Assignment Submitted by .................. To sir /Madam

Q 1 (a): What is an investment company ? How would

you differentiate between managed and unmanaged

investment company ? Qoute at least one example of

each from Pakistan ?

Ans :

investment company An investment company is a company whose main business is holding and managing securities for investment purposes. Investment companies invest money on behalf of their clients who, in return, share in the profits and losses

A corporation or trust engaged in the business of investing the pooled capital of investors in financial securities. This is most often done either through a closed-end fund or an open-end fund (also referred to as a mutual fund) .

Investment companies are business entities, both privately and public ly owned, that manage, sell,

and market funds to the public. They typically offer investors a variety of funds and investment services, which include portfolio management, recordkeeping, custodial, legal, accounting and tax management services.

Managed Investment Companies

The most common type of investment company is the management investment company, which

actively manages a portfolio of securities to achieve its investment objective. There are two types of management investment company: closed-end and open-end. The primary differences

between the two come down to where investors buy and sell their shares - in the primary or secondary markets - and the type of securities they sell.

Closed-End Investment Companies: A closed-end investment company issues shares in a one-time public offering. It does not continually offer new shares, nor does it redeem its

shares like an open-end investment company. Once shares are issued, an investor may purchase them on the open market and sell them in the same way.

Example of a Local Closed ended investment company : Golden Arrow Selected Stocks Fund Limited is a closed ended equity mutual fund launched and managed by AKD Investment Management Limited. The fund invests in the public equity markets of Pakistan. It invests in stocks of companies operating across diversified sectors. The fund invests in deep value and growth stocks of companies. It benchmarks the performance of its portfolio against the KSE 100 Index. Golden Arrow Selected Stock Fund Limited was formed on May 9, 1983 and is domiciled in Pakistan.

Open-End Investment Companies: Open-end investment companies, also known as mutual funds, continuously issue new shares. These shares may only be purchased from

the investment company and sold back to the investment company.

Example of a Local open ended investment company : NI(U)T is an open-end equity Fund constituted through a Trust Deed dated 12th November, 1962 executed between National Investment Trust Limited (NITL) being an Asset Management Company and National Bank of Pakistan (NBP) being Trustee to the Fund. The Fund primarily invests in equities listed on the stock exchanges of Pakistan.

non-managed investment

companies

There is only one type of non-managed investment companies called Unit

Investment Trusts.

A unit investment trust, or UIT, is a company established under an indenture or similar agreement. It has the following characteristics:

The portfolio is merely supervised, not managed, as it remains fixed for the life of the

trust. In other words, there is No day-to-day management of the portfolio.

The management of the trust is supervised by a trustee.

Unit investment trusts sell a fixed number of shares to unit holders, who receive a proportionate share of net income from the underlying trust.

The UIT security is redeemable and represents an undivided interest in a specific

portfolio of securities.

Example : Unit Trust of Pakistan

Unit Trust of Pakistan (UTP) is a balanced fund that aims to preserve and grow investor’s capital

in the long term while providing a regular stream of current income on an annual basis. The Fund

operates a diverse portfolio of equity and fixed income investments whereby the equity component is meant to provide the growth in capital while dividends on the equity component

along with the fixed income investments help generate the current income.

Refrenes :

(https://en.wikipedia.org/wiki/Investment_company) http://www.investopedia.com/terms/i/investmentcompany.asp#ixzz4uAgUCkO3

Types of Investment Companies http://www.investopedia.com/exam-guide/series-26/investment-companies/investment-companies.asp#ixzz4uAjlubZ7 (https://www.nit.com.pk/index.php?option=com_content&view=article&id=181&Itemid=272#?1) (https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=20383660)

Types of Investment Companies http://www.investopedia.com/exam-guide/series-26/investment-

companies/investment-companies.asp#ixzz4uAuY9Cdt (https://www.gulfbase.com/InvestmentTutorial/SubSection?id=33&SectId=58) ( http://www.jsbl.com/wealth-management/js-cash-fund/unit-trust-of-pakistan/)

Q1(b) : Explain investment decision making

process ? How direct and indirect investement

can be diffrenciated ? Support your answer

with local examples .

