Management

CAPM Review

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The CAPM model is based on specific assumptions. The investor could borrow or lend any amount of money at risk less rate of interest.

All investors hold only market Portfolio and the restless securities. Market portfolio consists of the investments in all securities of the market the proportion invested in IT security is equal to the percentage of the total market capitalisation represented by the security.

The capital market line represents the relationship between the expected return and standard deviation of the portfolio. The risk of the security is indicated by its covariance with the market portfolio.

Security market line shows the linear relationship between the expected returns and betas of the securities. The objective of the asset pricing model is to identify the equilibrium asset price for expected return and risk. If if the asset prices are not equal, there is a scope for arbitrage.

An arbitrage portfolio is constructed without any additional financial commitment. Investors indulge in arbitrage, moving the price opposite securities are held long and driving down the price of securities if held in short position, till the elimination of the arbitrage possibilities. The factor sensitivity in arbitration model in the case the responsiveness of a securities return to a particular factor.

Documents in International Trade

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In comparison with domestic trade International train presents certain special problems:

1. Sellers in international trade are not able to assess the creditworthiness of the buyers as reliable and thoroughly as sellers in domestic trade

2. Transportation of goods is slower and less certain and communication less efficient and more time consuming.

3. Legal settlement process are complicated, tardy and expensive In order to cope with these problems, international trade relies considerable on three major documents on instruments that is trade draft, bill of lading, and letter of credit.

Trade draft: The international trade draft, also referred to as a bill of exchange, is a a written order by the exporter (the drawer) asking be importer (the drawee) to pay specified amount of money at a certain time. The draught may be a sight draft (which is payable on presentation) or a time draft (which is payable A certain number of days after presentation).

The important features of the draft are:-

1. It is an unconditional written order signed by the drawer.

2. It specifies the exact amount of money to be paid and the time when it is payable.

Once the boy or his banker accepts the draft, he acknowledges his obligations. The draft then becomes a trade acceptance. If it is accepted by the banker, it becomes a bankers acceptance. In this case the bank assumes responsibility for payment. Bankers acceptance is generally are marketable.

Bill of lading: a bill of lading is a document of shipping employed when the exporter transports goods to be importer. It serves several functions such as:

1. It is a document of title to goods.

2. It is a receipt given by the transporter to the owner mentioning the receipt of specified goods.

3. It is a contract that binds the transporter to deliver in goods to a specified party at a certain destination.

The bill of lading is to be used to be important only when the payment is made (when the bill of lading is accompanied by a sight draft) or when the obligation is acknowledged (when the bill of lading is accompanied by a time draft).

Letter of credit: A letter of credit is issued by a bank on behalf of the importer. As per this document, the bank agrees to honour the draft drawn on the importer provided certain conditions are satisfied. Through the letter of credit arrangement, the credit of the importer is substituted by the credit of bank. Hence it virtually eliminates the risk of the exporter when he sells to an unknown importer in a foreign country. This arrangement is further reinforced if the letter of credit is confirmed by a bank in the exporters country.

Leasing

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A lease represents a contractual arrangement where by the lessor grants the lessee the right to use an asset in return for periodic lease rental payments.

Lease arrangements can be broadly divided into two categories:-

1. Operating

2. Financial leases

An operating lease is a short term lease which is not fully amortized. A financial lease, on the other hand, is a long term leaves which is fully amortized.

As there is no separate statue for equipment leasing in India, the provisions relating to bailment in the Indian contract Act govern equipment leasing agreements as well. The lease agreement specifies the legal rights and obligations of the lessor and lessee.

The lazy can claim lease rentals as tax deductible expenses and the lessor can claim investment allowance and depreciation on the investment in leased assets.

Please transactions are disadvantages from the sales point of view for two reasons:

1. The lessor is not entitled to be concessional rate of Central sales tax and,

2. Several state governments levy sales tax on lease rentals.

In finance literature, a leasing definition is commonly regarded as a financing decision. The definition to invest in the effort is taken for granted the option of living is compared with the option of buying with borrowed fund.

To compare leaving with buying (through borrowing) the following procedure may be followed:

1. Find the present value of the post tax cash flows associated with the leasing option.

2. Calculate the present value of the post tax cash is associated with the buying (with borrowed funds) option.

3. Choose the option which has the lower present value.

In addition to financial considerations, there are several other considerations which may be relevant in a buying versus leasing decision situation: borrowing capacity of the firm, tax factor, restrictive covenants, obsolescence risk, expeditious implementation, matching of lease rentals to cash flow capability and control.

Finance Companies usually offer the facility of hire purchase as an alternative to leasing. Under a higher purchase agreement, the hirer (the counterpart of lesse) enjoys the ownership related benefits. The hirer pays regular hire-purchase instalments which cover interest as well as principal repayment.

Cost and Benefit Principle

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Once an investment project is proposed, its cost and benefits must be estimated. This is usually done with the help of inputs provided by marketing, production, accounting and other departments. The role of the financial manager is to keep the exercise focused on relevant variables, co-ordinate efforts of various participants in this process and ensure that podcasts are reasonably balance and internally consistent. Usually the outcome of this process is the set of projections prepaid according to conventional Accounting principles. In order to derive the relevant stream of cost and benefits from these projections, the financial manager must bear in mind the following principles:

Cash flow principle

Long term funds principles

Interest exclusion principle

Posts tax principle

Cash flow principle

Cost and benefits must be measured in terms of cash flows - costs are cash outflows and benefits are cash inflows. Cash outflows, not expenses as determined by accounting conventions, Aarti relevant measure of course because they represent the flow of purchasing power. By the same token, cash inflows, not revenues as determined by accounting conventions, reflect benefits properly.

As there is usually a time difference between the recognition of revenues and expenses in accounting and the incidence of cash flows, a rigorous analysis requires that each item of revenue and expense be examined to find out the cash flows associated with it. For example, the pattern of collection associated with trade sales and the pattern of payments associated with credit purchases have to be analysed. This kind of detailed analysis, however, becomes to unwieldy and cumbersome for real life projects. Moreover, when we are concerned defining a cash flows on a yearly basis, as is usually done in project appraisal, a significant portion of such detailed analysis is deducted because it helps in getting only a more refined picture of intra-year cash flows. So, from a practical point of view, its suffices If depreciation and other non cash charges, which are deducted in computing profits from the accounting point of view, are added back because it do not result in cash outflow.

Incremental Principle

Cash flows must be measured in incremental terms. This means that the changes in the cash flows of the firm which can be attributed to the proposed project alone are relevant. In estimating the incremental cash flows of a project, the following guidelines must be borne in mind:

1. Consider all incidental effects: in addition to the direct cash flows of the project, all its incidental affects on the rest of the firm must be considered. The project may enhance the profitability of some of the existing activities of the form because it has a complimentary relationship with them; or, it may detract from the profitability of some of the existing activities of the firm because it had a competitive relationship with them- all these effects must be taken into accounts.

2. Ignore sunk cost: sunk costs represents past outlets which cannot be recovered. They are not relevant for new investment decisions. For example, if a company has spent, say, ₹5 million on some preliminary work before deciding whether it should undertake an investment, the amount of ₹5 million is totally irrelevant, as it represents a sunk cost, as far as the investment decision is concerned. Remember the phrase "bygones are bygones".

3. Include opportunity cost: if a project requires the use of some resources already available with the firm, the opportunity cost of these resources should be charged to the project. The opportunity cost of a resource if the valley of net cash flows that can be derived from it if it were put to its best alternative use. Suppose a project requires a vacant piece of firm. The cost of this land represents a sunk cost and is irrelevant for the new project decision. But the project should be charged with the opportunity cost of this land which represents the benefit that can be derived from it by putting it to its best alternative use, which in this case is simply be leasing the land to another firm.

4. Question the allocation of overhead costs: costs which are are only indirectly related to a product or service are referred to as overhead costs. They includes item like general and administrative expenses, managerial salaries, legal expenses, rent and so on. Accountants normally allocate these overhead cost to various products on some basis like labor-hours or machine hours which appears acceptable. Hence when a new project is proposed, a proportion of the overhead costs of the firm is usually allocated to it. The overhead allocated to it, however, has hardly any relationship with the incremental overhead cost, if any, associated with it. For the purpose of investment appraisal what matters is the incremental overhead cause along with other incremental cost attribute to the project and not the allocated overhead cost.

Long term Funds Principle: there are several points of view from which a project can be viewed. For example:-

1. Long term funds comprises of equality and long-term debt.

2. Current liabilities comprises of bank advance and spontaneous current liabilities such as trade credits, provisions, etc..

3. Total funds comprises of long term funds and current liabilities.

4. Fixed assets are fully supported by long term funds.

5. Current assets are partly supported by long term funds and partly supported by current liabilities. The portion of current assets that is supported by current liabilities. The portion of current assets that is supported by long term funds is called the net working capital.

Now, a project may be viewed from three distinct point of view:

1. Equity point of view

2. Long term funds point of view

3. Total funds of point of view

In capital budgeting, the long term funds point of view is commonly adopted, though one can adopt any of the three points of view. What is important is that the measures of cash flows and cost of capital must be consistent with the point of view adopted.

For the present discussion, the long term funds point of view is adopted. Hence, the question that need to be answered are: what is the sacrifice made by the suppliers of long term funds ? What benefits accrue to the suppliers of long term funds ?

The sacrifice made by the suppliers of long term funds is equal to the outlets on fixed assets and net working capital. The net working capital, which represents the difference between current assets and current liabilities, is supported by the long term funds. The benefits accruing to the suppliers of long-term points consists of operation cash flows after taxes and salvage value of fixed assets and net working capital.

Interest exclusion principle: When cash flows relating to long term funds are being measured, interest on long term debt should not be considered. Why ? The average cost of capital used for evaluating the cash flows takes into account the cost of long-term debt. Put differently, interest on long term debt is properly reflected through the average cost of capital. Hence, if interest earned on term deposit deducted in the process of cash flow analysis, the cost of long-term debt will be counted twice- an error which should be carefully guard.

Limitations of Indian Stock Market Predictions

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The stock market in India suffers from several limitations. The principal once are discussed below:

Skewed distribution of turnover:

The distribution of trading turnover is highly skewed. As of early 1997, specified shares (or a group of shares) which constituted will be less than 2% in number of of the the listed scripts accounted for over 95% of the trading turnover. (Note that the specified shares accounted for about 55% of market capitalisation). More important, four pivotals, viz., Reliance industries limited, State Bank of India, ITC and Tata Steel accounted for over 70% of the turnover of the specified shares. Thanks to such skewed distribution of trading, most shares are traded in frequently and, hence, lack liquidity.

Scarcity of floating stocks:

In general there is a scarcity of floating stocks in India. This seems to be caused by the following reasons:

1. Joint stock companies, Financial institutions and large individual investors, collectively own nearly three quarters of the equity capital in the private sector, generally do not offer their holding for trading.

2. Indian investors traditionally have sticky portfolio habits.

Due to the scarcity of floating stocks the market tends to be high volatile and more easily amenable to manipulation.

