Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Security Analysis - II - Question Paper

Inspite of all the talk about the so-called sophisticated markets being very efficient; there are deficiencies in all markets (the value investing is possible because of inefficiencies in market pricing). In practice, markets cannot be stated to be perfectly efficient or completely inefficient. However, a few markets can be stated to be more efficient than others. Now, if everyone believes that the market is efficient, than it cannot remain efficient, because no 1 will invest actively and it may turn out to be like a fixed income market. For market to remain efficient, it is essential to believe that the market is inefficient and people try to beat it. An efficient market is a state that has been conjured up only by theoreticians. It has nothing to do with the real world of uncertainty in which everyone makes decisions. In reality, lot of companies remain unanalyzed, and if the companies are small and not many may be subsequent the stock consequent to which such stocks remain neglected. Besides neglect, the fund managers are under constant pressure to produce superior outcomes. The management does not wish to lose their clients and fund managers do not wish to lose their jobs. Thus, unlike as an individual investor, fund managers cannot follow value-investing principles.



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Suggested Answers
Security Analysis - II (212): April 2006


part D : Case Study

1. Michael Porter Analysis

Threat of new entry

· It is a capital-intensive industry. Only large players with deep pockets can enter the market and operate successfully.

· Entry barrier is very high in most of market segments. New product development, innovations, superior quality, and aggressive marketing tactics are a few of the competitive strategies that the companies are adopting to retain and increase their market share.

· Due to high exit barriers there is low threat of new entry.

Threat of substitutes

The fiber optical industry can be substituted through the wireless technology. Wireline is optimized to give high-speed data applications as against wireless, which has limitations in terms of bandwidth and spectrum, when it comes to high-speed data. The global pattern clearly indicates that to support high speed broadband networks, and to give platform for network management services for large firms, and also for new offerings like triple play, ethernet leased lines, bandwidth-on-demand etc, new optical transmission networks are needed. Also lower cost of this technology will increase the penetration of wireline technology.

Earning:   Approval pending.