Ans :

In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

Traditional investments covers:

• Security analysis

Involves estimating the merits of individual investments

• Portfolio management

Deals with the construction and maintenance of a collection of investments

The process of analysing whether investment projects are worthwhile

Five main methods are used to asses an investment .

Payback

Net present value ("NPV") Average rate of return ("ARR")

Risks

The time value of money

When considering investing in property, one should choose between direct investment (owning one or two properties that are physically rented out and managed) or indirect investment (shares in a property loan stock or unit trust company).

Direct investment

Direct investment is defined by the International Monetary Fund (IMF) as “Investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the

investor, the investor’s purpose being to have an effective voice in the management of the enterprise.” In practice, this translates to an equity holding of 10 percent or more in the foreign firm. For example, the investor who decides to invest in a toll road is a direct investor.

Buying the stock by name or buying shares in a company or investing in shares directly

though broker/subbroker is called direct investment.

Local example : For example FDI through China and on Gwadar port will counted in Direct investment .

Indirect investment

An indirect investment is a type of investing opportunity that does not require the actual purchase of the asset that ultimately generates the return. This type of arrangement is often associated with investing in real estate ventures, typically by purchasing stocks issued by a real estate company that in turn purchases and maintains the properties generating the dividends issued to the shareholders.

Indirect investment is a way of investing in real estate without actually investing in the property. Indirect investment can be done in many ways, including securities, funds, or private equity. Most investors interested in indirect investment would do so through a company or advisor who has experience in this type of investing.

Local example: Mutual funds offered by different companies in Pakistan are type of Indirect

investment in which investor do not buy the asset .

Buying a mutual fund (having the same stock in its portfolio) is an indirect investment.

Refrences :

(https://enemsfinalyearprojectmadeeasy.com/2016/03/01/direct-and-indirect-investment-advantages-and-disadvantages/)

( https://enemsfinalyearprojectmadeeasy.com/2016/03/01/direct-and-indirect-investment-advantages-and-disadvantages/)

(https://www.bayt.com/en/specialties/q/295130/what-is-the-difference-between-direct-and-indirect-investment/)

Q:2 You are advised to study the existing corporate

structure of National clearing company ,central

depositary company and stock exachange . write one

page on each of the organization and also draw flow

diagrams of each?

A capital market is a market for securities (debt or equity), where

business enterprises (companies) and governments can raise long-

term funds. It is defined as a market in which money is provided for

periods longer than a year.

The Capital Market of Pakistan has a triangular foundation comprising of the stock exchange, Depository Company and NCCPL; the goal of all being an economically stronger, more prosperous Pakistani Capital Market.

National Clearing Company of Pakistan Limited

(NCCPL) The National Clearing Company of Pakistan Limited has been formed to establish and operate a national clearing and settlement system (“NCSS”)

Accordingly the Company was incorporated on July 3, 2001 to manage and operate the National Clearing & Settlement System (NCSS) in a fully automated electronic settlement system. NCSS Live Operations commenced from December 24, 2001. However, the Company became fully

operational in the year 2003-04 by inducting and handling clearing and settlement of all book-entry securities through NCSS. Thereafter, any security which becomes live in Central

Depository System, on ready status, is accordingly inducted into the NCSS.

As a part of Capital Market Development Program of Asian Development Bank (ADB) in

Pakistan, the Capital Market Project Consultants, Arthur Anderson & Company were given mandate to develop recommendations for a National Clearing & Settlement System (NCSS) to

replace the separate and individual Clearing Houses of three Stock Exchanges, namely Karachi Stock Exchange, Lahore Stock Exchange and Islamabad Stock Exchange by a single and centralized entity.

key products and services offered by NCCPL are as under:

Issuance of Unique Identification Number (UIN) for each client. UIN Information System (UIS) to access trading information directly by client through

NCCPL’s System. Pre-Settlement Delivery Facility.

Reporting of Un-Listed TFC Trades by Market Participants. Interbank Fund Transfer (IBFT) Facility for Members of NCCPL. Implementation of Leveraged Market Products such as:

o Margin Trading System (“MTS”); o Margin Financing System (“MFS”);and

o Securities Lending and Borrowing System (“SLB”) Risk Management of Institutional Clients and Leverage Markets. Computation, Determination and Collection of Capital Gain Tax “CGT”

National Custodial Services (NCS)

Organization flow Diagram

Central Depository Company(CDC)

Central Depository Company is recognized as the infrastructure backbone of the Pakistan Capital

Market and it is the sole securities depository in the country. In the past two decades, CDC has also evolved as one of the leading and most prestigious infrastructure institutions in Pakistan with a focus on the capital market.

