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Security Analysis and Portfolio Management




                    Notes              An increase in government spending  stimulates the demand for goods and services,
                                       whereas a  decrease deflates  the demand for goods and services. By the same token, a
                                       decrease in tax rates increases the consumption of goods and services and an increase in
                                       tax rates decreases the consumption of goods and services.
                                   2.  Monetary Policy: Monetary policy is concerned with the manipulation of money supply
                                       in the economy. Monetary policy affects the economy mainly through its impact on interest
                                       rates.

                                       The main tools of monetary policy are:
                                       (a)  Open market operation
                                       (b)  Bank rate
                                       (c)  Reserve requirements

                                       (d)  Direct credit controls

                                   4.1.2  Investment-making Process

                                   Each of the sectors show sings of stagnation and degradation in the economy. This, we can
                                   examine and understand by studying historical performance of various sectors of the economy
                                   in  the past,  their  performances  at  present  and then  forming  the  expectation  about  their
                                   performances in the future. It is through this systematic process that one would be able to realise
                                   various relevant investment opportunities whenever these arise. Sectoral analysis, therefore, is
                                   carried out along with overall economy analysis as the rate of growth in overall economy often
                                   differs from the rate within various segments/sectors.
                                   Rationale  of the above type  of analysis  depends on economic considerations  too. The way
                                   people in general, their  income and the way  they spend  these earnings would in ultimate
                                   analysis decide which industry or bunch of industries would grow in the future. Such spending
                                   affects corporate profits, dividends and prices of the shares at the many would grow in  the
                                   future. A research study conducted by King (1966) reinforces the need of economic and industry
                                   analysis in this context. According to him on an average, over half the variation in stock returns
                                   is attributed to market prices that affect all the market indices. Over and above this, industry
                                   specific factors account for approximately 10 to 15 per cent of the variation of stock returns. Thus,
                                   taken together, two-third of the variation of stock prices/returns reported to market and industry
                                   related factors. King's study, despite the limitations of its period of its publication and use of
                                   US-specific data, highlights  the  importance  of  economic  and industry  analyses  in  making
                                   investment decisions. To neglect this analysis while deciding where to invest would be at one's
                                   peril.
                                   It must be clear by this now that analysis of historical performance of the economy is a starting
                                   point; albeit a portent  step. But, for the analyst to decide whether to invest or not, expected
                                   future performance of the overall economy along with its various segments is most relevant.
                                   Thus, all efforts should be made to forecast the performance of the economy so that the decision
                                   to invest or to disinvest the securities can be a beneficial one.


                                       !
                                     Caution  Decisions can be made in the most haphazard manner. Interestingly, this calls for
                                     using the same indicators that describe how the economy has shaped up in the past and
                                     how it is likely to take shape in the future as compared to the current state of affairs.
                                     A healthy outlook about the economy goes a long way in boosting the investment climate
                                     in general and investment in securities in particular.




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