Q.1Define investment & its process in detail.
Q.2 What is the significance of Beta in portfolio selection? How it will be measured?
Wednesday, February 25, 2009
Thursday, January 22, 2009
Investment Alternatives
Investments alternatives
The investment alternatives ranging from financial securities to traditional non-security investments. The financial security may be negotiable or non-negotiable.
NEGOTIABLE SECURITIES
The negotiable securities are financial securities that are transferable. The negotiable securities may yield variable income or fixed income. Securities like equity shares are variable income securities. Bonds, debentures, Indra Vikas Patras, Kisan Vikas Patras, Government securities and money market securities yield a fixed income.
Variable Income Securities
Equity shares- The equity shares attract the interest of many. The stock market classifies shares into Growth shares, Income shares, Defensive shares, Cyclical shares
and Speculative shares.
i) Growth shares The stocks that have higher rate of growth than the industrial growth rate in profitability are referred to as growth shares. For example, the list of major gainers for 1999 is dominated by software sector stocks. The HCL and Infosystems share prices increased sharply.
ii) Income shares These stocks belong to companies that have comparatively stable operations and limited growth" opportunities. The bank shares and some of the fast moving consumer goods stocks such as Cadburys, Nestle and Hindustan Lever may be termed as income shares.
iii) Defensive shares Defensive stocks are relatively unaffected by the market movements. For example, a host of pharmaceutical stocks posted returns in excess of 50 per cent in 1998. The pharmaceutical industry owing to its inherent nature of demand is not affected by the down turn in the economy.
iv) Cyclical shares The business cycle affects the cyclical shares. The upward and downward movements of the business cycle affect the business prospects of certain companies and their stock prices. Such shares provide low to moderate current yield. Capital gain may be highly variable. For example, the automobile sector stocks are affected by the business cycles.
v) Speculative shares Shares that have lot of speculative trading in them are referred to as speculative shares. During the bull and bear phases of the market, this type of shares attracts the attention of the traders.
The stocks, which fall under one category in one period may switch over to another categury in another period. The classification should not be considered rigid. For example, growth shares may be speculative shares.
Fixed Income Securities
a) Preference shares A detailed description of the preference shares is given in chapter 1. Preference shares are no longer regarded as inferior to the equity capital. Corporate like Siemens has placed Rs.150 Cr. worth of preference shares. High tax paying companies or investors prefer to subscribe to the preference shares and investors with a low tax burden would prefer to go in for debt instruments. The conversion options provided in the by preference shares also make it attractive. The biggest advantage is the tax-exempt status of the preference share's dividend.
b) Debentures Corporate debentures are an option available to the investors who are willing to sacrifice liquidity for higher return. Manufacturing companies like Gujarat Industries Power and TISCO have issued debentures. If the debentures are not actively traded in the debt segment of the capital market, the investors may have to hold the instrument till maturity. If the instruments were actively traded in the secondary market, it would have perhaps changed hands at a considerable premium, thereby lowering the
yield on par with the present interest rate. These reasons contribute towards high coupon rates on debentures.
c) Bonds Bonds are similar to the debentures but they are issued by the public sector undertakings. The value of the bond in the market depends upon the interest rate and the maturity. The coupon rate is the nominal interest rate offered on the bonds. The coupon rate is contractual involving the terms and conditions of the issuance of the debt security. Being contractual it cannot be changed during the tenure of the instrument. The investors are not affected by lowering of the bank rates. When the bank rates are lowered, actually, the value of the bonds, which are carrying interest rates above the bank rate would appreciate. lOBI and ICICI have issued various bonds to suit the needs of the investors. Some of them are deep discount bond, education benefit bond, retirement benefit bond and index bond.