CDC is the sole entity handling the electronic (paperless) settlement of transactions carried out at the stock exchanges of the country. Through efficient functioning of CDC, all the market settlement is in book entry form.

Primarily, CDC’s function was to operate the Central Depository System (CDS) for all financial

instruments traded in Pakistan Capital Market. However, with the ever growing capital market, It

has diversified its business beyond the traditional depository domain It offer the following services as well:

Investor Account Services

Launched in 1999 Allows the retail investor to open and maintain custody accounts directly with CDC.

Trustee and Custodial Services

Launched in 2002 Serves as a Trustee to Open-end and Closed-end Mutual Funds and Voluntary Pension Schemes.

Share Registrar Services

Launched in 2008 Provides share issuing companies state-of-the-art facilities of registrar and transfer agents,

including customer dealing on behalf of the companies.

ITMinds Limited

(Wholly owned subsidiary of CDC)

Launched in 2009 Provides Business Process Outsourcing (BPO) services which include provision of back office

functions to the Mutual Fund industry.

CISSII (Centralized Information Sharing Solution for Insurance Industry)

(Developed and managed by CDC Pakistan)

Launched in 2014 Offers online information sharing solution for the life insurance industry. It allows life insurance

companies to share information such as acceptance of claim, postponed or declined risks, malpractices of agents and group life claims experience for the purpose of achieving gre ater efficiency and transparency in the Industry.

CDC Organization Flow diagram

stock exachange

The Pakistan Stock Exchange (PSX) is the stock exchange of Pakistan with trading floors in

Karachi, Islamabad and Lahore. PSX was established on 11 January 2016 after the merger of individual stock exchange's of Karachi, Lahore and Islamabad PSX's origin's where laid with the

establishment of the Karachi Stock Exchange in 1947, the Lahore Stock Exchange in 1970 and the Islamabad Stock Exchange in 1992. As of May 28, 2016, there are 560 companies listed in PSX and the total market capitalisation is $98billion.

The investors on the exchanges include 1,886 foreign institutional investors and 883 domestic institutional investors along with about 0.22 million retail investors. There are also about 400

brokerage houses which are members of the PSX as well as 21 asset management companies.

PSX was reclassified as a MSCI Emerging Market in May 2017. While, the FTSE classifies PSX as a Secondary Emerging Market.

PSX is among the world's best performing stock market's, between 2009 and 2015 it delivered a

26% a year. In December 2016, PSX sold 40% strategic shares to a Chinese consortium for $85 million

PSX Flow Diagram

Refrences:

https://dps.psx.com.pk/webpages/crp_information.php

http://cdcpakistan.com

https://www.nccpl.com.pk/

(https://en.wikipedia.org/wiki/Pakistan_Stock_Exchange)

Q#3(a) : Discuss different types of Funds

available to the investores in Pakistan ?

Ans :

Following types of funds are vailable to

the investors in Pakistan .

Equity Scheme: An equity scheme or equity fund is a fund that invests in Equities

more commonly known as stocks. The objective of an equity fund is long-term growth through capital appreciation, although dividends and capital gain realized are also sources of revenue.

Example :

ABL Stock Fund (ABL-SF) is an open end equity fund.

Salient Features:

Minimum investment from Rs. 5,000/-

Encashment anytime

Tax Exempt (as per Current Tax Law)

Tax Credit of up to Rs.75,000/- for individuals*

Suitable for investors with a long term horizon

Other : AKD Opportunity Fund , Alfalah GHP Alpha Fund , Askari Equity Fund , Atlas Stock Market

Fund , PIML Value Equity Fund , First Habib Stock Fund , JS Growth Fund , Lakson Equity Fund , UBL

Stock Advantage Fund

Balanced Scheme: These funds provide investors with a single mutual fund that

invests in both stocks and debt instruments and with this diversification aimed at providing investors a balance of growth through investment in stocks and of income from investments in debt ins truments.

