IGNOU FREE MMPF-004 Security Analysis and Portfolio Management Solved Guess Paper 2025

✅ Q1. Explain the meaning, scope and importance of Security Analysis.

Security analysis refers to the systematic evaluation of financial securities such as shares, debentures and bonds with the objective of determining their intrinsic value and assessing the risk and return associated with them. It helps investors decide whether a particular security is underpriced, overpriced or fairly priced. The scope of security analysis is very wide as it includes the study of economic conditions, industry performance and company-specific financial analysis. It involves both quantitative and qualitative assessment of securities. Quantitative analysis is based on financial statements, ratios, earnings, dividends and cash flows, whereas qualitative analysis focuses on management quality, corporate governance, market reputation and future growth prospects. The importance of security analysis lies in reducing investment risk and improving the quality of investment decisions. It helps investors identify fundamentally strong companies for long-term investment and avoid speculative and weak securities. Security analysis also supports portfolio diversification by identifying suitable combinations of securities. It enables investors to maximise returns at minimum possible risk. In the absence of proper security analysis, investment decisions become speculative and risky, leading to financial losses. In modern capital markets, where a wide variety of securities are available and market volatility is high, security analysis plays a crucial role in disciplined and rational investment planning. Therefore, security analysis forms the foundation of sound investment strategy and effective portfolio management.

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✅ Q2. Discuss the concept and objectives of Fundamental Analysis.

Fundamental analysis is a method of evaluating securities by studying the basic economic, industry and company-related factors that influence the value of a security. It attempts to determine the intrinsic value of a share by analysing the financial strength and future growth prospects of the company. Fundamental analysis is generally carried out at three levels: economic analysis, industry analysis and company analysis. Economic analysis studies macroeconomic factors such as GDP growth, inflation, interest rates, fiscal policy and industrial development. Industry analysis examines industry characteristics, demand-supply conditions, level of competition, government regulations and technological changes. Company analysis focuses on financial statements, profitability, liquidity, solvency, management quality, dividend policy and future growth plans. The objectives of fundamental analysis are to identify undervalued and overvalued securities, assess long-term investment potential and support rational investment decisions. It helps investors forecast future earnings and dividends. It reduces speculative risk and promotes long-term wealth creation. The importance of fundamental analysis lies in its scientific and systematic approach. It helps investors understand the real worth of a security rather than depending on market rumours. It supports sound portfolio construction and long-term investment planning. Therefore, fundamental analysis is an essential tool of security analysis for investors who aim at stable returns and capital appreciation.

✅ Q3. Explain the concept and role of Technical Analysis in Security Markets.

Technical analysis is a method of evaluating securities based on past price movements, trading volume and market trends rather than on financial statements and economic factors. It is based on the assumption that market prices reflect all available information and that price patterns repeat over time. Technical analysts use charts, graphs and indicators such as moving averages, support and resistance levels, relative strength index and trend lines to predict future price movements. The main objective of technical analysis is to identify the right time to buy or sell a security. The role of technical analysis in security markets is very significant, especially for short-term traders and speculators. It helps investors capture market trends and price momentum. It supports quick decision-making in volatile markets. It helps identify market psychology and investor behaviour. However, technical analysis has limitations as it ignores company fundamentals and long-term value. It also depends heavily on the accuracy of past data. Despite these limitations, technical analysis is widely used in stock markets for timing buy and sell decisions. Therefore, technical analysis plays an important complementary role to fundamental analysis in security markets.

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✅ Q4. Explain the meaning, objectives and principles of Portfolio Management.

