Investor PGDM Class of 2016-18

Trimester 2 Nov16/Jan17

TO DO FOR THE FIRST CLASS

Read the course outline carefully and raise any question that appears in your mind.

At the outset you must know that a good question requires as much preparation as a good answer
does, and we facilitate learning as much by raising questions as we do by providing answers.

Course Focus: What are we aiming at?

Managers should focus on external and internal stakeholders in order to be successful. Investors are
one such external group. This course talks about how investors think, behave and invest. The investor
module talks about the role of institutional investor in the market. How he invests in the market based
on the risk and return expectations. The course starts with the overview of the financial markets and
instruments and their prices. It also deals with the construction of two asset portfolio- a risk free and a
risky asset and two risky assets and portfolio diversification.

This course will help you understand the role that investors play in an organization. Investors here has
put their financial resources at the disposal of the company with an aim in mind. Hence these
investors are the owners of the company (often referred to as principal). The company and its
financial resources however are managed by people (read company managers, also referred to as
agents) who are expected to uphold and further the interest of the owners (principal). Hence as a
representative of the organization concerned (manager), you will need to understand what investors
do, how they behave and what they are concerned about.

For doing the same you will need to understand the causal link between organizational objectives vis-
-vis the objectives of the investor and dovetail the two for creating a win-win situation for
stakeholders in general and the investor in particular.

However, both the investor and the organization operate in a context. Here you may understand the
context as an economic system where institutions and markets facilitate transaction and allocation of
resource, with an elaborate set of checks and balances to protect the rights of stakeholders as well as
expects fulfillment of certain duties/obligations on them. Hence the context is also equally important.
In a nutshell, we are aiming to learn

the role and criticality of an investor in an organization

the alternative avenues (instruments) through which an investor may build
(financial) stake in an organization
factors that influences the value of these instruments
how to analyze these instruments in terms of their risk-reward potential both as
stand-alone investments and as portfolio of assets
how institutions are integral to stakeholders
Why should you do this course?

Module Pre-Requisites: You are expected to be familiar with the topics covered in the core paper
Basics of Accounting and must possess working knowledge of MS Excel. It is also important that
you be in touch with developments in the economy in general and major events/decisions that
influence the productive sectors in particular.

Preparing for the class:

We as an institution believe that (a) peer learning has an important role to play in determining
learning outcomes and (b) learning can best happen in the form of discussion/dialogue. Hence
preparing well for the class is critical. Though a majority of your assessments are individual in nature,
we encourage you to discuss/solve lessons/problem sets within your groups.

This course outline details on the session plan and readings for each session in the following sections.
You are expected to go through the relevant materials/pre-readings provided in the course pack before
you reach the class room. Similarly, for sessions identified for case discussions, individual reading
and group discussion of the case must precede discussion of the same in the class room. Adequate
preparation at an individual/group level will determine the richness/quality of discussion we have and
our learning from each session.

Module Overview

Session Topics Date Venue

1 Who is our Investor?

2 The Objective of the Firm: Alternative Perspectives

3-4 Primary Market: Red herring prospectus and IPO: Book Building
Process, Green Shoe Option, Role of Merchant Bankers, Rights
issue, FPO.
5-6 Types of equity shares and their rational for issue, Post IPO & the
role of Secondary Market
7 Money market instruments

8-9 Stock Trading Simulation

 10 Defining Risk and Return: Definition, computation and
interpretation
11 Asset Allocation 1 One Risky Asset

12 Asset Allocation 2 Two Risky Assets

13 Pricing Risk: The Capital Asset Pricing Model

14-15 Bond Valuations and Yields

16 Fundamentals Based Investing: an Introduction-Guest Session

Readings: There is no text book recommended for the course. A lot of the information and material
for class room discussions are provided in soft copies to participants. If a candidate wants to have a
reference text for materials covered in the course the books mentioned below will be helpful.

