DMGT511 Security Analysis And Portfolio management ASSIGNMENT I Maximum Marks 50

Q 1: The investment process involve the series of activities starting from the policy formulation.
Discuss. [10 marks]

Q 2:

Apply the run Test on the following data of ABC ltd. Company from 1 jan 2011 to 31 jan 2011

[20 marks]

Date Jan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Price 133.05 133.40 131.75 132.65 133.60 133.05 133.40 136.80 136.60 137.50 137.40 142.15 142.50 143.45 147.55 147.45 145.90 144.15

Date 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

Price 144.70 148.95 150.30 149.65 148.65 146.80 143.50 141.50 138.40 142.30 146.05 145.15 146.40 147.15 147.25 147.55 146.75

Q 3:

(a) Read the case given below and answer the questions that follow: Currently the real estate industry seems to be experiencing a boom in India. The surge in real estate construction is not a unique issue, because historically, real estate investment proves to be a better investment avenue for many investors. Recently DLF Group bid $160 mn for the Bombay Textile Mills and 17.5 acres of land which was highest price ever paid for a piece of land in India. Subsequently, Kohinoor Consolidated Transport Network Ltd. bought the five acre Kohinoor Mills of Mumbai for a whopping $100 mn and NTC has sold five mill lands in Mumbai for more than Rs. 2,000 cr. Even the loss making Bata India plans to develop p an integrated township near Kolkata with a large investment of Rs. 1,200 cr. This year, the real estate market has seen a total of 23 million sq. ft of new space, as compared to 18 million square feet in 2004. The housing sector has also been growing at an average of 34% annually and analysts estimate that there will be annual shortfall of 20 mn housing units by 2011, and India will see 75 million sq ft of retail space by 2007. The real estate market in India has seen remarkable changes in the past few years. The rapid expansion of information technology, especially BPOs, spurt in the middleclass income, and 7% growth in GDP are the potential key factors for the growth. The economic indicators are also promising. These factors have created a new demand for commercial and residential house in India. Along with the increasing GDP growth, the rental income from housing and leasing are also expected to increase in the future and, thus, the industry can emerge as a big opportunity for investment. In addition to the above, the construction industry is also booming. According to a McKinsey report, the average profit from construction in India is 18%, which is double the profitability for a construction projects undertaken in the US. IT and ITenabled services (ITES) sector in India is still in its growing stage due to increasing demand for business processing units in India. This could lead to a space requirement of 2025 million sq ft per annum. Taking this factor into consideration, the total value of real estate to be created by the IT and ITES sector in the next three years will be Rs.1,32,000 cr. Liberalization in the foreign sector has boosted foreign investment in India and also in the real estate market; investors are eyeing most metro cities like Mumbai, Hyderabad and Bangalore. Recently, the Cabinet Committee on Economic Affairs has agreed to permit 100% FDI in all forms of housing, hotels, resorts, commercial premises, educational institutions, recreational facilities, and hospitals, to attract higher investments. Earlier, restrictive norms were imposed on foreign investments, with their presence permitted only in the integrated townships. With the opening of foreign direct investment in the construction sector, various foreign investors have shown a lot of interest to participate in the real estate industry in India. SEBI has already received proposals worth over $1 bn in real estate funds. Once SEBI clears these proposals, Real Estate Investment Trusts (REITs) will then allow retail investors to diversify into real estate investments. Though the industry is growing high, there are some constraints too. The growing demand in real estate can be fulfilled only by a huge investment in this sector. Although leading venture funds like ICICI, HDFC, SBI , and Kotak Mahindra have floated issues in the sector, poor finance regulations of the banking system may hit the industry. From a regulatory point of view, REITs are currently nonexistent in India and also the tax structure is not liberal for the industry. Further, the license raj doesnt make it any easy for property owners as they have to abide by rentcontrol laws and other regulations. International Scenario The real house prices have increased rapidly in many countries. Property markets have been frothing in America, Britain, Australia, France, Spain, and China. When the stock market bubble burst in 2000, there was a rise in the property prices, which propped up the world economy. Over the past five years, the total value of residential property has increased from more than $30 tn to over $70 tn. Many home buyers were encouraged to borrow more money at low interest rates, and after stock markets have fallen, the households had no faith in equities, which resulted in the global housing boom. There was an increase in home prices by 10% or more in half of the countries

across the world. Over the past year, America has shown largest house price inflation with 12.5% increase in the home prices. The house prices increased at the rate of 9% or more in France, Italy, Belgium, Denmark, and Sweden over the past year. There was failure in some tourism boom also. In late2003, Australian house prices showed an increase of 20%, which in the first quarter of this year, has come down to 0.4%. Britains housing market also cooled very fast. An international expert says that Taiwan, South Korea, Japan, and India have the best potential for investment in the Asian market. His forecast is based on the change in micro factor population growth and other factors like technology and GDP growth. In India, historically, experience says that a dramatic rise in the financial market turns to a big crash. A more recent example is the stock and real estate market crash in Japan and some other countries like Norway, Finland, and Sweden in 1990s, after the dramatic rise in real estate and stock prices in the late 1980s. Basically, a financial market crash has three phases. In the first phase, the price of financial assets starts increasing, due to cheaper finance and liberal policy of government lending. This rise in the financial assets may continue for a shortterm or a longterm. The second phase is marked by an asset price collapse, when the economy turns southward and, inflation and interest rate turn northward. In the third phase, most of the firms, financial institutions, and other agents who have exposure in the market, begin to collapse. If we consider India, we can say that it is going through the first phase. This is because the Indian economy is on a growing path, and in the near future a big structural change is expected in the economy that could justify the high real estate prices.

Questions: a. What are the reasons for the recent boom in Indian real estate industry? Will it be sustainable in the long run? (5 marks) b. What are the factors which boost the confidence of the investors for investing in the Indian real estate industry? Are there any constraints for the growth of this industry? (5 marks) c. What is the international scenario of the real estate industry? Historically, what was the experience of this industry with reference to growth or fall? (5 marks)

(b) An investor A purchased a bond at a price of Rs 900 with Rs 100 as coupon payment and sold it at Rs1000. What is his holding period return? [5 marks]