe ratio of the market portfolio.

∆ Security Market Line (SML) is a graph that illustrates the relationship between a security's
expected return and its systematic, or market, risk. It is a visual representation of the Capital Asset
Pricing Model (CAPM) and is used by investors to determine if a security is valued fairly in the
market. The x-axis or the horizontal axis represents the risk of the asset or its beta, while the y-axis or
the vertical axis represents expected returns from the asset. By plotting the security market line, you
can get a better idea of the relationship between the risk and the expected returns from a stock,
making it easier to assess if the risk is worth the expected returns.
1. When Probability is not given

∑(𝑅𝑖 − 𝑅̅ )2
𝜎=√
𝑛

2. When Probability is given

̅ = ∑𝑃 ×𝑅
Expected Return/ 𝑹

𝜎 = √𝜎 2 = √∑𝑝𝑖 ⋅ (𝑅𝑖 − 𝑅̅ )2

𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 − 𝐼𝑛𝑖𝑡𝑖𝑡𝑎𝑙 𝑃𝑟𝑖𝑐𝑒

3. CAPM :- ● Expected return on Portfolio = × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑃𝑟𝑖𝑐𝑒

● 𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅𝑹𝒆𝒕𝒖𝒓𝒏 = 𝑹𝒇 + 𝛽( 𝑹𝑚 − 𝑹𝒇 )
𝑺𝑫
● Co-efficient of Covariance =
𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒓𝒆𝒕𝒖𝒓𝒏

𝑹̅̅𝒔 )(𝑹𝒎 − ̅̅̅̅̅̅

𝚺(𝑹𝒔 − ̅̅ 𝑹𝒎 ) 𝚺𝑹𝒔 𝚺𝑹𝒎
4. Beta ● 𝑪𝒐𝒗(𝑹𝒔 × 𝑹𝒎 ) = ̅̅̅
𝑹𝒔 = , 𝑹𝒎 =
𝒏−𝟏 𝑵 𝑵

𝑹𝒎 )𝟐
𝚺(𝑹𝒎 − ̅̅̅̅̅
● 𝝈𝟐 𝒎 = 𝒏−𝟏

𝑪𝒐𝒗 ( 𝑹𝒔 × 𝑹𝒎 )
● 𝜷= 𝝈𝟐 𝒎

𝑃1 − 𝑃0
5. Probable Return ●𝑅= 𝑃0
× 100

𝑤ℎ𝑒𝑟𝑒, . . . . . 𝑃1 = 𝐸𝑛𝑑 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒 𝑃0 = 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑆𝑡𝑟𝑖𝑐𝑘 𝑃𝑟𝑖𝑐𝑒

𝐷 + (𝑃1 − 𝑃0 )
6. Return on Equity ● 𝑅𝑂𝐸 = × 100
𝑃0

𝑅 − 𝑅𝑓
7. Sharpe’s ratio ● r = avg. return, rf = risk free return,
𝜎
𝜎 = 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛
𝑅 − 𝑅𝑓
8. Treynor ratio ●
𝛽

9. Jensen Measure ● 𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅𝑹𝒆𝒕𝒖𝒓𝒏 = 𝑹𝒇 + 𝛽( 𝑹𝑚 − 𝑹𝒇 )

● Jensen measure = Actual return – Expected return