Question

1. a) What are the differences between Equity and Fixed –Income Securities?

b) How does Investment Banking differ from Commercial Banking?

c) What is the difference between Asset Allocation and Security Selection?

d) What are the differences between Real and Financial Assets?

Answer 1

(a) Equity is the owner's fund in the company.An investor may invest either in the equity capital of the companies or may invest in the debt securities issued by companies and other organizatins like Government. Difference between these two may be summarized as follows:

Sr.	Equity	Fixed Income Securities
1	This is the part of Equity Capital of the company	These are the instruments of loan taken by the organization
2	It dose not guarantee any return as the return to share-hoders is provided only if profits are remaining after deducting all the expenses of the company	Fixed Income securities gurantee a fixed percentage of return to the security-holders
3	Equity carries very high risk and potential of huge return as well	As the return on fixed income securities is fixed and repayment of Fixed amount on maturity is also fixed, these securities carry low risk.
4	Equity Share-holders are the owners of the company hence they posses voting rights in the company	Holders of Fixed income securities do not carry any voting rights.
5	Return to Equity shareholders is given by way of Dividend	Return to Fixed Income Security Holders is provided in the form of interest.

(b) Investment Bankers acts as an intermediary between Issuer of Securitis and investors. Investment bankinrs facilitate isssue of Securities either in Initial Public Offer or in Further Public Offer. Investment Bankers provide investment advisory services to the investors, these also conduct research of the Companies. In essence these help issuers in raising fund and help investors in investing. Investment banks are regulated by the Security Market Regulator of the country like SEC,SEBI.

Commercial banks provide services to general public in the form of deposite management, loan providing,facilitating payments to business entities and general public etc. Commercial banks are regulated by the Central Bank of the country like Federal Reserve,Reserve Bank of India.

(c)Difference between Asset Allocatin and Security Selection:

Asset Allocation is the process of determinig proportion of Non Corelating Securities in the portfolio e.g. diciding how match debt and how much equity shuld be there in the portfolio to acheive optimum risk return balance. We know that all type of securities may not move in the same direction at the same time. If equity rises,Debt falls and vice versa: if large cap stocks rises, small cap may fall.

Security selection is the process of selecting best securities among the choices available. Once the investor has decided the proportion of non corelating securities, he choose some securities for constructing his/her portfolio.

(d)Real asset is an physical asset which has it's inherent value. Substance used in the real asset has it's value like wood,gold,iron.Examples are Building,Motor Car,Ornaments etc

Financial Asset is an asset which derive it's value from contractual claim such as bond,stocks etc.

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