Dilatory settlement

Trades are settled by physical delivery of securities accompanied by transfer deeds. The physical movement of securities from the seller to the sellers broker (through the clearing house of the exchange or directly) and from the buyer's broker to the buyer makes the settlement dilatory. The problem is further accentuated because the buyer has to lodge the securities with the company or its transfer agents for transfer and process of transformer take one to three months.

Counterparty risk

Barring the National Securities Clearing Corporation (NSCC) which was set up in 1996 for guaranteeing all trades on NSE, clearing corporations do not presently exist for the other exchanges hence some counterparty risk exists on the other exchanges. of course be improved management of exchanges and the creation of trade guarantee fund such risk has diminished.

Preponderance of Speculative Trading

There is a preponderance of speculative trading, where the primary motive is to derive benefits from short term price fluctuation. It appears, that's very small fraction of transactions represent purchases/sales by genuine investors.

Price rigging

Often, companies issuing securities in the domestic capital market or International capital market have a tendency to artificially question the prices before the issue of securities. A common way of doing this is to resort to circular trading - parties buy and sell stocks among themselves and pushed the prices up.

Insider trading

Insider trading is common in India. In such trading, insiders, who are privy to price-sensitive information, use such information to their advantage. Though security exchange board of India introduced its first set of regulation to curb insider trading in November 1992, they have remained mainly only on paper.

Problems In Financial Statement Analysis

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Financial statement analysis can be a very useful tool for understanding a a firm's performance and condition. However, there are are certain problems and issues encountered in such analysis which call for care, circumspection and judgement about the over all performance of the the particular firm or entity.

Heuristic and intuitive character

Most of the ratios found in the old and traditional literature on financial statement analysis have been proposed in a heuristic or intuitive fashion. The ratios are often not related logically to a well defined theoretical framework. Instead they have been suggested in a somewhat impressionistic manner. In the absence of a well defined theoretical underpinning, the traditional univariate approach two financial statement analysis seems to be lacking in direction. It appears ad hoc, informal, subjective and somewhat disjointed.

Development of benchmarks

Many firms, particularly the larger ones, have operations spanning a wide range of industries. Given the diversity of their product lines, it is difficult to find suitable benchmark for evaluating their financial performance and condition. Hence, it appears that meaningful benchmarks maybe available only for firms which have a well defined industry classification. Even for search firms, at least in India, the financial analyst may run into a difficulty. The information is is available only about the industry average and not about the entire dispersion of ratios for various firms in the industry, it may not be possible to draw meaningful inferences.

Window dressing

Farms made resort to window dressing to project a favourable financial picture. For example, A firm may prepare its balance sheet at a point when its inventory level is very low. As a result, it may appear that the firm has a very comfortable liquidity position and the high turnover of inventories. When window dressing of this kind is suspected, the financial analyst should look at the average level of inventory over a period of time and not the level of inventory at just one point of time.

Price level changes

Financial accounting, as it is currently practiced in India and most other countries, does not take into account the price level changes. As a result, balance sheet figures are distorted and profits mis reported. Hence, financial statement can be vitiated.

Variations in accounting policies

Business forms have some latitude in the accounting treatment of items like depreciation, valuation of stocks, research and development expenses, foreign exchange transactions, installment sales, preliminary and preoperative expenses, provision of reserves, and revaluation of assets. Due to diversity of accounting policies found in practice, comparative financial statement analysis may be vitiated.

Interpretation of results

Though industry averages and other yardsticks are commonly used in financial resource, it is somewhat difficult to judge whether a certain ratio is good or bad. A high current ratio, for example, may indicate a strong liquidity position (something good) or excessive inventories (something bad). Likewise, a high turnover of fixed assets may mean efficient utilisation of plant and machinery or continuous locking of more or less fully depreciated, worn out, and inefficient plant and machinery.

Another problem in interpretation arises when a firm has some favourable ratios and some unfavourable ratios - and this is rather common. In such a situation, it may be somewhat difficult to form an overall judgement about its financial strength or weakness. Multiple discriminant Analysis, a statistical tools, may be employed to sort out the net effect of several ratios pointing in different directions.

Capital Budgeting Process

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Capital Budgeting is a complex process which may be divided into the following phases:

1. Identification of potential investment opportunities.

2. Assembling of proposed investments.

3. Decision making

4. Preparation of capital budget and appropriations.

5. Implementation

6. Performance review

Identification of potential investment opportunities

The the capital budgeting process begins with the identification of potential investment opportunities. Typically, the planning body (it may be an individual or a committee organised formally or informally) develops estimates of future sales which service as the basis for setting production targets. This information, in turn, is helpful in identifying required investments in plant and equipment.

Imaginative identification of investment ideas it is helpful to:

1. Monitor external environment regularly to scout investment opportunities

2. Formulate a well-defined corporate strategy based on a thorough analysis of strengths, weaknesses, opportunities and threats.

3. Share corporate strategy and perspective which persons who are involved in the process of capital budgeting.

4. Motivate employees to make suggestions.

Assembling of investment proposals:

Investment proposals are identified by the production department and other departments are usually submitted in a standardized capital investment proposal form. Generally, most of the proposals, Before they reach the capital budgeting committee for some body which assembles them, are routed through several persons. The purpose of routing a proposal through several persons is primarily to ensure that the proposal is viewed from different angles. It also helps in creating a climate for bringing about coordination of interrelated activities.

Investment proposals are usually classified into various categories for facilitating decision making, budgeting and control. An illustrative classification is given below:

1. Replacement investments

2. Expansion investments

3. New product investments

4. Obligatory and welfare investments

Decision making:

A system of rupee gateways usually characterizes capital investment decision making. Under this system of executive are vested with the power to ok investment proposals up to certain limits. For example, in one company the plant superintendent can ok investment outlays upto ₹200000, the works manager up to ₹500000, and the managing director upto ₹20,00,000. Investment requiring higher outlays need the approval of the board of directors.

Preparation of capital budget and appropriations:

Project involving smaller outlays and which can be decided by executive at lower level open covered by a blanket appropriation for expeditious action. Projects involving larger outlays are included in the capital budget afterwards necessary approvals. Before undertaking such projects an appropriation order is usually required. The purpose of this check is mainly to ensure that the funds position of the firm is satisfactory at the time of implementation. Further, it provides an opportunity to review the project at the time of implementation.

Implementation:

Translating an investment proposal into a concrete project is a complex, time consuming, and risk fraught task. Delays in implementation, which are common, can lead to substantial cost-overruns. For expeditious implementation at a reasonable cost, the following are helpful :

1. Adequate formulation of projects: The major reason for delay is inadequate formulation of projects. Put differently, if necessary home work in terms of preliminary studies and comprehensive and detailed formulation of the project is not done, many surprises and shocks are likely to spring on the way. Hence, the need for adequate formulation of the project cannot be over emphasised.

2. Use of the principle of responsibility accounting: Assigning specific responsibilities to project managers for completing the project within the defined time-frame and cost limits is helpful for expeditious execution and cost control.

3. Use of network techniques: For project planning and control several network techniques like PERT (Programme Evaluation Review Technique) and CPM (Critical Path Method) are available. With the help of these techniques monitoring becomes easier.

Performance review:

Performance review, or post completion audit, is a feedback device. It is a means for comparing actual performance with projected performance. It may be conducted, most appropriately, when the operations of the project have stabilised. It is useful in several ways:

1. It throws light on how realistic were the assumptions underlying the project;

2. It provides a documented log of experience that is highly valuable for decision making;

3. It helps in uncovering judgemental biases:

4. It induces a desired caution among project sponsors.

Factors to be considered by the Investors

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The number of stocks, which has remained inactive increased steadily over the past few years, irrespective of the overall market levels. Price rigging, in different usage of funds, vanishing companies, lack of transparency, the notion that equity is a cheap source of funds and the permitted free pricing of the issue was our leading to the prevailing primary market conditions. In this context, the investor has to be alert and careful in his investment. She has to analyse several factors. They are given below:

1. Promoters credibility:

a) promoters past performance with reference to the companies promoted by them earlier.

b) the integrity of the promoters should be found out with enquiries and from financial magazines and newspapers.

c) their knowledge and experience in the related field.

2. Efficiency of the management:

a) managing director's background and experience in the field.

b) the composition of the board of directors is to be studied to find out whether it is broad-based and professionals are included.

3. Project details:

a) the credibility of the appraising institution or agency.

b) the stake of the appraising agency in the forthcoming issue.

c) availability of raw materials, government norms regarding it and tax concessions, if any.

4. Product:

a) reliability of the demand and supply projections of the product.

b) competition faced in the market and competitive strategy for marketing.

c) If the product is export oriented, the tie up with the for collaborator or agency for the purchase of products.

5. Financial data:

a) Accounting policies should be considered before investing by the investors.

b) revaluation of the assets is required if present.

c) analysis of the data related to capital, reserves, turnover, profit, dividend record and profitability ratio.

d) possibilities for achieving the financial projections as indicated by the appraising institution.

6. Litigation: pending litigation and their effect on the profitability of the company. Defaul in the payment of dues to the banks and Financial institutions.

7. Risk factors: ok for study of the general and specific risk factors should be carried out.

8. Auditor's report: A thorough reading of the auditor's report is needed especially with reference to accounts, qualifying remarks and changes in the Accounting policy. In the case of letter of offer the investors have to look for recent un-audited working reserves and of letter of offer.

9. Statutory clearance: investors should find out whether all the required statutory clearance has been obtained if not what is the current status. The clearances used to have a bearing on the completion of the project.

10. Investor service: Promptness in replying to the enquiry of allocation of shares, refund of money, annual reports, dividends and share transfer should be assessed with the help of past record.

National Stock Exchange

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Inaugurated in 1994, the National Stock Exchange seeks to establish a nation-wide trading facility for equity, debt and hybrids; to facilitate equal access to investors across the country; to impart fairness, efficiency, and transparency to securities trading; to shorten settlement cycles; and to meet International securities market standards.

The distinctive feature of National Stock Exchange, as its functions currently are as follows:

1. The National Stock Exchange employees a screen based trading system.

2. The National Stock Exchange has two segments: The capital market segment covers equities, convertible debentures, and retail trade in non convertible debentures. The wholesale debt market segment is a market for high value transactions in government securities, PSU bonds, commercial papers and other debt instruments.

3. The trading members in the capital market segment are connected to the central computer in Bombay through the satellite link using very small aperture terminals. The trading members in the wholesale debt market segment are linked, through dedicated high speed lines, Tony Central computer at Mumbai.

4. The National Stock Exchange has opted for an order driven system. When an order is placed by a trading member and order confirmation slip is generated. The computer stores the orders as and when receive in terms of price and time. It automatically searches for a match and no sooner the same is found the deal is struck. Since the system is order driven, buy and sell rates are independent. As a result the difference between them is sometimes as well as just 10 paise particularly for liquid securities.

5. When a trade takes place a trade confirmation slip is printed at the trading members work station. It gives details like quantity, price, code number of country party and so on.

6. The Identity of a trading member is not revealed to others when he places an order for when his pending orders are displayed. Hence, last orders can be placed in the National Stock Exchange system without the fear of influencing the market sentiment.

7. On the eighth day of trading, each member gets a statement showing his next position, the amount of cash he has to transfer to the clearing Bank and the securities he has to deliver to the clearing house.