Portfolio management refers to the process of selecting, managing and reviewing a collection of securities such as shares, debentures and mutual fund units in order to achieve the desired investment objectives. It is concerned with balancing risk and return by proper diversification and asset allocation. The main objectives of portfolio management are capital appreciation, regular income generation, safety of investment and liquidity. Portfolio management aims at maximising returns at minimum possible risk based on the investor’s risk appetite. The principles of portfolio management include diversification, risk-return trade-off, liquidity, marketability and proper asset allocation. Diversification reduces risk by spreading investment across different securities and industries. Risk-return trade-off ensures that higher return is accompanied by higher risk. Liquidity ensures that securities can be easily converted into cash. Marketability ensures easy buying and selling of securities. Proper asset allocation balances investment among equity, debt and other instruments. The importance of portfolio management lies in protecting investors from market uncertainty and volatility. It improves consistency of returns and supports long-term financial goals. It also helps investors manage risk in a systematic manner. Therefore, portfolio management is an essential investment function for achieving financial stability and wealth creation.

✅ Q5. Discuss the role of Institutional Investors in Portfolio Management.

Institutional investors are large financial institutions that invest huge funds on behalf of others in capital markets. They include mutual funds, insurance companies, pension funds, banks, financial institutions and foreign institutional investors. These investors play a significant role in portfolio management because they bring professionalism, research expertise and stability to capital markets. Institutional investors use advanced analytical tools and expert fund managers to construct and manage diversified portfolios. They influence market trends due to their large-scale buying and selling activities. The importance of institutional investors in portfolio management is very high because they promote market efficiency and transparency. They improve liquidity and depth of the capital market. They encourage corporate governance by monitoring company performance and exercising voting rights. They provide better investment opportunities to small investors through mutual funds and pension schemes. Institutional investors also help in stabilising the market during extreme fluctuations. Therefore, institutional investors play a vital role in the growth, stability and professionalism of modern portfolio management and security markets.

✅ Q6. Explain the Efficient Market Hypothesis (EMH) and its implications for investors.

Efficient Market Hypothesis (EMH) states that security prices in a capital market at any given time fully reflect all available relevant information, and therefore it is not possible for any investor to consistently earn abnormal returns by using any publicly available information. According to EMH, price changes occur only due to the arrival of new information, and since new information is unpredictable, price movements are also unpredictable. EMH is classified into three forms: weak form, semi-strong form and strong form efficiency. Weak form efficiency states that current prices reflect all past price and volume data and therefore technical analysis cannot consistently outperform the market. Semi-strong form efficiency states that prices reflect all publicly available information such as financial statements, news, dividends and economic data, making fundamental analysis ineffective for earning abnormal returns. Strong form efficiency states that prices reflect all public as well as private insider information, which implies that no one can consistently beat the market. The implications of EMH for investors are very significant. It suggests that consistent outperformance of the market is extremely difficult. It encourages passive investment strategies such as index funds instead of active stock picking. It highlights the importance of diversification rather than speculation. EMH also justifies why security prices react quickly to news and announcements. It promotes transparency and information dissemination in capital markets. However, EMH is criticised on the grounds that markets are not always perfectly rational and information is not evenly distributed. Behavioral finance has shown that investor psychology, emotions and herd behaviour influence market prices. Despite these criticisms, EMH remains a powerful theoretical foundation of modern finance. Therefore, EMH provides valuable insights into market behaviour and guides rational investment decision-making.

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✅ Q7. Discuss the concept of Risk and Return in Portfolio Management.

Risk and return are the two fundamental pillars of investment and portfolio management. Return refers to the gain or profit earned on an investment over a period of time, whereas risk refers to the uncertainty or variability of expected returns. In portfolio management, the basic principle is that higher risk is associated with higher potential return and lower risk offers lower return. Risk can be broadly classified into systematic risk and unsystematic risk. Systematic risk is the market-related risk caused by factors such as inflation, interest rates, economic recession and political instability, and it cannot be eliminated through diversification. Unsystematic risk is the firm-specific risk arising due to factors such as management inefficiency, strikes, technology failure and poor financial performance, and it can be reduced through diversification. Portfolio management aims at achieving the best possible combination of risk and return according to the investor’s objectives and risk tolerance. Diversification plays a key role in reducing unsystematic risk by spreading investment across different securities, industries and asset classes. The importance of understanding risk and return lies in rational decision-making. Investors select portfolios based on expected return for a given level of risk or minimum risk for a given level of return. Risk-return analysis helps investors avoid speculative losses and align investments with financial goals. In modern finance, risk is measured using statistical tools such as variance, standard deviation, beta and covariance. Therefore, risk and return form the foundation of portfolio management and guide the construction of efficient investment portfolios.

