SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

PORTFOLIO SELECTION             The objective of every investor is to maximize his returns and minimize his risk. Diversification is the method adopted to reduce the risk. It essentially results in the construction of portfolios. The proper goal of construction of portfolios would be to generate a portfolio that provides the highest return and lowest risk. Such a portfolio would be an optimal portfolio. The process of finding the optimal portfolio is described as portfolio selection.             The conceptual framework and analytical tools for determining the optimal portfolio in disciplined and objective manner have been provided by Harry Markowitz in his pioneering work on portfolio analysis described in his 1952 “JOURNAL OF FINANCE” article and subsequent book in 1959. His method of portfolio selection is come to be known as Markowitz model. In fact, Markowitz work marked the beginning of what is today the Modern Portfolio Theory. FEASIBLE SET OF PORTFOLIOS     

Bond Features and Prices Bonds are debt securities – the bondholder is a creditor of the entity issuing the bond. The bondholder makes a loan of the face value to the issuer. The issuer (borrower) promises to repay to the lender (investor) the principal on maturity date plus coupon interest over its life. Bond terms Par value (face value): Face amount paid at maturity. Coupon rate: Percentage of the par value that will be paid out annually in the form of interest. Annual interest payment on bond = coupon rate  par value Maturity: The duration of time until the par value must be repaid. Example A bond with par value of $1,000 and coupon rate of 8% might be sold to a buyer for ` 1,000. The bondholder is then entitled to a payment of ` 80 (= 8%  ` 1,000) per year, for the stated life of the bond, say 30 years. The ` 80 payment typically comes in two semi-annual instalments of ` 40 each. At the end of the 30-year life of the bond, the issuer also pays the ` 1,000