1. Investments by Bodie, Kane, Marcus and Mohanty, Tata McgrawHill

Publication.
2. Investments: Principles and Concepts By Charles P.Jones, Wiley Publication.
3. Investment Analysis and Portfolio Management, Reilly and Brown, 8e, Cengage
Learning
4. Indian Financial System, By M.Y Khan, Tata McgrawHill Publication.
5. Indian Financial System, B V Pathak, 3e, Pearson
6. Modern Portfolio Theory and Investment Analysis, Elton and Gruber, Wiley

Journals/Periodicals: It is strongly recommended that you glance through periodicals like NSE
Newsletter, Economist throughout the delivery of this course

Recommended Articles & Other material: You will need to go through newspapers like Economic
Times, Business Line or HT Mint, on a regular basis to participate meaningfully in class discussions. I
will encourage discussions on news analysis which you deem appropriate give the scope of this paper.
Additionally, watching any business news channel may be of great help. A lot of valuable information
is already available on the subject in www.nseindia.com, www.bseindia.com,
http://www.rbi.org.in/home.aspx, www.sebi.gov.in

Detailed Sessions

Session 1: Who is our Investor?

Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is
an effort, which should be successful, to prevent a lot of money from becoming a little. Fred
Schwed Jr.

Let us not be mistaken. An investor is not a speculator who takes on high risks for high rewards. He is
also not a gambler who undertakes risk of total loss for out of proportion rewards. He is an individual
who commits financial resources in a business venture with an expectation of financial return.
Generally, the primary concern of an investor is to minimize risk while maximizing return, unlike the
speculator or gambler. And unlike the speculator or gambler an investor often buys into a business
idea for its perceived future potential and stays invested for a longer period of time. Consequently,
there is a lot of objective analysis and subjective judgment involved in the process through which an
investor selects one out of many contending opportunities. In this session we discuss both subjective
(individual specific) and objective (macroeconomic factors) items that go into analysis.

Required Readings: Handout (see course pack)

The handout is prepared from 10 Things An Investor Must Do Before Investing, Forbes,
Entrepreneurs, 3rd March 2014 (http://www.forbes.com/sites/ryancaldbeck/2014/03/03/10-things-an-
investor-must-do-before-investing/)

I recommend that you prepare a short summary of this article for future reference. We will refer to
this article again and again throughout the course.

Session 2: The Objective of the Firm: Alternative Perspectives

We aspire to be the global steel industry benchmark for Value Creation and Corporate Citizenship
TATA STEEL
Please refer to this URL below and discuss the content with your peers before reaching the class.
http://www.tatasteelindia.com/corporate/vision-and-strategy.asp

In this session I will review alternative goals a firm may set for itself and deliberate with you on the
choice of objective(s). In the end we need to reach a consensus on this topic, because everything else
flows from here.

Required Readings:
HBSP Case: Apple, Einhorn and i-Prefs, HBS, 2015
Ten ways to create shareholder value, A Rappaport, HBR, Sept 2006 (pages 14)
Desired Reading: Corporation and its Shareholders: What Should B-Schools Teach?
N Balasubramanian, Sendil K Ethiraj, Romie Littrell, Sebastian Morris, DVR Seshadri, Jayanth R
Varma, and Srilata Zaheer, S Manikutty (Coordinator), Vikalpa, Vol. 31,No 2, 2006 (pages 33)

Session 3 and 4: Primary Market Red herring prospectus and IPO: Book Building Process, Green
Shoe Option, Rights issue, FPO and the role of intermediaries

In these sessions I will introduce you to the process through which a company becomes public. I will
discuss the process in brief, including the alternative ways of pricing a new issue, the role of
institutions in general and the primary market in particular. Subsequently rights issue and follow-on
public offer is also discussed in brief. These discussions will throw light on why some companies
continue to remain private while others go public.
As a manager, you will need to know when it is beneficial for you to remain unlisted, and when your
investors will benefit from going public.