✅ Q8. Explain the concept and significance of the Capital Asset Pricing Model (CAPM).

The Capital Asset Pricing Model (CAPM) is a fundamental model in finance that explains the relationship between risk and expected return of a security. According to CAPM, the expected return on a security depends on the risk-free rate of return, the market risk premium and the systematic risk measured by beta. Beta represents the sensitivity of a security’s return to market movements. The CAPM formula is: Expected Return = Risk-Free Rate + Beta × (Market Return – Risk-Free Rate). The significance of CAPM lies in providing a scientific method for pricing risky securities. It helps investors estimate the required return for taking additional risk. It helps in measuring systematic risk which cannot be eliminated through diversification. CAPM is widely used in capital budgeting, portfolio selection, performance evaluation and cost of equity calculation. It supports rational allocation of funds based on risk-return trade-off. It also helps in comparing securities based on their risk-adjusted returns. However, CAPM has certain limitations such as unrealistic assumptions of perfect markets, risk-free borrowing and lending, and rational investor behaviour. Empirical studies have also challenged the accuracy of beta as the sole measure of risk. Despite these limitations, CAPM remains one of the most widely accepted and practically used models in portfolio management and investment analysis. Therefore, CAPM plays a crucial role in linking risk with return in modern financial theory.

✅ Q9. Discuss the concept and types of Mutual Funds and their role in Portfolio Management.

Mutual funds are collective investment schemes that pool money from a large number of small investors and invest it in a diversified portfolio of securities such as shares, bonds and money market instruments. Each investor holds units of the mutual fund in proportion to their investment. Mutual funds are managed by professional fund managers who use their expertise to select securities and manage risk. The main types of mutual funds include equity funds, debt funds, balanced funds, index funds, sectoral funds, tax-saving funds and money market funds. Equity funds invest mainly in shares and aim at long-term capital appreciation. Debt funds invest in fixed income securities and aim at steady income. Balanced funds combine equity and debt to balance risk and return. Index funds replicate stock market indices. Sectoral funds invest in specific industries. The role of mutual funds in portfolio management is highly significant. They provide diversification at low cost. They offer professional management to small investors. They reduce investment risk through portfolio diversification. They provide liquidity and transparency. Mutual funds also promote financial inclusion by allowing small investments. They help investors achieve their financial goals such as retirement planning, education funding and wealth creation. Therefore, mutual funds play a vital role in modern portfolio management by making investment simple, safe and efficient.

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✅ Q10. Explain the role and importance of Foreign Institutional Investors (FIIs) in Indian Capital Market.

Foreign Institutional Investors (FIIs) are foreign entities such as pension funds, mutual funds, insurance companies and investment trusts that invest in the capital markets of another country. In India, FIIs play a vital role in the development and growth of the capital market. They invest in equity shares, bonds, mutual funds and derivatives. The importance of FIIs lies in providing large-scale capital inflows which increase market liquidity and trading volume. FIIs improve market efficiency by bringing global best practices, professional research and advanced trading techniques. They help in price discovery and market integration with global financial systems. FIIs also promote better corporate governance by actively monitoring company performance and exercising shareholder rights. Their presence enhances the credibility and global image of the Indian stock market. However, FIIs can also increase market volatility because they move large funds quickly in response to global economic events. Sudden inflow or outflow of FII funds affects market stability and exchange rates. Therefore, while FIIs strengthen capital markets, proper regulation is essential to balance benefits and risks. Thus, FIIs play a crucial role in strengthening market depth, efficiency and global integration of the Indian capital market.

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