8. Members are required to deliver securities and cash by the 13th and 14th day respectively. The fifteenth day is the payout day.

Markowitz Portfolio Model

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Harry Markowitz opened new vistas to modern portfolio selection by publishing an article in the journal of Finance in March 1952. His publication indicated by the importance of correlation among the different stock's returns in the construction of a Portfolio. Markowitz also showed that for a given level of expected return in a group of securities, one security dominates the other. To find out this, the knowledge of the correlation coefficient between all possible securities combination is required.

After the publication of his paper, numerous Investment firms and Portfolio managers developed "Markowitz Algorithms" to minimise the portfolio variance i.e. risk. Even today the term Markowitz diversification is used to refer to the portfolio construction accomplished with the help of security covariances.

Simple diversification

Portfolio risk can be reduced by the simplest kind of diversification. Portfolio means de group of assets an investor owns. The assets may vary from stocks to different types of bonds. Sometimes the portfolio may consist of securities of different industries. When different assets are added to the portfolio, the total risk tends to decrease. In the case of common stocks, diversification reduces the unsystematic risk or unique risk. Analyst opine that if 15 stocks are added in a Portfolio of the investor, the unsystematic risk can be reduced to zero. But at the same time if the number exceeds 15, additional risk reductions cannot be gained. But diversification cannot reduce systematic or an diversifiable risk.

The naive kind of diversification is known as simple diversification. In the case of simple diversification, securities are selected at random and no analytical procedure is used.

Total risk of the portfolio consist of systematic and unsystematic risk and total risk is measured by the variance of the rates of returns over time. Many studies have shown that is systematic risk forms one quarter of the total risk.

The simple random diversification reduces the total risk. The reason behind this is that the unsystematic price fluctuations are not correlated with b markets systematic fluctuations. This describes how the simple diversification produces in portfolio management. The following graph shows how the simple diversification reduces the risk. The standard deviations of a portfolios are given in y axis angle number of randomly selected portfolio securities in the x axis.

The standard deviation was calculated for each portfolio and plotted. As the portfolio size increases, the total risk line starts declining. Its flattens out after a certain point. Beyond that limit, risk cannot be reduced. This indicates that spreading out the assets beyond certain level cannot be expected to reduce the portfolios total with below the level of undiversifiable risk.

Problems of vast diversification: spreading the investment on too many assets will give rise to problems such as purchase of poor performers, information adequacy, high research cost and transaction cost.

Purchase of poor performers: while buying numerous stocks, sometimes investors also buy stocks that will not yield adequate return.

Information inadequacy: if there are too many securities in a Portfolio, it is difficult for the portfolio manager to get information about their individual performance. The portfolio manager has to be in touch with the details regarding the individual company performance. Get all the information simultaneously is quite difficult.

High research cost: if a large number of stocks are included, before the inclusion itself the return and risk of the individual stock have to be analysed. Towards this end, lot of information has to be gathered and kept in store and these procedures involve high cost.

High transaction cost: when small quantity of stocks are purchased frequently, the investor has to Inka transaction cost then the purchase of large blocks at less frequent intervals. In spite of all these difficulties big Financial institutions purchase hundreds of different stocks. Likewise, mutual funds also invest in different stocks.

The Markowitz model

Most people agree that holding two stocks is less risky than holding one stock. For example, holding stocks from textile, banking and electronic companies is better than investing all the money on the textile company's stock. But building up the optimal portfolio is very difficult. Markowitz provides the answer do it with the help of risk and return relationship.

Assumptions: the individual investor estimates risk on the basis of variability of return that is the variance of returns. Investors decision is solely based on the expected return and variance of return only.

For a given level of risk, investor prefers higher return to lower return. Likewise, for a given level of return investor prefers lower risk than higher risk.

The concept: in developing his model, markowitz had given up the single stock portfolio and introduced diversification. The single security portfolio would be preferable if the investor is perfectly so that his expectation of highest return would turn out to be real. In the world of uncertainty, most of the risk averse investors would like to join Markowitz rather than keeping a single stock, because diversification reduces the risk.

Minimising Risk Exposure In Investment

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Every investor wants to guard himself from the risk. This can be done by understanding the nature of the risk and careful planning. The following paragraph gives an agenda for protecting the investors from the different types of risks:

Market risk protection

1. The investor has to study the price behaviour of the stock. Usually history repeats itself even though it is not in perfect form. The stock that shows a growth pattern may continue to do so for some period. The Indian stock market expects the growth pattern to continue for some more time in information technology stock and depressing conditions to continue in the textile related stock. Some stocks may be cyclical stocks. It is better to avoid such type of stocks.

2. The standard deviation and beta indicate the volatility of the stock. The standard deviation and beta are available for the stocks that are in the indices. The National Stock Exchange News bulletin provides this information. Looking at the beta values, the investor can gauge the risk factor and make wise decision according to his/her risk tolerance.

3. Further, the investor should be prepared to hold a stock for a period of time to reap the benefits of the rising trends in the market. He should be careful in the timings of the purchase and sale of the stock. He should purchase it at the lower level and should exist at a higher level.

Protection against interest rate risk

1. Offering suggested solution for this is to hold the investment to maturity. If he sells it in the middle due to fall in the interest rate, the capital invested would experience a heavy loss.

2. The investors can also buy treasury bills and bonds of short maturity. The portfolio manager can invest in the treasury bills and the money can be invested in the market to suit with prevailing interest rate.

3. Another suggested solution is to interest in bonds without different maturity dates. When the bonds mature in different dates, reinvestment can be done according to the changes in the investment climate. Maturity diversification can yield the best results.

Protection against inflation

1. The general opinion is that the bonds or debentures with fixed return cannot solve the problem. If the bond yield is 13 to 15% with low risk factor, they would provide hedge against the inflation.

2. Another way to avoid the risk is to have investment in short term securities and to avoid long term investment. The rising consumer price Index may wipe off the real rate of interest in the long term.

3. Investment diversification can also solve this problem to a certain extent. The investor has to diversify his investment in real estates, precious metals, arts and antiques along with investment in securities. One cannot be sure that different types of investments would provide the perfect hedge against inflation. It can minimise the loss due to the fall in the purchasing power.

Protection against business and financial risk

1. To guard against the business risk, the investor has to analyse strength and weakness of the industry to which the company belongs. If weakness of the industry is too much of government interference in the way of rules and regulations, it is better to avoid.

2. Analysing the profitability trend of the company is essential. The calculation of standard deviation would yield the variability of the return. If there is inconsistency in the earnings, better to avoid it. The investor has to choose a stock of consistent track record.

3. The financial risk should be minimised by analysing the capital structure of the company. If the debt equity ratio is higher, the investors should have a sense of caution. Along with the capital structure analysis, he should also take into account of the interest payment. In a boom period, the investor can selector highly level company but not in a recession.

Warrants

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A warrant is a better document of title to buy a specified number of equity shares at a specified price. Usually warrants can be exercised over a number of years. The life period of warrants are long. Warrants are generally offered to make the bond or preferred stock offering more attractive. Bonds may bear low interest rate but the warrants offered along with them helps the investor to enjoy the equity appreciation value. Warrants are detachable. The investor can sell the warrants separately and they are traded in the market.

The person who is holding the warrant cannot enjoy the benefits of the equity holder before the conversion of the warrant. The price at which rewards are converted is called exercise price. The exercise price face always greater than the current market price of the respective equity at the time of issue of warrant. When warrants are issued along with host securities and detachable, they are known as detachable warrants. In some cases the warrants can be sold back to the company before the expiry date, such type is known as puttable warrants. Naked warrants are issued separately and not with any host security. The investor has the option to convert it into equity or bond.

Advantages of warrants

1. Warrants make the non convertible debentures and other debentures more attractive and acceptable.

2. The debentures along with the warrants are able to create their own market and reduce the company's dependence on Financial institutions and mutual funds.

3. Since the exercise of the warrants take place at a future date, the cash flow and the capital structure of the company can be planned accordingly.

4. The cost of debt is reduced if warrants are attached to it. Investors are willing to accept lower interest rate in the anticipation of enjoying the capital appreciation of equity values at a later date.

5. Warrants provide high degree of leverage to the investor. He can sell the warrant in the market or convert it into stocks or allow it to lapse. But if the conversion is compulsory, even if there is a fall in the price of the shares, the investor has to shell out money from pocket.

6. Warrants are liquid and they are traded in stock exchanges. Hence, the investor can sell the warrants before exercising them.

Bond

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Bond is a long term debt instrument that promises to pay a fixed annual sum as interest for a specified period of time. The basic features of bonds are given below:

1. Bonds have face value. The face value is called Par value. The bonds may be issued at par or at discount.

2. The interest rate is fixed. Sometimes it may be variable as in the case of floating rate bond. Interest is paid semi-annually or annually. The interest rate is known as coupon rate. The interest rate is specified in the certificate.

3. The maturity date of the bond is usually specified at the issue time except in the case of perpetual bonds.

4. The redemption value is also stated in the bonds. The redemption value may be at par value or at premium.

5. Bonds are traded in the stock market. When they are traded the market value may be at premium or at discount. The market value and redemption value need not be the same.

Types of bonds

1. Secured bonds and unsecured bonds: The secured bond is secured by the real assets of the issuer. In the case of the unsecured bond the name and fame of issuer may be the only security.

2. Perpetual bonds and redeemable bonds: Bonds that do not make sure on never mature are called perpetual bonds. The interest alone would be paid. In the redeemable Bond, the bond is redeemed after a specific period of time. The redemption value is specified by issuer.

3. Fixed interest rate bonds and floating interest rate bonds: In the fixed Interest rate bonds, the interest rate is fixed at the time of the issue. Whereas in the floating interest rate bonds, the interest rate changes according to the prefixed norms. For example, in December 1993, State Bank of India issued floating interest rate bonds worth off ₹500 Crores packing the interest rate with its own 3 and 5 years fixed deposit rates to provide built in flexibility to investors.

4. Zero coupon Bond: these bonds sell at a discount and the face value is repaid at maturity. The origin of this type of Bond can be traced in the US security market. The high value of the US government security prevented the investors from investing their money in the Government Security. Big brokerage companies like Merril Lynch, pierce and others purchased the government securities in large Quantum and resold them in smaller denomination - at a discounted rate. The difference between the purchase cost and face value of the bond is the gain for the investor. Investor does not receive any interest on the bond, conversion price suitably arranged to protect the interest loss to the investor.

The merit of this bond is that the company does not have the burden of servicing the debt during the execution period of the project. The repayment could be adjusted to fall after the completion of a project. This could result in considerable cost savings for the company.

5. Deep discount bonds: deep discount bond is another form of zero coupon Bond. The bonds are sold at large discount on their nominal value; interest is not paid for them and they mature at par value. The difference between the maturity value, MB issue price serves as an interest return. The deep discount bonds maturity period mein winners from 3 years to 25 years or more. IDBI was the first to issue deep discount bonds in India in 1992 with varying maturity period options. ICICI also issued deep discount bonds with four optional maturity period in 1997. Early redemption option is provided at the end of the 6th, 12th and 18th year.