Required Readings: Handout (see course pack)

The handout is prepared from materials provided in NSE website (http://www.nse-
india.com/corporates/content/ipo_listing.htm)

Session 5 and 6:Types of equity shares and their rational for issue, post listing & the role of
Secondary Market

We continue with our learning from the previous session and here we get introduced to different
categories of equity shares like shares with differential voting rights, non-voting right equity shares
and the like. We discuss their rational for issue and implications for investors.
In session 19 we discuss what happens in the post IPO scenario, trading of shares in the secondary
market, information sharing and the process of price discovery. I will discuss the Efficient Market
Hypothesis and Random Walk theory in passing here. These topics will be dealt with in details in year
II.
Required Readings
Purpose of the secondary market:http://www.yourarticlelibrary.com/economics/market/9-most-
important-functions-of-stock-exchangesecondary-market/8766/
Desired Readings
Chapter 8, Indian Financial System, V B Pathak, pp 186-260 (selected sections only)
Efficient Market Hypothesis:
http://people.hss.caltech.edu/~jlr/courses/BEM103/Readings/JWCh09.pdf

Session 7: Introducing to money market instruments

Company managers also require short term financing in order to tide over unpredictable fund
requirements. Long term funds are expensive and hence it is not prudent to put them to short term use.
Consequently, in running an organization seamlessly businesses often take recourse to market for
short term financing. This market is termed the money market and in this segment one can raise funds
for a day to 364 days, depending on their requirements.
In session 20 I plan to sensitize you about the money market and introduce you to the instruments
traded/exchanged between borrowers and lenders.

Required Readings
Debt segment (New debt segment, wholesale debt segment and corporate bond segment) at
nseindia.com
Money market instruments (http://www.sbidfhi.com/Products-Services.aspx?id=4)
Money Market Operations (rbi.org.in)

Session 8 and 9: Stock Trading Simulation

__________________________________________________________________________________
Stock trading simulation has been incorporated which will help them to apply concepts covered in the
module. They will be analyzing stocks based on their fundamentals and trends in price movements
and constructing a diversified portfolio with the objective of maximizing the overall return.

Session 10: Defining Risk and Return: Definition, computation and interpretation

"You have to take risks. We will only understand the miracle of life fully when we allow the
unexpected to happen" - Paulo Coelho

You may define risk as a situation where the expected outcome and the actual outcome are different
from each other. And in the context of this paper, outcome refers to returns; the reward that investors
expect. We defined and discussed instruments in the previous session, and here we try and understand
the nature of these instruments from another dimension: in terms of the rewards they provide to
investors and the possible risks that investors face in staying invested. We will also talk about the
relationship between these two concepts, and differentiate between risk taking and speculating.

Required Readings
Chapter 4, Modern Portfolio Theory and Investment Analysis, Elton and Gruber, Wiley, pp 44-65

Session 11: Asset Allocation 1 One risky asset and a risk free asset

Dont try to out-guess the markets because you will not be successful in the long term, and it will cost
you dearly. Control what you can control: costs, taxes, risk. Then let the markets take care of the rest.
This approach has the highest probability of financial success. Richard A. Ferri,

As an investor you will need to decide on resource allocation between/among assets of different class
with an aim of fulfilling your objective. Hence, in the context of this paper you need to understand
investment objective(s) and actions that ensure the fulfillment of objectives. Investment objectives
as you may have correctly guessed are subjective decisions. Hence individual preferences,
indifferences and aversions towards risk need to be understood in deciding objectives.

In this session we will use a risk free asset and a risky asset to discuss asset allocation under risk
aversion (the economic agent does not like risk) using utility (satisfaction) values.