Example :

Meezan Balanced Fund

Meezan Balanced Fund is a Shariah Compliant open-end balanced scheme. It is a tool that provides exposure to both

Equity and Debt markets through a single fund. The earnings are generated by potential capital appreciation and regular

income. Meezan Balanced Fund ( previously a closed end balanced scheme ) was converted into an open -end balanced

fund with effect from July 1, 2013.

Other : Faysal Balanced Growth Fund , First Habib Islamic Stock Fund (Formerly: First Habib

Islamic Balanced Fund) ,

Asset Allocation Fund: These Funds may invest its assets in any type of

securities at any time in order to diversify its assets across multiple types of securities & investment styles available in the market.

Askari Asset Allocation Fund

In line w ith our unique philosophy, the Asset Allocation Fund does not track the Stock Index as a benchmark, instead the strategy

w orks towards measured goals, and allow s the investor to build and follow an objective, i.e. earn Risk Free + 4% (CAGR) on a

rolling period of 3 years. This philosophy makes the investment, 'Objective Based'. The strategy calls for investments in fundamentally stable companies and uses market volatility to its advantage.

Other companies : PIML Asset Allocation Fund , Faysal Asset Allocation Fund , HBL Islamic Asset Allocation Fund , MCB

Pakistan Asset Allocation Fund

Fund of Fund Scheme: Fund of Funds are those funds, which invest in other

mutual funds. These funds operate a diverse portfolio of equity, bal anced, fixed income and money market funds (both open and closed ended).

Meezan Financial Planning Fund of Funds (Aggressive) , JS Fund of Funds , UBL Conservative Allocation Plan funds of funds , NAFA Islamic Principal Preservation Fund of funds .

Shariah Compliant (Islamic) Scheme: Islamic funds are

those funds which invest in Shariah Compliant securities i.e. shares, Sukuk, Ijara sukuks etc. as may be

approved by the Shariah Advisor of such funds. These funds can be offered under the same categories as

those of conventional funds.

ABL Islamic Dedicated Stock Fund , Atlas Islamic Stock Fund , PIML Islamic Equity Fund , Dawood Islamic

Fund , Faysal Islamic Savings Growth Fund , JS Islamic Fund , NAFA Riba Free Savings Fund

Capital Protected Scheme: In this type of scheme, the payment of

original investment is guaranteed with any further capital gain which may accrue at the end of the

contractual term of the Fund. Such funds are for a specific period.

JS Capital Protected Fund V , NAFA Islamic Principal Protected Fund I , UBL Capital Protected Fund III

Index Tracker Scheme: Index funds invest in securities to mirror a

market index, such as the KSE 100. An index fund buys and sells securities in a manner that mirrors the composition of the selected index. The fund's performance tracks the underlying index's performance.

AKD Index Tracker Fund

Money Market Scheme: Money Market Funds are among the safest and

most stable of all the different types of mutual funds. These funds invest in short term debt instruments such as Treasury bills and bank deposits.

ABL Cash Fund , AKD Cash Fund , Meezan Cash Fund , Alfalah GHP Cash Fund , Askari Sovereign Cash Fund

Income Scheme: These funds focus on providing investors with a steady

stream of fixed income. They invest in short term and long term debt instruments like TFCs, government

securities like T-bills/ PIBs, or preference shares.

ABL Income Fund , Meezan Islamic Income Fund , Alfalah GHP Income Fund, Askari Islamic Income Fund

Aggressive Fixed Income Scheme: The aim of

aggressive income fund is to generate a high return by investing in fixed income securities while taking

exposure in medium to lower quality of assets also. Commodity Scheme: These schemes enable small

investors to take advantage of gains in commodities such as gold through pooled investments. They

invest at least 70%of their assets in commodity futures contracts, which include both cash-settled and deliverable contracts.

AKD Aggressive Income Fund (Formerly: AKD Income Fund) , Alfalah GHP Income Multiplier Fund , Askari High Yield Scheme , Faysal Income & Growth Fund

An investor can invest in any of the above categories of funds in accordance with his requirements and

appetite for risk. For example those who want to earn high returns over a longer period can invest in

Equity Funds whereas those who want to invest for short term with reasonable return can invest in Money Market Fund.

http://www.mufap.com.pk

(http://www.aiml.com.pk/funds.php?fund=Askari%20Asset%20Allocation%20Fund&fundid=2)

(https://www.almeezangroup.com/what-we-offer/mutual-funds/balanced-funds/)

http://ablamc.com/funds/abl_stock_fund/)

Q#3(b)

Important terms to know . before answering above

questions .