6. Capital indexed bonds: in the capital index bond, principal amount of the bond is adjusted for inflation for every year. For example, an investment of ₹1000 in the inflation indexed bonds on the investors a semi annual interest income for the five years period. The reselling of the principal amount is done semi-annually based on the WPI movements. The the principal amount of the bond is adjusted for inflation for each of the years. On the inflation adjusted principal, the coupon rate of 6% is worked.

The benefit of the bond is that it gives the investor an increase in return by taking inflation into account. The investor enjoys the benefit of a return on his principal, which is equal to the average inflation between the issue (purchase) and maturity period of the instrument. To avail the benefit of inflated principal, investor needs to hold be instrument for the entire five year period.

If the investor wants to exit early, he can do it through the secondary market. The value of the principal repayment will be adjusted by me index rate, which will be announced by the RBI 2 weeks prior to the repayment of the principal. The IR is worked out as follows = Reference WPI as in August 2002/ Base WPI (as in August 1997).

In the Indian situation indexed bonds offer more scope since the economy is highly sensitive to the inflation. According to the study conducted by the Development Research Group (DRG) of the RBI, during the period 1972-93, the real rate of interest was negative for most of the years. Average value over the period is -1.84 %.

This situation warrants and inflation hedge. The inflation protection provided by the bond guarantees real rate of return which means that with the rise in inflation, the returned from the inflation-protected bond will rise. In 1997 capital indexed bond is introduced.

Debenture

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According to the Companies Act 1956 " Debenture includes debenture stock, bonds and any other securities of company, brother constituting a charge on the assets of the company or not". Debentures are generally issued by the private sector companies as a long term promissory note for raising loan capital. The company from sister to pay interest and principal as stipulated. Bond is an alternative form of debenture in India. Public sector companies and Financial institutions issue bonds.

Characteristic features of debentures

The main characteristics feature of debentures are listed below:

1. Form: it is given in the form of certificate of indebtedness by the company specifying the debt of redemption and interest rate.

2. Interest: the rate of interest is fixed at the time of issue pixel which is known as contractual or coupon rate of interest. Interest is paid as a percentage of the par value of the debenture and may be paid anually, semi-annually or quarterly. The company has the legal binding to pay the interest rate.

3. Redemption: As stated earlier the redemption date would be specified in the issue itself. The maturity period may range from 5 years to 10 years in India. They may be redeemed in installments. Redemption is done through a creation of sinking fund by the company. A trustee incharge of the fund buys debentures either from the market or owners. Creation of the sinking find eliminates the risk of facing financial difficulty at the time of redemption because redemption requires huge sum.

Buyback provisions help the company to reading 2 debentures at a special price before maturity date. Usually the special prices higher than the par value of the debenture.

4. Indenture: Indenture is a trust deed between the company issuing debenture and the debenture trustee who represents the debenture holders. The trustee takes responsibility of protecting the interest of DE debenture holders and ensures that the company fulfills the contractual obligations. Financial institutions, banks, insurance companies law firm attorneys act as trustees to the investors. In the indenture the terms of the agreement, description of debentures, rights of the debenture holders, rights of the issuing company and the responsibilities of the company are specified clearly.

Types of debentures

Debentures are classified on the basis of the security and convertibility:

1. Secured or unsecured

2. Fully convertible debenture

3. Partly convertible debenture

4. Non convertible debenture

Secured or unsecured debentures: a secured debenture is secured by a lien of the companies specific assets. In the case of default the trustee can take hold of the specific asset on behalf of the debenture holders. In the Indian market secured debentures have a charge on the present and future immovable assets of the company.

When the debentures are not protected by any security they are known as unsecured or naked debentures. In the American capital market debenture means unsecured bonds while bonds could be secured or unsecured. Unsecured debentures find it difficult to attract investors because of the risk involved in them. Generally the benches are treated by the credit rating agencies.

Fully convertible debenture: this type of debenture is converted into equity shares of the company on the expiry of specific period. The conversion is carried out according to the guidelines issued by SEBI. The FCD carries lower interest rate than other types of debentures because of the attractive feature of convertibility into equity shares.

Partly convertible debenture: This debenture consists of two parts namely convertible and non-convertible. The convertible portion can be converted into shares after a specific period. Here, the investor has the advantage of convertible and non convertible debentures blended into one debenture. Ex. Procter and Gamble had issued PCD of of ₹200 each to its existing shareholders. The investor can get a share for ₹65 with the face value of ₹10 after 18 months from allotment.

Non convertible debenture: Non-convertible debentures do not confirmed any option on the holder to convert the debentures into equity shares and dividend at the expiry of the specified period.

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Equity shares

Equity shares are commonly referred to common stock or ordinary shares. Even though the words shares and stocks interchangeably used, there is a difference between them. The term Stock is the aggregate of a member's fully paid up shares of equal value merged into one fund. It is a set of shares put together in a bundle. The "Stock" is expressed in terms of money and not as many shares. Stock can be divided into sections of any amount and such fractions may be transferred like shares.

Share certificate means a certificate under the common seal of the company specifying the number of shares held by any member. Share certificate provides the prima facie evidence of title of the members to such shares. This gives the shareholder the facility of dealing more easily with his shares in the market. It enables him to sell his shares by showing marketable title.

Equity shares have the following rights according to the section 85(2) of the Companies Act 1956.

1. Right to vote at the general body meeting of the company.

2. Right to control the management of the company.

3. Right to share in the profits in the forms of dividend and bonus shares.

4. Right to claim on the reciprocal after repayment of all claims in the case of winding up of the company.

5. Right of pre-emption in the matter of issue of New capital.

6. Right to apply to court if there is any discrepancy in the rights set aside.

7. Right to receive a copy of the statutory report, copies of annual accounts along with audit report.

8. Right to apply the central government to call an annual meeting when a company fails to call such a meeting.

9. Right to apply the Company Law Board for calling and extraordinary general meeting.

Importance of equity shares

In a limited company equity shareholders are liable to pay the company's debt only to the extent of the share in the paid up capital. The equity shares have certain advantages. The main advantages are:

a. Capital appreciation

b. Limited liability

c. Free tradability

d. Tax advantages

e. Hedge against inflation

Capital appreciation: Capital appreciation is a rise or increase in an investment's market price over a time period. Capital appreciation is the difference between the purchasing price and the selling price of an equity shares. For example, If an investor bought a stock for ₹100 per share, and the stock price rises to ₹120, the investor has earned ₹20 in capital appreciation.

Limited liability: Limited liability is a type of legal protection for shareholders and owners that prevents individuals from being held personally responsible for their company's debts or financial losses. Staying at above of your accounting and bookeeping has never been so easy.

Free tradability: There is no limitations of trading of equity shares. The shareholders are free to sell their securities at their own will. Due due to the launch of online trading of securities it had made easier for shareholders to hold or trade their securities freely, with less brokerage charges.

Tax advantages: When you invest your investible money in shares, you make capital gains on the sale of shares which are taxable. Conversely, if you sell a listed equity share after a one year from the date of purchase, you earn long-term capital gains (LTCG). Long term capital gains in excess of Rs 1lac are taxable at the rate of 10% without the benefit of indexation.

Hedge against inflation: Equities have traditionally been viewed as an inflation hedge asset class. The theory is simple: a company's revenues and earnings would also rise with inflation over the course of time. From a long-term perspective of shareholders objectives, equities may therefore be considered an inflation hedge.

Options for investing surplus funds

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Companies often have surplus funds for a short period of time before they are required for capital expenditures, loan repayment, for some other purpose. These funds may be deployed in a variety of ways. At one end of the spectrum is the term deposit (to be made for a minimum period of 46 days) in a bank, virtually a risk free investment, that offers are relatively modest rate of interest; at the other end of the spectrum is the investment in equity shares which can produce highly volatile returns. In between life several other venues like units public sector bonds treasury bills in corporate deposits and bill discounting. This section looks at the options available for deploying surplus funds.

Units of the unit 1964 scheme

The most important mutual fund scheme in India, the unit scheme 1964 of the Unit Trust of India, has the following features:

a) it is an open ended scheme as it accepts funds from investors and also permits them to withdraw their investment on a continuing basis.

b) the units have a face value of rupees 10. The sale and purchase price of units are not squarely based on the net asset value per unit, as should be the case for a truly open ended scheme. Instead they are determined administratively in such a manner that they rise gradually over time.

The units of the unit 1964 scheme offer a convenient and attractive Avenue for investing short term funds for the following reasons:

a) There is a very active secondary market for units. For example, if the sale and repurchase prices fixed by the unit Trust of India are, say, ₹ 16.00 and ₹15.00, respectively, the units are traded activity in the secondary market around ₹15.60 with a spread of few paise between the buying and selling rates.

b) unit appreciate overtime in a fairly predictable manner as a Unit Trust of India makes a gradual upward revision in its selling and purchase price from July to June.

IT in the modern organisation

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In the modern competitive world, it is impossible to think of life without information. The whole world depends upon how quickly the information is conveyed from one person or place to another. To keep the system up to date, we need to gather information from various sources like newspaper, radio, magazines, televisions, internet etc.

Information is significant to a business. It is vital for managers, scientists, and for practitioners in any business organisation to take decisions, to prepare plans, to control activities, to pursue research at advanced level, to provide services, etc. The organisation structure must be capable of managing this information throughout the information lifecycle regardless of source or format (data, paper, documents, electronic documents, audio, video, etc.). Information, formal or informal, is however to be managed.

Timeliness refers to that the information should be available when needed. If information is provided to early, it may no longer be current when used. If the information is supplied to late, it will be of no use.

The term information technology is widely used nowadays. It refers to the subjects related to creating, managing, processing and exchanging information. It defines an industry that uses computers, networking software programming, and other equipment and processes to store, process, retrieve, transmit and protection information.

In this area of Information technology, computer science used in almost all walks of life. Computers of widely used in several fields, such as education, communication, entertainment, banking, medicine, weather forecasting and scientific research. We can use computers to perform a variety of tasks, such as drafting letters, performing calculations, maintaining records about students, creating question papers, analysing exam results and even creating attractive pictures. In spite of the field of working, today every person need to have basic knowledge of computers to excel in his or her respective field. IT proficiency allows a person to be an active and effective participant in the emerging information for knowledge society. To be successful in today's information on knowledge age, we must have knowledge and understanding of computers and their uses.

Managing information technology in organisations

A modern organisation possesses the following amount of information resources:

Hardware: These are the peripheral devices like monitor, processor, printer, keyboard and mouse etc. used to perform input, processing and output activities.

Software: These are the program for set of instructions that allowed the hardware to process the data for producing useful information from the data.

Data bases: These are the Sadiq collection of associated files for tables containing related data. A database represents an organised collection of facts and information in the form of table.

Network: A computer network is a system in which multiple computers are connected to each other to share information and resources. The connections between the computers are established using either cable or wired media or wireless media. The best known computer network is the internet.

People: The most important element in Computer based information systems. Every Computer based information system needs people if it is to be useful. It can be developer of Computer based information system or the persons who operate and maintain the Computer based Information systems such as managers and technical support staff.

Procedures: Procedures include the strategies, policies, methods and rules used for combining the above components to process information and produce the preferred output.