Required Readings:
Chapter 6, Investments by Bodie, Kane, Marcus and Mohanty, Tata McGraw Hill Publication (See
course pack, pp 172-180)

Session 12: Asset Allocation 2 Two Risky Assets

Diversify your investments John Templeton

How many times have you heard of this statement? Or a statement like dont put all your eggs in one
basket? Avoiding unfavorable situations is inherent in every (rational) investors decision making
process. And interestingly diversification (allocating your investable funds among unrelated assets
instead of putting it all in one risky asset) is a traditional way of reducing risk. So what we are in fact
saying is some part of total risk can be done away with by this act of diversification. We discuss both
the algebra and the logic behind this in session 9 and 10.
It is important that you brush up concepts related to mean, standard deviation and co-variances to
participate effectively in this session.
Required Readings
Introduction to portfolio theory, HBS, 9-185-066, p6

Desired Reading: Chapter 5, Modern Portfolio Theory and Investment Analysis, Elton and Gruber,
Wiley, pp 66-96
Session 13: Pricing Risk: The Capital Asset Pricing Model

Businesses in general and corporations in particular are going concerns (they have indefinite life).
Hence capital assets are long term in nature. For you, an investor, it is important to price these capital
assets before you own them; so in fact you need to determine the fair price of an asset before
purchasing it. The capital asset pricing model is a tool that helps us in pricing/valuing risky assets that
are long term in nature.

In these three session I will discuss with you the need for asset pricing in detail, the assumptions
under which the CAPM was framed and its usefulness and applicability for the investor and the
investment. The uniqueness of the model stems from the simplicity of its design and the usefulness of
its application.

Required Reading:
Chapter 13, Modern Portfolio Theory and Investment Analysis, Elton and Gruber, Wiley, pp 292-308
Case: Diversification, the CAPM and the Cost of Equity Capital, HBS, 9-276-183

Session 14 & 15: Bond Valuations and Yields

Bonds/debentures are popular instruments that organizations/businesses use for funding their long
term financing needs. These financial instruments are contractual agreements between the borrowers
and lenders wherein lenders part with their funds for a limited period of time (usually more than a
year) in return for a fixed yearly income; the borrower is contractually bound to make to pay the
lenders irrespective of the performance of the organization. Inability to pay interest has far reaching
consequences for the organization concerned.
These sessions will introduce you to concepts of coupon rate, yield, yield-to-maturity of par, discount
and premium bonds. Examples and illustrations of both fixed and floating rate instruments will be
discussed in these sessions. I will use current market data from NSEs wholesale debt market segment
in these sessions.

Required Reading:
Chapter 17 and 18, Investment Analysis and Portfolio Management, Reilly and Brown, 8e, Cengage
Learning (pp. 649-652, pp 682-696)

Problem Set
Bond Math, HBS, 9-201-101
Fixed Income Valuation, HBS, 9-298-080

Session 16: Fundamentals based investing: An Introduction Guest Session

Nothing tells shareholders more about the overall health of a company than a cash flow statement,
which details how much cash a business makes from its operating activities. Cash flow from a
companys operations holds the key to a companys true performance precisely why executives
dont want you to see it. Unlike earnings or revenue, the cash a company creates is just that cash.
There is no fancy way to fudge it. Shareholders have a right to know whats left over after companies
pay the bills. But no law requires CFOs to provide such information in a release. As a result, many
investors who focus on pro forma, or even GAAP net income results, may never realize how badly
their companies are struggling to make money. - Mike Tarsala
Investing is as much a science as an art. And investing for the long term requires lot of analysis using
both numbers and qualitative data. Remember, no one will invest in you for what you have been; they
will invest in you for what you will be in the future. And to understand what lies ahead, you have to
predict the future of the business you are attempting to move into. For predicting an investor will
analyze your present status and estimate your growth potential for the years that lie ahead.
Fundamental based investing is all about the analysis that go into to pick winners out of a bundle. We
discuss these issues in these two sessions.

Required Readings: study material based on Fundamental Analysis for Active Investing, Module
Note for Instructors, Suraj Srinivasan, HBS 114079-PDF-ENG will be distributed to students.