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Security Analysis and Portfolio Management

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Question # 3: a) There is direct relationship between the economic conditions and the performance of the stock market of a particular economy. This makes it necessary to investigate the overall condition of the economy before making an investment decision to purchase finance securities. An investor will be able to get increased return on the financial securities if the economic condition is positive. The fundamental analysis of the stock market involves the method of stock valuation which utilizes the concepts of financial and economic analysis in order to forecast the future movement and condition of the value and prices of the financial securities. b) Gross Domestic Product (GDP): 1.

Gross Domestic Product (GDP) is the measurement of the all goods and services produced by the economy. It is the most essential indicator of the economic condition of any country and reflects the overall economic activities. 2. Five primary components of GDP are: private consumption (C), government consumption (G), investments (I), imports (M), and exports (X). GDP = C + I + X – M 3. Real GDP is different from nominal GDP, as it is adjusted for any changes in the price.

Real GDP provides the result in constant dollars. Most of the analysts mostly use real GDP while analyzing the economy because it allows the better outlook of the overall condition of the economy. This measure allows to compare the performance of the economy in different time periods as the effect of inflation or deflation has been adjusted. c) Cyclic economic indicators are useful to predict and forecast the economic condition. 1. The three groups of cyclic economic indicators are: leading indicators, lagging indicators, and coincident indicators. These indicators are divided on the basis of their occurrence timings in relation to the business cycle.

The leading indicators consist of those economic variables which show changing trend before the complete change in the economy. The lagging indicators consist of those economic variables which change after the change in the economy. And coincident indicators consist of economic variables which change at the same time the economy is changing. 2. The most useful economic indicator will be leading indicators for forecasting the economic activity as these indicators will allow to take necessary steps and measures beforehand. d) The technical analysts or chartist usually focus on the price and volume charts in order to forecast the future trends in the stock industry.

However, economic indicators can also be used by technical analysis in the process of technical analysis. Economic indicators can help the technical analysts in predicting the future market activity. e) According to the Efficient Market Hypothesis (EMH) the financial markets are efficient in term of information. This means that it is not possible for the investor to get excess returns as compared to the average market returns, as the prices of the stock always reflect all relevant and important information.

On the other hand behavioral finance presents the idea that there are imperfections in the financial markets because of the different behaviors and attitudes of the investors like overconfidence, bias information, overreaction, etc. Question # 4: a) The two types of municipal bonds or securities are: General Obligation bonds and Revenue bonds. The difference between this both types is on the basis of the repayment of the principal and interest. In General Obligation bonds the payments of the principal and interest are supported by the faith and credit of the issuer or municipality and are supported by the taxing power of the municipality.

On the other hand in Revenue bonds the payment of principal and interest is secured on the basis of revenue generated from specific project. b) In order to assess the default risk of General Obligation bonds one should consider the taxing base of the municipality i. e. the current debt in against this base and the variability associated with the tax (Fischer & Jordan, 356).

On the other hand in order to assess the default risk of Revenue bonds, one should consider the financial feasibility of the project which is supporting the bond and the variability associated with the revenue generated from that specific project. c) If the municipal bonds are not supported by taxes, then municipality purchases private municipal bond insurance in order to reduce the risk associated with the municipal bond and increasing the credit rating. Municipality justify the cost of the insurance premium by the value of the interest cost which is saved throughout the life of the bond (Feldstein & Fabozzi, 1088). d) The main feature that attracts investors to buy and own municipal bonds is interest revenue or income earned by municipal bond holders are usually exempted from income tax of the state and federal income tax. e) Serial bond is defined as a bond whose fraction or portion gets matured at regular intervals till complete bond has become matured.

In comparison to serial bonds, corporate bonds are matured at the end of their tenure so a typical bondholder would get the principle amount at the end of duration rather than getting small portion of principle at regular intervals as in the case of serial bonds. Works Cited Feldstein, Sylvan, & Frank, Fabozzi.

The Handbook of Municipal Bonds. New Jersey: Wiley & Sons, Inc. , 2008. Fischer, Donald, & Ronald, Jordan. Security Analysis and Portfolio Management. New Delhi: Pearson Education, Inc. , 1995.

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