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Master in Business Administration –Semester 3
MF0010– Security Analysis and Portfolio Management - 4 Credits
(Book ID: B1208)
Assignment Set- 2 (60 Marks)

Note: Each question carries 10 Marks. Answer all the questions.

Q.1 Differentiate between ADRs and GDRs

Q.2 Using financial ratios, study the financial performance of any particular company of your interest.

Q.3 As an investor how would you select an equity mutual fund scheme?

Q.4 Show how duration of a bond is calculated and how is it used.

Q.5 Show with the help of an example how portfolio diversification reduces risk.

Q.6 Study the performance of any emerging market of your choice.


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Formatted wrote:
Master in Business Administration –Semester 3
MF0010– Security Analysis and Portfolio Management - 4 Credits
(Book ID: B1208)
Assignment Set- 2 (60 Marks)

Note: Each question carries 10 Marks. Answer all the questions.

Q.1 Differentiate between ADRs and GDRs

Q.2 Using financial ratios, study the financial performance of any particular company of your interest.

Q.3 As an investor how would you select an equity mutual fund scheme?

Q.4 Show how duration of a bond is calculated and how is it used.

Q.5 Show with the help of an example how portfolio diversification reduces risk.

Q.6 Study the performance of any emerging market of your choice.

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Q.1 Differentiate between ADRs and GDRs

Depositary Receipts (DRs), which include ADRs, GDRs and Euro DRs are negotiable securities that generally represent a foreign company’s publicly traded equity or debt. Depositary Receipts are eligible to trade on U.S. stock exchanges as well as on many European Stock Exchanges.

Both individual and institutional investors desire to diversify their portfolios and reduce risk by investing internationally. But there are problems encountered when investing directly in local trading markets. These obstacles can include inefficient trade settlements, uncertain custody services and costly currency conversions. Depositary Receipts can help overcome many of these operational and custodial problems of international investing.

The Depositary Receipt is issued by a depositary bank, when the underlying shares are deposited with the bank, usually by a broker who has purchased the shares in the open market (in the company’s home country). Once issued, these certificates may be freely traded in the over-the-counter market or, upon compliance with regulations, on a national stock exchange. The Depositary Receipt Certificate states the responsibilities of the depositary bank with respect to actions such as payment of dividends, voting at shareholder meetings, and handling of rights offerings.

Investors looking for international investment opportunities also invest in mutual funds. There are both global mutual funds as well as regional and single country funds available to investors interested in investing overseas. The global funds are composed of shares of companies that are both foreign and domestic, whereas regional or single country funds expose investors to companies from one region or country in particular.

American Depository Receipts (ADR)

ADRs, are investment vehicles designed to allow U.S. investors to invest in companies that are not based in the United States. In this case, the companies are not traded on US exchanges, but on their home country’s exchange. The ADR itself is a certificate issued by a U.S. depositary bank, representing shares of a foreign company held by the bank. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. The ADR allows these shares to be traded in US dollar denominated securities in the US domestic financial market. Corporations issuing ADRs are typically among the largest foreign companies.

ADR is a receipt that represents the number of foreign shares that are deposited at a U.S. bank. The ADR represents the ownership of underlying foreign stock that is held in custody by the bank that issues them. In effect, the bank owns the shares and trades claims against those shares. ADR investors are entitled to all the privileges of stock ownership including dividend payments. The bank also serves as a transfer agent for the ADR.

American Depositary Receipts (ADRs) have been used to help U.S. investors to avoid transactions costs and some of the risks of holding or trading securities in an unfamiliar foreign market. They can also be used to overcome regulatory barriers facing U.S. investors from holding shares in non-U.S. firms. The wide range of companies whose shares are indirectly traded in the United States means that U.S. investors can essentially achieve full diversification without moving outside the securities traded within the United States.

ADRs are issued typically by one of the large U.S. banks. An American Depositary Receipt certifies that the depositary bank is holding shares in the non-U.S. firm as a trustee for the holder of the certificate. Normally it is at the request of the non-U.S. firm that the depositary bank launches an ADR program, with the objective of enabling the firm to reach a larger pool of worldwide investors. ADRs can be offered for sale in the United States only in accordance with regulations established by the Securities and Exchange Commission (SEC), which ensures an adequate degree of disclosure of the foreign firm’s accounts. The more is the disclosure, the more unrestricted is the trading of the ADR in the U.S. markets.

Owning ADRs has some advantages compared to owning foreign shares directly for an investor in USA. When an investor buys and sells ADRs he is trading in the U.S. market. The trade will clear and settle in U.S. dollars. The depositary bank converts any dividends or other cash payments into U.S. dollars before sending them to the investor. The depositary bank may also arrange to vote on behalf of the investor in the shareholder meeting as per the instructions of the investor. However, there are disadvantages too. Depositary banks charge fees for their services and will deduct these fees from the dividends and other distributions on the shares. The depositary bank also will incur expenses, such as for converting foreign currency into U.S. dollars, and usually will pass those expenses on to the investor.

Global Depository Receipts (GDR)

To raise money in more than one market, some corporations use Global Depositary Receipts (GDRs) to sell their stock on markets in countries other than the one where they have their headquarters. The GDRs are issued in the currency of the country where the stock is trading. For example, a German company might offer GDRs priced in pounds in London and in yen in Tokyo. Individual investors in the countries where the GDRs are issued buy them to diversify into international markets.

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