It is very difficult to manage Information technology resources because all the above mentioned resources are scattered throughout the organisation; some of them change frequently.

It is very important to manage information system properly because the acquisition, operation and maintenance of these systems involve a great amount of money. The information system department and the end users take the responsibility of management of information resources. The information system department is responsible for corporate level and shared resources, in the end users are responsible for departmental resources. In other words information system department will the system and the end users operate and maintain them.

The role of information system department is to manage information technology in organisation through following ways:

a) Designing strategic information systems

b) Infrastructure planning, development and control

c) Incorporating E-Commerce into the business

d) Incorporating internet, intranets and extranets in organisation for system integration

e) Educating the non information system managers about information technology

f) Supporting end user computing

g) Partnering with the executive level that runs the business

h) Actively participating in business process reengineering

I) Actively analysing innovative ideas about information technology

j) Making business alliances with vendors and information system departments in other organisations.

Data mining

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Data mining is defined as extracting the information from the huge set of data and using it to make crucial business decisions. In other words we can say that mining is mining the knowledge from data that improves business efficiency.

Data mining brings a lot of benefits to businesses, society, governments as well as individual. However privacy, security and misuse of information are the big problems if they are not addressed and resolved properly.

Need of Data Mining

We need data mining mainly due to following reasons:

In field of information technology, we have huge amount of data available information from the huge set of data is called data mining. This information further can be used for various applications such as market analysis, fraud detection, customer retention, production control, science exploration etc.

We are living in extremely competitive world today where once more information can make or break a business. More and more insight is needed to get pass the competitors in any business. Managers and executives of these organisations are always under pressure to obtain and apply more and more effective methods of carrying out their business. This ever increasing need of more and more business intelligence has motivated the development of data mining more than anything.

Advantages of data mining

Data mining brings a lot of advantages when using in a specific industry. Some of the main advantages are:

1. Data mining predict future trends, customer purchase habits etc. Based on these trends, marketers can direct their marketing attentions to their customers with more accuracy.

2. Data mining helps marketing companies to build models based on historical data to predict who will respond to new marketing campaign such as direct mail, online marketing campaign etc. Through this prediction, marketers can have appropriate approach to sell profitable products to targeted customers with huge satisfaction.

3. In addition, data mining Mahal marketers in protecting which products their customers may be interested in buying. Through this prediction, marketers can surprise their customers and make the customers shopping experience become a pleasant one.

4. Data mining can help banks to detect fake credit card transaction to help credit card's owner prevent their losses.

5. By applying data mining in operational engineering data, manufacturers can detect faculty equipments and determine optimal control parameters.

6. Data mining gives Financial institutions information about loan information and credit reporting. By building a model from historical customers data, the bank and financial institution can determine good and bad loans.

7. Data mining can assist researchers by speeding up their data analysing process; thus, allowing them more time to work on other projects.

Disadvantages of data mining:

There are few disadvantages of data mining, which are:

1. Because of privacy issues, people are afraid of their personal information is collected and used in an ethical way that potentially causing them a lot of trouble. Businesses collect information about their customers in many ways for understanding their purchasing behaviours trends. However businesses don't last forever, some days they may be acquired by other or gone. At this time the personal information on probably is sold to other or leak.

2. Businesses on information about the employee and customers including social security number, birthday and payroll etc. There have been a lot of cases that hackers were accesses and stole big data of customers from big Corporation with so much personal and financial information available. So, security is a big issue in data mining.

3. Information collected through data mining intended for marketing of ethical purposes can be misused by unethical people.

4. Data mining technique is not perfectly accurate therefore if inaccurate information is used for decision making will cause serious consequence.

Applications of data mining

Today, various industries organisations have been adopting data mining to gain competitive advantages and help business grow. Some of the common application area of data mining are:

Data mining in sales/marketing: data mining enables the businesses to understand the patterns hidden inside past purchase transactions, thus helping in plan and launch new marketing campaigns in prompt and cost-effective way. In sales and marketing, data mining is used for market basket analysis to provide insight information on what product combinations were purchased, when they were bought and in what consequence by customers. This information helps businesses to promote their most profitable products to maximize the profit.

Data mining in banking or Finance: data mining is used to identify customer loyalty by analysing the data of customers purchasing activities such as the date of frequency of forces in a period of time, total monetary value of all purchases and when the last purchase was. After analysing those dimensions, the relative measure is generated for each customer. To help Bank to retain credit card customers, data mining is used. By analysing the past data, data mining can help banks to predict customers that likely to change their credit card affiliation so they can plan and launch different special offers to retain those customers.

Data mining in healthcare and insurance: the growth of the insurance industry is entirely depends on the ability of converting data into the knowledge, information on intelligence about customers, competitors and its markets. Data mining is applied in insurance industry lately but brought reminders competitive advantages to the companies who have implemented it successfully. The data mining applications in insurance industry I am listed below:

a) data mining is applied in claims analysis such as identifying which medical procedures are claimed together.

b) data mining enables to forecast which customers will potential purchase new policies.

Data mining in transportation: data mining helps to determine the distribution schedules among warehouses and outlets and analyse loading patterns.

Data mining in fraud detection: data mining is also used in fields of credit card services and telecommunication to detect fraud. Infra telephone call it helps to find destination of call, duration of call, Time of day or week.

Data mining in telecommunication: today the telecommunication industry is one of the most emerging industries providing various services such as facts, pager, cellular phone, internet messenger, images, email, web data transmission etc. Due to the development of new computer and communication technologies, the telecommunication industry is rapidly expanding. This is the reason why data mining is become very important to help and understand the business.

Data mining in telecommunication industry helps in identifying the telecommunication patterns, catch fake activities, make better use of resource and improve quality of service.

Difference between the indices

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The are different from each other up to certain extent. Sometimes the sensex may move up to buy 100 points but NSE Nifty may move up only 40 points. The main factors that differentiate one index from the other are given below,these are the difference between the indices:

a) The number of the component stocks

b) The composition of the stocks

c) The weights

d) Base year

The number of the components stocks

The number of stocks in an index influences the behaviour of the index. If the number of component stocks is larger, it would be a representative sample capable of reflecting the market movement.

The sensex has 30 scrips like the Dow Jones Industrial average in the U.S.. At the same time BSE 100 (national), BSE-2000the Dollex, (dollar equivalent of BSE-200), the RBI index (338 stocks) and Nifty (50 stocks) are also widely used. Private organisations like CRISIL has constructed its own index and name it as CRISIL-500. From the above examples it is clear that the number of scrips different from one index to another and hence their movement also vary. BSE National index is considered to be more representative than sensex because it has 100 stocks. Out of 100, 22 are coated on the BSE and the rest are listed on the BSE and other exchanges.

Decomposition of the stocks

The composition of the stocks in the index should reflect the market movement as well as the macroeconomic changes. The centre for monitoring Indian economy maintains an index. It often changes the composition of the index so as to reflect the market movements in a better manner. Some of the scrip's traded volume may fall down and at the same time some other stock may attract the market interest. In such a case the script that has lost the market interest should be drop and others must be added. Only then, the index would become more representative. In 1993, Sensex drop one company and added another. In August 1996 Sensex was thoroughly revamped. Half of the scrips was changed. The composition of the Nifty was changed in April 1996 and 1998. CRISIL-500 was changed in November 1996. In October 1998 the Nifty junior index composition has been changed. Recognising the importance of the information technology scrips, bear included in the index.

The weights

The weight assigned to each companies scrip also influences the movement of the index. The indices may be weighted with the price or value. The Dow Jones industrial average and Nikkei stock average of 225 scrips of Tokyo stock exchanges are weighted with the price. A price weighted index is computed by adding the current prices of the stocks in the stock exchange and dividing the sum by the total number of stocks. The stocks with high price influence the index with low priced stock in the sample. The number of stocks is usually adjusted for any stock splits, bonus and right issues.

In the value weighted index the total market value of the share (the number of outstanding shares multiplied by the current market price) is the weight. Most of the Indus all over the world and in India except Economic Times Ordinary share index are weighted with the value. The script influences the index in proportion to its importance in the market. The price changes that occur in script with heavy market capitalization dominates the changes that occur in the index. The price changes caused by bonus issue or right of a particular scrip are reflected in the index. With the bonus issue or right issue the number of outstanding shares and their values used to change.

In an unweighted index, all stocks carry equal weights. The price or market volume of the scrip does not affect the index. The movement of the price is based on the percentage change in the average price of of the stocks in the particular index. Here it assumes that equal amount of money is invested in each of the stocks in the index. Value line average in the US is calculated without weights but Geometric mean is used in the computation instead of arithmetic mean.

Base year

The choice of base year also leads to variations among the index. The base year different from each other in the various indices. The base year should be free from any unnatural fluctuations in the market. If the base year is close to the current year, the index would be more effective in reflecting the changes in the market movement. At the same time if it is too close, the investor cannot make historical comparison.

New technologies in IT Sector

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Information technology has been evolving since globalization. Let's see in detail what all new technologies has been evolved in business information technology:

Introduction to hypermedia

Hypermedia is extension to hypertext that supports links among any set of multimedia objects including graphics, sound, and video elements in addition to text elements. Hypermedia is the ability to open new web pages by clicking images, movies, graphics and other media apart from text to create a non linear network of information.

For example, whenever you flown the mouse cursor over the image or video and the cursor changes, usually into a small hand, it means that the element is hypermedia. Clicking the text, image, or video will open up a new location in your web browser. Therefore, you should only click a hypertext or hypermedia link when you are ready to leave the current page. If you want to open the link in a new window, you can usually right click the link and select "Open Link In New Window".

The internet is the best illustration of hypermedia. Apart from internet, lot of software makes use of both hypermedia and hypertext. Microsoft office suite that includes word processing, spreadsheet and presentation software allow hypermedia to be embedded into the documents created. For example, In Microsoft word, users can add hyperlink to any word and even add links to pictures. Microsoft PowerPoint has the same features for hypermedia.

Multimedia can be delivered using:

Optical disk (CD-based): it is one of the most cost effective methods of delivery multimedia materials. These devices are used to store large amounts of some combination of text, graphics, sound, and moving video. This media compact disc (CD), Digital Versatile Disc (DVD) and Bluray Disc (BD). The main features of this approach are:

a) Can store high and multimedia elements

b) Can be permanently stored and not changeable

c) Information can be quickly outdated

Distributed network: This method is suitable for web based content that is website. Files are generally compressed before transfer.

The main features of this approach are:

a) Limited in pictures size and low video resolution

b) Can be changes, damaged or deleted by irresponsible individuals.

c) Information can be updated easily and cheaper

Artificial intelligence

Artificial intelligence(AI) is a branch of computer science constant making computers behave like human that is a development of such computers that can think and respond like human beings. This is one of the fastest growing branches of computer science.

Application of artificial intelligence: Artificial intelligence has been used in a wide range of fields including Finance, hospitals and medicine, industry, music, games etc.

Finance: Bank use artificial intelligence systems to organise operations, invest in stocks, and managed properties. Banks use intelligence software applications to screen and analyse financial data.

Hospitals and medicine: A medical clinic and use artificial intelligence system to organise bed schedules, make a staff rotation, and provide medical information.

