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Unit 1: Basics of Investment

and so on. This problem of specific identification is known as the problem of selectivity. Notes
It is obvious that the issue of selectivity will have to be based on micro-level forecasts of
expected cashflows from specific shares/debentures of different companies. The investor
will use security analysis approaches for this. Then, he must determine the timing of his
investment and for this he will have to observe the forecasted price movements of shares
relative to debentures at the macro level. Finally, he will make all possible efforts to
minimise his risk for a given expected level of average return of his potential portfolio.
This he would be able to achieve when the returns of shares and debentures that would
comprise his portfolio are not positively correlated to each other. The resultant portfolio
would be known as ‘diversified’ portfolio. Thus, portfolio construction would address
itself to three major problems via selectivity, timing, and diversification. The related
questions would be: which specific shares/debentures to buy, when to buy, and how best
to combine them in a way that risk is reduced to a minimum for a given level of expected
return.
4. Portfolio Revision: As time passes, the investor would discover that securities that once
were very attractive have ceased to be so. Also, new securities with promises of high
returns and relatively low risk have emerged. In view of such developments it would be
necessary for him to review the portfolio. He would liquidate the unattractive securities
and acquire the new stars from the market. In a way, he repeats the first three steps of the
investment process. He sets a new investment policy, undertakes security analysis afresh,
and re-allocates his cash for the new portfolio. It must be observed that the transaction
costs incurred in the buy-sell activities relating to the new portfolio and also the extent of
improvement expected in the future outlook of new securities would be important
considerations in the revision of the given portfolio.
5. Portfolio Performance Evaluation: A rational investor would constantly examine his chosen
portfolio both for average return and risk. Measures, for doing so, must be developed. Also,
the calculated risk-return positions must be compared with certain yardsticks or norms.

Did u know? This step in the investment process, acquires considerable significance since
the tasks involved are quantitative measurement of actual risk and return their evaluation
against objective norms.

Self Assessment

Fill in the blanks:
4. ...................................... analysis consist of examining the risk-return characteristics of
individual securities or groups of securities identified under step one.
5. Under ...................................... analysis the analyst studies part movements in prices of
securities he is interested in, to determine the trends and patterns that repeat themselves.
6. In ...................................... analysis, analyst works out a true or intrinsic value of a security
and compares it with the current market price.
7. Portfolio construction would address itself to three major problems via., selectivity, timing,
and ......................................

1.3 Features of Investments

In choosing specific investments, investors will need definite ideas regarding features which
their portfolios should possess. These features should be consistent with the investors’ general

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