Benchmark A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market-segment stock and

bond indexes are used for this purpose.

R-squared R-squared is a statistical measure that represents the percentage of a fund or security's

movements that can be explained by movements in a benchmark index. For example, an R-squared for a fixed-income security versus the Barclays Aggregate Index identifies the security's proportion of variance that is predictable from the variance of the Barclays Aggregate Index. The

same can be applied to an equity security versus the Standard and Poor's 500 or any other relevant index

Alpha Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and

the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT).

All of these indicators are intended to help investors determine the risk-return profile of a mutual

fund.

Beta Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to

the market as a whole. Beta is used in the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns. Beta is also known

as the beta coefficient.

(i)Which funds returns are best explained by the

market returns ?

Ans : Fund number one is best explained by market`s return .

Reason : As the 1st fund has highst value of R^2 and +ve alpha and beta is aslo 1 so it is

best for investments.

98 % rpresents that there is a very good correlation between Fund returns and

benchmark`s return .

Value of alpha is +ve which means Fund is performing better than its beta would predicit . while fund produced a return 2% higher than its beta would predict .

Beta of the market is taken as 1 so when we see the beta of Fund 1 we notice that it is also 1 it means Funds excess return are aligned with benchmark index.

(ii)Which fund had the largest Total Risk ?

Ans : Fund Five had the largest total risk

Reason : Because fund five has high beta value among all other funds which is 1.2 it means it is

more more sensitive to market movements the value of alpha is also low although it is +ve but as

compared to other funds it is low which means difference between fund's actual returns and its

expected performance is less while the R^2 of the Fund is also average which is 60% wile above 70 % is considered good .

(iii)Which Fund had the lowest market risk ?

highest risk ? As Explained earlier Fund number 5 had highest market risk because its beta value which is 1.2 is very

high than other funds and Fund number 4 has lowest market risk because its beta value lowest than all other funds and R^2 value is also good which is 80% above 70% .

(iv)Which Fund(s) according to jensen Alpha

outerperformed the market ?

According to jensen alpha Fund number #3 outperformed the market as its alpha value is 3.5 which

means Fund #3 produced a return 3.5 higher than its bita would predict . which is higher than all other

funds .

Refrences :

Read more: Beta http://www.investopedia.com/terms/b/beta.asp#ixzz4uKiKRKQ8

Read more: Benchmark http://www.investopedia.com/terms/b/benchmark.asp#ixzz4uKga2I4X

Read more: Alpha http://www.investopedia.com/terms/a/alpha.asp#ixzz4uKhklq8y

Read more: R-Squared http://www.investopedia.com/terms/r/r-squared.asp#ixzz4uKh18Chc

Q4:

overvalued stock

An overvalued stock has a current price that is not justified by its earnings outlook or price/earnings (P/E)

ratio, so it is expected to drop in price. Overvaluation may result from an emotional buying spurt, which

inflates the stock's market price, or from a deterioration in a company's financial strength. Potential

investors do not want to overpay for a stock.

undervalued stock An undervalued stock is defined as a stock that is selling at a price significantly below what is assumed

to be its intrinsic value. For example, if a stock is selling for $50, but it is worth $100 based on predictable future cash flows, then it is an undervalued stock.

Following stocks are under and

over valued see the picture

below

The securities that are plotted above the SML, i.e. the risk-free rate, are undervalued because their

expected return compared to their risk is low. Conversely, the securities that are plotted below the SML are overvalued because their expected return compared to their risk is high.

The security market line (SML)

The security market line (SML) presents the capital

asset pricing model (CAPM) on a graph, seeking to

demonstrate the levels of market risk based on the

hypothesis of a perfect market

The security market line (SML) of Stock A

The security market line (SML) of Stock B

The security market line (SML) of Stock C

Overvalued http://www.investopedia.com/terms/o/overvalued.asp#ixzz4uHbVztiF

((https://en.wikipedia.org/wiki/Undervalued_stock)

(http://www.myaccountingcourse.com/accounting-dictionary/security-market-line)

Q5:

Ans :

Important formulea are these see below

The End