Industry: robot have become common in many industries. They are often given jobs that are considered dangerous to humans. Robots have proven effective in jobs that are very repetitive which may lead to mistakes or accidents due to all that same concentration and other jobs which humans may find degrading.

Aviation: Airlines use expert systems in place to monitor atmospheric conditions and system status. The plane can be put on autopilot once the course is set for the destination.

Weather forecast: Neural networks are used for predicting weather conditions. Previous data is fed to a neural networks which burns the pattern analysis that knowledge to predict weather patterns.

Speech Recognition: In the 1990's, Computer speech recognition reached a practical level for limited purposes. Speech understanding systems are capable of recognising several several thousand words continuous speech.

Natural language processing: Natural language processing gives machines the ability to read and understand the languages that human speak. Many researchers hope that a sufficiently powerful natural language processing system would be able to acquire knowledge on its own, by reading the existing text available over the internet. Some straight forward applications of natural language processing include Information retrieval (or text mining) and machine translation.

Computer vision: in computer vision, the systems are capable of face recognition.

Robotics: creating robots that could perform physical tasks that were too dangerous for boring for human beings was considered to be an important commercial application of artificial intelligence.

Business intelligence

Business intelligence (BI) refers to a computer-based technique that presents a collection of processes, tools and technologies helpful in achieving more profit by considerably improving the productivity, sales and service of an enterprise. With the help of business intelligence methods, the corporate data can be organised, analyse in a better way and then converted into a useful knowledge of information needed to initiate a profitable business action. Thus, business intelligence is about turning a raw, collected data into intelligent information by analysing and rearranging the data according to the relationships between the data items by knowing what data to collect and manage and in what context.

The main objective of business intelligence is to support better business decision making. Thus a business intelligence system can be called a decision support system (DSS).

Business intelligence tools are a type of application software design to retrieve, analyse and report data. The tools generally read data that have been previously stored in a data warehouse or data mart. Some commonly used business intelligence tools are- Spreadsheet, Data mining, Data warehousing, OLAP,etc.

Accompany collected raw data is an important asset where one can find solution to many of an organisation critical questions like what was the net profit for a particular product last year and what will be the says this year and what are the key factors to be focused on this year in order to increase sales?

Knowledge discovery in database

Knowledge discovery is a process that extracts implicit, potentially useful or previously unknown information from the data available in the database.

Let's examine the knowledge discovery process in detail

a) Data comes from where it of sources is integrated into a single data store for target data.

b) Data then is preprocessed and transformed into standard format.

c) The data mining algorithms processing data to the output in form of patterns for rules.

d) Then those patterns and rules are interpreted to new or useful knowledge or information.

The ultimate goal of knowledge discovery process is to find the patterns that hidden among the huge sets of data and interpret them to useful knowledge and information.

Data warehouses and data marts

Many organisations now use data warehouses to bring multiple databases together and make them available for analytical purposes.

Data warehouse is a collection of data, usually current and historical, derived directly from multiple databases that life organisation can use for analysis and decision making. The purpose, of course, is to bring key sets of data about or used by the organisation into one place. Its specific purpose is to support business decisions, not business operations. So, it is a decision support database that is main teen separately from the organisations operational database. The process of constructing and using data warehouses is called Data warehousing.

Bringing together so much data into a data warehouse makes analysis very difficult. To address this problem, organisations use what are called data marts.

Data marts of related set of data that are grouped together and separated out from the main body of data in the data warehouse. Data Marts are design to be made available to specific sets of users. For example, data about manufacturing can be put into a data mart and be made available to the production department. Human resource data can be put into another data mart and be provided to the human resources employees.

So, a data mart is a simple form of a data warehouse that is focused on a single subject, such as sales, finance or marketing. Data Marts are often built and controlled by single department within an organisation. Given their single subject focus, data mass usually draw data from only a few sources. Resources could be internal operational systems, a central data warehouse, or external data.

Data mining

Data mining is defined as extracting information from the shoot set of data and using it to make crucial business decisions. In other words we can say that data mining is mining the knowledge from the data that improve business efficiency.

Data mining brings a lot of benefits to business society, governments as well as individual. However privacy, security and misuse of information are the big problems if they are not addressed and resolved properly.

Online analytical processing

Let's quickly review the business model of a large retail operation. If you just look at days sales, you soon realise that the sales are interrelated with many business dimensions. The daily sales are meaningful only when they are related to the date of the sales, the products, the distribution channels, the stores, the the sales territories and a few more dimensions. Multidimensional views are inherently representative of any business model. For planning in making strategic decisions, managers and executive look into business data through scenarios. For example, compare actual sales against targets and against sales in prior periods. They examined the breakdown of sales by product, by store, by sales territory, by promotion and so on.

Online analytical processing systems are capable of analysing online a large number of past transactions for large number of data records and summarised them. This type of data is usually multidimensional in nature. So, OLAP can be defined as an online approach used to quickly provide answers to analytical queries that are multidimensional in nature.

Enterprise resource planning

ERP is an acronym for enterprise resource planning. Enterprise resource planning is business process management software that integrates with various functions that are essential to running a business, including inventory and order management, accounting, human resources, customer relationship management into one complete system to streamline processes and information across the entire organisation. An effective enterprise resource planning system integrates both internal and external information flows used by the organisation within a single, comprehensive solution. The enterprise resource planning software air generally runs on a variety of computer hardware and network configuration, including "on premises" or hosted.

Supply chain management

A supply chain is a network of facilities that performs the function of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organisations along the supply chain operated independently. These organisations understood the importance of humility effort to achieve a sustainable competitive advantage. Hence, these organisations are referred to collectively as the supply chain. The organisation that make up the supply chain are linked together through physical flows and information flows. Physical flows involve the transformation, movement, and storage of goods and materials. Information flows allow the various supply chain partners to co-ordinate their long-term plans, and to control the day-to-day flow of goods and material up and down the supply chain.

Supply chain management, then, is the active management of supply chain activities to maximize customer value. supply chain activities covers everything from product development, sourcing, production, and logistics, as well as the information systems needed to co-ordinate these activities.

Customer relationship management

Customer relationship management is a business strategy that builds long term, profitable companies relation with specific customers, clients and sales prospects. It involves technology to organise, manage, automate and synchronise customer interactions and data throughout the customer life cycle. Customer relationship management is a customer oriented feature that provides service response on customer request based on customers input, one-to-one solutions to customers requirements, direct online communication with customer and customer service centre that are intended to help customers solve their issues. The company may communicate with customers through various modes including the company's website, telephone, live chat, direct mail, marketing materials and social media.

Customer relationship management software stores customer related information into a single customer relationship management database. The Other main functions of this software include recording various interactions, automating various workflow processes such as tasks, calendars and alerts, and giving manages the ability to track performance and productivity based on information logged within the system.

Geographic information system

Geographic information system is a Computer based tool that allows you to create manipulate analyse store and display geographically reference information based on its location. A geographic information system technology allows you to compare the locations of different things in order to discover how they relate to each other.

Geographical information system integrate data hardware and software and different kinds of geographic information, such as digital maps aerial photographs, satellite images and global positioning system data.

Geographic information systems benefits organisations of all sizes and in almost every industry. There is a growing interest in an awareness of the economic and strategic value of geographic information systems. Common examples include real estate site selection, route or corridor selection, evacuation planning, conservation, natural resource extraction, etc. Making correct decisions about location is critical to the success of an organisation.

Geographic data stored in a vector graphics or raster graphics format. A vector format allows two dimensional data storage in terms of X and Y coordinates. A road or a river can be described as a series of x,y co-ordinate points. Nonlinear features such as town mountains can be stored as a closed loop of coordinates. The vector model is good for describing well delineated features. Arrested data format expresses data as a continuously changing set of grid cells.

IT support at different organisational levels

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An information system (IS) provides information to all the three level (top, middle and lower) management to accomplish their function more effectively and efficiently. The three level management activities are strategic planning, management control and operational control. The top-level deals with strategic planning, middle level with management control and low level with operational control respectively. These levels of Management activity are discussed below:-

Strategic planning

Strategic planning is top level management activity. It deals with long range planning activities of senior management. The senior management consists of board of directors and other chief executives. This activity tackles and addresses strategic issues to achieve the strategic growth of the business firm.

The common essentials of strategic planning include:

a) Define goals

b) Define policies and strategies

c) Determine organisational objectives

d) Develop and introduce new product in market

e) Expansion of business

f) Business aquisition and mergers

Top management may rely on executive information systems for some of their decision-making and forecasting. Strategic managers make decisions that affect the long-term impact in the organisation. The decision maker developed objectives and deals with required resources to accomplish this objectives. Sims decisions are made considering a long period of time, thus involved huge investments.

Management control for tactical management:-

Management control is middle level management activity. It serves the monitoring, controlling, decision making, and administrative activities of middle managers of the business organisation. Management information system (MIS) provide the primary support at this level, along with some types of DSS. It involves the decision for the subordinates on the basis of general guidelines received from the top level management. The managers develop medium term planning and defining objective at the departments. These managers find out the finest operational measures to accomplish this strategic decision set by the top level management.

The common essentials of Management control include:-

a) Acquisition of resources

b) Acquisition tactics

c) Budget monitoring

d) New product establishment

e) Profit centres to measure performance

f) Decision on control actions

g) Formulate new decision rules

Operational management:-

Operational management is lower level management activity. It deals with short-term decisions for current operations. The main objective of this activity is to use available facilities and resources in effective and efficient way within budget constraints. These managers implements policies handed over to them by their superiors.

The common essentials of operational management includes:-

a) Scheduling

b) Promotional efforts

c) Cash deposits

d) Credit decisions

e) Flow of material

f) Preparation of payroll

g) Inventory management

h) Periodic analysis of sales

Theories of Financing choices

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Two theories are commonly advanced to explain real world corporate financing behaviour, that is trade off theory and the pecking order theory.

Trade off theory

While using debt-equity ratio, financial managers of a look at the tradeoff between the tax provided by the cost of financial distress. Following figure shows the nature of the trade-off.

According to the trade off theory, profitable firms with stable, tangible assets would have higher debt-equity ratios. On the other hand, unprofitable forms with risky, intangible assets tend to have lower debt equity ratio.

How well does the trade of theory explain corporate financing behaviour ? It explains reasonably well some industry differences in capital structures. For example, power companies and refineries use more that and their assets are tangible and safe. High- tech growth companies, on the other hand, dirilis because the assets are mostly intangible and somewhat risky.

The trade off theory, however, cannot explain why some profitable company depend so little on debt. For example, Hindustan lever limited and Colgate Palmolive India limited, two highly profitable companies, use very little debt. They pay large amounts by way of income tax which they can possibly saved by using death without causing any concern about their solvency.

Pecking order theory

There is an alternative theory which explains why a profitable firms used little debt:-

a) internal Finance (retained earnings)

b) debt Finance

c) external equity Finance

A file first taps retained earnings. Its timely attraction is that comes out of profits and not much effort is required to get it. Further, the capital market ordinary does not view the use of retained earnings negatively.

When the financing needs of the firm exceed its retained earnings. It seeks debt finance. There is very little scope for debt to be mispriced, a debt issue does not ordinarily cause concern to investors. Also, A debt issue prevents dilution of control.

External equity appears to be the last choice. A great deal of effort may be required in obtaining external equity. More important, while retained earnings is not regarded by the capital market as a negative signal, external equity is often perceived as 'bad news'. Investors generally believed that a firm issues externally equity when it considers it stock over price in relation to its future prospects.

Thus, according to the pecking order theory, there is no well defined target debt equity ratio, is there too kind of equity, internal and external. While the internal equity (retained earnings) if at the top of the pecking order, the external equity is at the bottom. The pecking order theory explains why highly profitable forms generally use little debt. The borrow less as they don't need much external finance and not because they have a low target debt- equity ratio. On the other hand, less profitable firms borrow more because their financing needs exceed retained earnings and debt finance comes before external equity in the pecking order.

Reference: Fundamentals of Financial Management by Prasanna Chandra.

Approaches in portfolio construction

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Portfolio is a combination of securities such as stocks, bonds and money market instruments. The process of blending together the broad asset classes so as to obtain optimal return with minimum risk is called portfolio constructions. Diversification of investments helps to spread risk over many assets. A diversification of securities gives the assurance of obtaining the anticipated return on a portfolio. In a diversified portfolio, some securities may not perform as expected, but others may exceed the expectation and making the actual return of the portfolio reasonably close to the anticipated one. Keeping a Portfolio of single security many to a greater likelihood of the actual return somewhat different from that of the expected return. Hence, it is a common practice to diversify securities in the portfolio.

Approaches in portfolio construction

Commonly, there are two approaches in the construction of the portfolio of securities that is traditional approaches and markowitz efficient Frontier approach. In the traditional approach, investors need in terms of income and capital appreciation are evaluated and appropriate securities are selected to meet the needs of the investor. The common practice in the traditional approach is to evaluate the entire financial plan of the individual. In the modern approach, portfolios are constructed to maximize the expected return for a given level of risk. Use portfolio construction in terms of the expected return and the risk associated with obtaining the expected return.

1. Traditional approach

The traditional approach basically deals with two major decisions. They are:

a) Determining the objectives of the portfolio.

b) Selection of securities to be included in the portfolio.

Normally, this is carried out in 4 to 6 steps. Before formulating the objectives, the constraints of Investor should be analysed. Within a given framework of constraints, objectives are formulated. Then based on the objectives, securities are selected. After that, the risk and return of the securities should be studied. The investor has to assess the major business categories that he or she is trying to minimise. Compromise on risk and non risk factor has to be carried out. Finally relative portfolio weights are assigned to securities like bonds stocks and debentures and then diversification is carried out.

Analysis of Constraints: The constants normally discussed are: income needs, liquidity, time horizon, safety tax considerations and the temperament.

Income needs: the information depend on the need for income in constant rupees and current rupees. The need for income in current rupees arises from the investors need to meet all or part of the living expenses. At the same time inflation may erode the purchasing power, the investor may like to offset the effect of the inflation and so, needs income in constant rupees.

a) need for current income: The investor should establish the income which the portfolio should generate. The current income made depends upon the entire current financial plan of the investor. The expenditure required to maintain a certain level of standard of living and all the other income generating sources should be determined. Once this information is arrived at, it is possible to decide how much income must be provided for the portfolio of securities.

b) need for constant income: inflation reduces the purchasing power of the money. Hence, the investor estimates the impact of inflation on his estimated stream of income and tries to build a portfolio which could offset the effect of inflation. Funds should be invested in such securities where income from them might increase at a rate that would offset the effect of inflation. The inflation or purchasing power risk must be recognised but this does not pose a serious constraint on portfolio if growth stocks are selected.

Liquidity: Liquidity need of the investment is highly individualistic of the investor. If the investor prefers to have high liquidity, then funds should be invested in high quality short term debt maturity issues such as money market funds, commercial papers and shares that are widely traded. Keeping the funds in shares that are too early traded or stocks in closely held business and real estate lack liquidity. The investor should plan his cash drain and the need for net cash inflows during the investment period.

Safety of the principal: Another serious constraint to be considered by the investor is a safety of the principal value at the time of liquidation. Investing in bonds and debentures is safer than investing in the stocks. Even among the stocks, the money should be invested in regularly traded companies of longstanding. Investing money in the unregistered Finance companies may not provide adequate safety.

Time horizon: Time horison is the investment planning period of the individuals. This varies from individual to individual. Individuals risk and return preferences are often described in terms of his "life cycle". The stages of the life cycle determined the nature of investment. The first stage of early career situation. At the career starting point assets are lesser than their liabilities. More goods are purchased on credit. His house might have been built with the help of housing loan scheme. His major asset maybe the house he owns. His priority to what investments may be in the form of savings for liquidity purposes. He takes life insurance for protecting him from unforeseen events like death and accidents and then he thinks of the investments. The investor is young at this stage and has long horizontal of life expectancy which possibilities of growth in income, he can invest in high waist and growth oriented investments.

The Other stage of the time horizen if the mid career individual. At this stage, his assets are larger than his liabilities. Potential pension benefits are available to him. But this time establishes his Investment program. The time horizont before him is not as long as the earliest age and he wants to protect his capital investment. He may wish to reduce the overall risk exposure of the portfolio but, he may continue to invest in high risk and high return securities.

The final stage is the late career or the retirement stage. Here, the time horizon of the investment is very much limited. He needs stable income and one he retires, the size of income he needs from investment also increases. In this stage, most of his loans are repaid by him and his assets far exceed the liabilities. His pension and life insurance programs are completed by him. He shift his investment to low return and low risk category investments, because safety of the principal is given priority. Mostly he likes to have a lower risk with high interest or dividend paying component to be included in his portfolio. Thus, the time horizon puts restrictions on the investment decisions.

Tax consideration: Investors in the income tax paying group considered the tax concessions they could get from their investments. For all practical purpose, they would like to reduce the taxes. For income tax purpose, interest and dividends are taxed under which head "income from other sources". The capital appreciation is taxed under the head "capital gains" only when the investor sells the securities and realises the gain. The tax is done at a concessional rate depending on the period for which the asset has been held before being sold. From the tax point of view, the form in which the income is received that is interest, dividend, short term capital gains and long term capital gains are important. If the investor cannot avoid taxes, he can delay the taxes. Investing in Government bonds and NSE can avoid taxation. Discount stream makes the investor to include the items which will reduce the tax.

Temperament: The temperament of the investor himself poses a constraint on framing his investment objective. Some investors are risk lovers or takers who would like to take up higher even for low return. While some investors are risk averse, who may not be willing to undertake higher level of given for higher level of return. The risk neutral investors match the return and the risk. For example, if a stock is highly volatile in nature then the stock may be selling in a range of rupees ₹100-₹200and returns may fluctuate between ₹00-₹100 in a year. Investors who are risk averse would find it disturbing and do not have the temperament to invest in this stock. Hence, the temperament of the investor plays an important role in setting the objectives.

Determination of objective: Portfolios have the common objective of Financing present and future expenditure from a large pool of assets. The return that the investor requires the degree of risk is willing to take depend upon the constraints. Objectives of portfolio range from income to capital appreciation. The common objective are stated below:

a) current income

b) growth in income

c) capital appreciation

d) preservation of capital

The investor in general would like to achieve all the four objectives, nobody would like to lose his investment. But, it is not possible to achieve all the four objective simultaneously. The investor aims at capital appreciation, he should include risky securities where there is an equal likelihood of using the capital. Thus, there is a conflict among the objectives.

Selection of portfolio: the selection of portfolio depends on the various objectives of the investor. The selection of portfolio under different objective are dealt subsequently.

Objectives and asset mix: if the main objective is getting adequate amount of current income, 60% of the investment is made on debts and 40% on equities. The proportions of investment on debt and equity differ according to the individual's preferences. Money is invested in short term debt and fixed income securities. Here the growth of income becomes the secondary objective and stability of principal amount may become the third. Even within the debt portfolio, defence invested in short term bonds depends on the need for stability of principal amount in comparison with the stability of income. If the appreciation of capital is given third priority, instead of short term debt investor opts for long term debt. The maturity period may be a constraint.

Growth of income and assessments: here the investor requires a certain percentage of growth in the ankle receive from his investment. The investors portfolio consists of 60-100 % equities and 0 to 40% debt instrument. The debt portion of the portfolio may consist of concession regarding tax exemption. Appreciation of principal amount is given third priority. For example computer software, hardware and non-conventional energy producing company shares provide good possibility of growth in dividend.

Capital appreciation and asset mix: capital appreciation means that the value of the additional investment increases over the years. Investment in real estates like land and house may provide a faster rate of capital appreciation but they lack liquidity. In the capital market, Diwali of the shershah much higher than their original issue prices. For example Satyam computers, share value was ₹306 in April 1998 but in October 1999 the value was₹1658. Likewise, several examples can be cited. Market capitalisation also has increased. Next to real assets, stock market provide best opportunity for capital appreciation. If the investor's objective is capital appreciation, 90-100% office portfolio mein consists of equity and 0-10% of debts. The growth of income becomes the secondary objective.

Safety of principal and asset mix: usually, the risk averse investors are very particular about the stability of principal. According to the life cycle theory, people in the third stage of life also give more importance to the safety of the principal. All the investors have this objective in their mind. No one likes to lose his money invested in different assets. But, the degree may differ. The investors portfolio may consist more of debt instruments and within the debt portfolio more would be on short term dates.

Risk and return analysis: The traditional approach to portfolio building has some basic assumptions. First, the individual prefers larger to smaller returns from securities. To achieve this goal, the investor has to take more risk. The ability to achieve higher returns is dependent upon his ability to judge raised and his ability to take specific risks. The risks are namely interest rate risk, purchasing power risk, financial risk and market risk. The investor analysis the varying degrees of risk and construct his portfolio. At first, he establishes the minimum income that he must have to avoid hardships under most adverse economic condition and then he decides risk of loss of income that can be tolerated. The investor makes a series of compromises on risk and non risk factors like taxation and marketability after he has assessed the major risk categories, which he is trying to minimise.

Diversification: once the asset mix is determined and the risk and return are analysed, the final step is the diversification of portfolio. Financial risk can be minimised by commitments to top-quality bonds, but the securities of a poor resistance to inflation. Stocks provide better inflation protection than bonds but are more vulnerable to financial risks. Good quality convertibles mein balance the financial risk and purchasing power risk. According to the investors need for income and risk tolerance level portfolio is diversified. In The Bond portfolio, the investor has to strike a balance between the short term and long term bonds. Short term fixed income securities offer more risk to income and long-term fixed income securities offer more risk to principal. In the stock portfolio, she has to adopt the following steps which are shown in the following figure:

The Investor has to select the industries appropriate to his investment objectives. Each industry corresponds to specific goals of the investor. The sales of some industries like two wheelers and steel tend to move in tandem with the business cycle, the housing industry sales move counter cyclically. If regular income is the criteria then industries, which resists the trade cycle should be selected. Likewise, the investor has to select one or two companies from each industry. The selection of the company depends upon its growth, yield, expected earnings, past earnings, expected price earning ratio, dividend and the amount spent on research and development. Selecting the best company is widely followed by all the investors but this depends upon the investors knowledge and perception regarding the company. The final step in this process is to determine the number of shares of each stock to be purchased. This involves determining the number of different stocks that is required to give adequate diversification. Depending upon the size of the portfolio, equal amount is allocated to each stock. The investor has to purchase round locks to avoid transaction costs.

Modern approach

The traditional approach is a comprehensive financial plan for the individual. It takes into account the individual needs such as housing, life insurance and pension plans. But these types of financial planning approaches are not done in the Markowitz approach. Markowitz gives more attention to the process of selecting the portfolio. Is Planning can be applied more in the selection of common stocks portfolio than the bond portfolio. The stocks are not selected on the basis of need for income for appreciation. Bara selection is based on the risk and return analysis. Return includes the market return and dividend. Then Western meets return and it may be either in the form of market return or dividend. There are seem to be indifferent towards the form of return.

From the list of stocks quoted at the Bombay Stock exchange or it any other regional Stock exchange, the investor selections of me some group of shares say of 10 or 15 stocks. For these stocks, expected return and risk would be calculated. The investor is Asin to happy objective of maximizing the expected return and minimising the risk. Further, it is assumed that investors would take an risk in a situation when adequately rewarded for it. This implies that individuals would prefer the portfolio of highest expected return for a given level of risk.

In the modern approach, the final step is asset allocation process that is to choose the portfolio that meets the requirements of the investor. The risk taker that is who are willing to accept a higher probability of risk for getting me expected return would choose high-risk portfolio. Investor with you lower tolerance for risk would choose low level risk portfolio. The risk neutral investor book shows the medium level risk portfolio.

Basic concepts of Information Systems

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Information system refers to a Computer based system that provides information to the management of organisation between enabled them to make decisions. In simple terms, an information system helps management in decision making.

Information system is not simply about computers, it is about how businesses can make the best use of Computer technology to provide the information needed to achieve their goals. In the same way as your own lives and qualities and unique to you, each organisation has different goals and requirements any successful implementation of information system requires a Thoreau understanding of the business issues involved, as well as the different technologies that are available.

Businesses make use of information system so that accurate and up-to-date information will be available when it is required. Since it is not always possible to predict what information will be needed at some future date, most organisations use computers to record and store the details of their business transactions. When a query arises, or a standard business report must be produced, this raw data can be retrieved and manipulated to produce the required information.

Information infrastructure

Information infrastructure consists of group of interrelated components such as physical devices, services and Management which works collectively to carry out input processing output storage and control actions in order to convert data into information products that can be used to support forecasting, planning, control, coordination, decision making and operation activities in organisation.

The information infrastructure consists of following five basic resources:-

Peoples: people resources including users, developers of an information system and the persons who operate and maintain the system such as managers and technical support staff.

Hardware: hardware resources include computers and other tangible items such as printers channels etc.

Software: software resources referred to computer programs known as software and associated instruction manuals.

Communication: communication resources include networks and the hardware and software needed to support them.

Data: data resources cover the data that an organisation has access to such as computer databases and paper files.

Types of information systems

Within any single business organisation, executive at different levels in the management hierarchy have very different information requirements and different types of Information systems have evolved to meet their needs.

A common approach to examining the types of Information systems used within organisations, tips to categorise information system applications by the rules they play at various levels in the organisational structure. This is known as the vertical approach.

In this case the organisation is viewed as a management pyramid with four levels:

1. At lowest level, non management staff attendance to rotine baby business transactions such as selling goods and issuing receipts for payment.

2. Operational management is responsible for monitoring the transactions that are occurring, and dealing with any problems that may arise.

3. Tactical management decides on budgets, set targets, identify strengths and develop short term plans for the business.

4. At the top of the pyramid, strategic management is responsible for defining the long-term goals of the company, and how it intense to position itself within its particular industry.

These levels of Management generate different types of information systems. System analysis develop different categories of information system to meet the various business needs.

The various types of information systems are:-

Transaction processing system (TPS)

TPS became operational in 1960. It is software system that is generally used for transactions processing and record keeping. Transaction processing system is also known as electronic data processing. This collects, stores, modifies and retrieves the data transactions of an organisation. It is widely used in the field of Accounting, Order Processing, Finance, Marketing, Sales and Human resources.

It uses computers in recording organising, classifying, manipulating and summarising data and transactions. Process data resulting from business transactions, update operational databases, and produces business documents.

The important features of transactional processing system are its fast performance, continuous availability, ease of use, data integrity and modular growth. Examples for Automatic teller machine (ATM), Airline Reservation System and Ticket net.

Office automation system (OAS)

Office automation system is a software system that is generally used to digitally create, gather, store, transmit and manipulate office information required to accomplish desired task. Office automated system became operational in 1960 to 1970.

Office automation system is focus on communication in which local area network is used to transmit data, voice, mail and images across the network. The main functions of office automated system include electronic communication, electronic publishing, office management and electronic collaboration.

Office automation system is used for documents, schedules, emails, conference and communications. Its facilities the various activities such as:-

1. Producing outgoing documents (using text processors).

2. Storage and retrieval of documents (using document management system).

3. Transmission of messages (using message communication systems).

4. Scheduling a meeting management (using video conferencing systems).

The important features of office automatic system are increased productivity, better communication facilities, less storage space, fast access, integrated software and paperless office. Examples are document management system (such as word processing, spreadsheet, desktop publishing and image processing), office support system and message handling system.

Management information system

Management information system became operational in late 1970s. It is focused on information. It is a Computer based system that provides information to managers of it organisation to make strategic, operational and tactical planning. It is also known as the computer based information and decision system.

Management information system produces suitable and detailed reports on operations in an accurate, consistent and timely manner for every level of management in an organisation. The concept of management information system is to provide the right information to the right people at the right time. It assembles, process, stores, retrieves, evaluation and disseminates information.

Decision support system (DSS)

Decision support system became operational in late 1970s. It is focus on decision support. It is Computer based system that is generally used to support decision making in organisation.

Decision support systems gathers massive raw data from wide range of sources, analyse data and compile information that can be used to make better decisions. The main objective of decision support system is to improve their effectiveness of the managers decision making process.

The main features of decision support system are easily adaptable, great flexibility, time-saving, high level of interactivity, ease of use, user controlled inputs/outputs, extendibility, adaptability, enhanced effectiveness, cost reduction, ease of development, interpersonal communication, automated manager process and sophisticated modelling tools. It is widely used in the field of business management, agricultural production, analysing cost, verifying load credit and medical diagnosis.

Executive support system (ESS)

Executive support system became operational in 1980s. It is focused on decision support for top management. It is also known as the executive information system.

Executive support system is also a Computer based system that provides executive level reports for senior executive to support decision-making needs in organisation. It provides easy and quick access to both internal and external information relevant to organisational objectives. It is widely used in the field of, marketing and financial analysis.

Expert system (ES)

Expert system became operational in late 1980s. It is focused on consultation. It acts as an expert consultant to end user. Expert system is also known as knowledge based system (KBS). Vidyadhar knowledge on specific topics from experts and served information requires and knowledge level of the organisation.

Expert system is widely used in the field of scientific and engineering design, properly integration of new knowledge within business. It can be used by management and non management personnel in order to solve a particular problem. It helps in training new employees in an organisation, reducing human errors and monitoring routine tasks.

Expert system combines the knowledge of several experts and makes available this knowledge to one or more people at different locations. Examples are CAD/CAM system, Forecasting of financial development, Market predictions, Diagnostic maintenance system, Credit application advisor, Investment workstations and Virtual reality system.

Artificial intelligence (AI)

Artificial intelligence became operational in 1990s. It is focused on self learning on thinking systems. Expert systems are type of artificial intelligence. It is computer system that takes the characteristics of human intelligence.

Artificial intelligence includes hardware, software, data, people, procedure, knowledge to develop computer system that demonstrates the characteristics of intelligence. The main feature of artificial intelligence are self learning, handle complex situations, react quickly and correctly to a new situation, understand visual images, creative and imaginative. Examples are robotics, expert system and neural networks.

Types of Network- LAN,WAN,MAN and PAN

2021-04-20T23:38:00.003+05:30

Depending upon the geographical area covered by a network, it is classified into three main categories:-

a) PAN (personal area network)

b) LAN (local area network)

c) MAN (metropolitan area Network)

d) WAN (wide area network)

Personal area network

Network spanning an area of several metres around an individual are called personal area networks. Personal area network includes devices such as laptop computers personal digital assistants and wireless connections.

The purpose of this network is to transfer files including emails and calendar appointments, digital photos and music. Personal area network can be constructed with cables or be wireless. USB and firewire technologies often linked together a wide band while wireless personal area networks typically used bluetooth or infrared connections.

The range of personal area network is usually small which varies from less than 10 metres or about 30 feet. Thus, personal area network is a subset of local area network that supports one personal instead of a group.

Local area network

It is a network of computers that operates in a very small geographic area to few kilometres. It is used to link devices in a single office building or a campus.

A typical land has the following characteristics:-

1. Discover small geographical area up to 5 to 6 km

2. It is used to link devices in a single office, building or a campus.

3. A lan is used to connect the computers and other network devices so that the devices can communicate with each other to share the resources.

4. Cables like twisted pair, coaxial or fibre optic are used as communication medium.

5. The resources to be shared can be a hardware device like printer and software like any data file.

6. Local area networks are easy to install and maintain.

7. Troubleshooting is easy.

8. The various devices in local area network are connected to a central device known as HUB.

9. Local area network offers high speed data transmission.

10. Different types of topologies such as bus, rings, star, tree etc. are used for local area networks.

11. A common example of local area network found in many business organisation employing link of tasks related computers, e.g. accounting PC's, finance PC's, Administrative PC's etc.

Metropolitan area Network

A metropolitan area Network is a network that interconnects users with computer resources in a geographical area or region larger than that covered by even a larger local area network but smaller than the area covered by a wide area network. The term is applied to the interconnection of network in a city.

A typical metropolitan area Network has the following characteristics:

1. Metropolitan area Network are extension of local area network spreading over an entire City.

2. It may be a single network such as a cable TV Network covering entire City or a group of several local area networks.

3. Metropolitan area networks are mainly owned by large organisation to interconnect all the branches across the city.

10. It may be used to share the resources between two or more local area networks.

11. A metropolitan area Network may be wholly owned and operated by a private company or maybe a service provided by a public company.

12. A common example of metropolitan area Network is cable TV Network and telephone company that provides a high speed DSL line to customers.

Wide area networks

A wide area networks from was a large geographic area such as country continent or even the whole world to share data and resources it contains several local area network and metropolitan area networks.

A typical wide area network has the following characteristics:-

1. Why did the networks provide interconnectivity without any distance limit.

2. Since wide area network spans whole of the world, it may utilise public, leased a private communication devices.

3. It provides long distance transmission of data, including text, images, audio and video information over large geographical areas.

4. It can be used to interconnect two or more local area networks for wide area networks.

5. They are used for transferring large blocks of data between their users.

6. Linking medium used vary from telephone line to satellites.

7. Internet is an example of world's biggest wide area network.