d) IVPs and KVPs These are saving certificates issued by the post office with the name Indira Vikas Patra (IVP) and Kisan Vikas Patra (KVP). The IVPs are in the face value of R~500, 1000 and 5000. The KVPs are in the denomination of Rs, 1000, 5000 and 10000. The capital is doubled in 5.5 years with the return of 13.47%. IVPs are like bearer bonds, transferable by hand delivery and therefore are attractive to the persons who prefer cash transactions. No income tax concession is available for this type of investment.
e) Government securities The securities issued by the Central, State Government and Quasi Government agencies are known as Government securities or gilt edged securities. As Government guaranteed security is a claim 1m the Government, it is a secured financial instrument, which guarantees the income and the capital. The rate of interest on these securities is relatively lower because of their high liquidity and safety.
f) Money market securities Money market securities have very short term maturity say less than a year. Common money market instruments are:
Treasury bills
Commercial paper
Certificate of deposit
i) Treasury bills A treasury bill is basically an instrument of short term borrowing by the Government of India. To develop the treasury bill market and provide investors with financial instruments of varying short-term maturities and to facilitate the cash management requirements of various segments of the economy, in April 1997 treasury bills of varied maturities were introduced. 14-day treasury bill on a weekly basis was introduced from June 6, 1997. In the second half of 1997-98, treasury bill of 28-day
was introduced on aucti9n basis. Further, it was decided to reintroduce 182-day treasury bills through auctions. Generally, treasury bills are of 91-days. Since the interest rates offered on the treasury bills are very low, individuals very rarely invest in them.
ii) Commercial papers Commercial paper is a short-term negotiable instrument with fixed maturity period. It is an unsecured promissory note issued by the company either directly or through bank/ merchant banks. The maturity period of commercial paper was originally three (minimum) to six (maximum) months from the date of issue. In Oct 1993, the maximum period was extended to one year. The commercial papers are sold at a discount and redeemed at their face value. The discounted value implicates the interest rate. The denomination of commercial paper is high. Mostly the companies and institutional investors favour them. The minimum maturity of CP was brought down from 3 months to 30 days.
iii) Certificate of deposit The certificate of deposit is a marketable receipt of funds deposited in a bank for a fixed period at a specified rate of interest. They are bearer documents and readily negotiable. The denominations of the CD and the interest rate on them are high. It is mainly preferred by institutional investors and companies rather than the individuals. The minimum size of the certificate is Rs 10 lakh. The additional amount is issued in multiples of Rs 5 lakh.
NON-NEGOTIABLE SECURITIES
The non-negotiable financial investment as the name itself suggests is not transferable. This is also known as non-securitised financial investments. Deposit schemes offered by the post offices, banks, companies, and non-banking financial· companies are of this category. The tax-sheltered schemes such as public provident fund, national savings certificate and national savings scheme are also non-securitised financial investments.
(A) Deposits
Deposits earn fixed rate of return. Even though bank deposits resemble fixed income securities they are not negotiable instruments. Some of the deposits are dealt subsequently.
a)Bank deposits It is the simple investment avenue open for the investors. He has to open an account and deposit the money. Traditionally the banks offered current account, savings account and fixed deposit account. The deposits in the banks are considered to be safe because of the RBI regulation. The risk averse investors prefer the bank deposits.
b) Post office deposits Like the banks, post office also offers fixed deposit facility and monthly incomescheme. Post office Monthly Income Scheme is a popular scheme for the retired. An interest rate of 13% is paid monthly. The term of the scheme is 6 years, at the end of which a bonus of 10% is paid. The annualised yield to maturity works out to be 15.01% per annum. After three years, premature closure is allowed without any penalty. If the closure is after one year, a penalty of 5% is charged.
c) NBFC deposits In recent years, there has been a significant increase in the importance of non-banking financial companies in the process of financial intermediation. The NBFC comes under the purview of the RBI.The amendment of RBI Act in Jan 1997, made registration compulsory for the NBFCs.
i) Period The maturity period ranges from few months to five years. It varies from company to company. For example, the Birla Global Finance, the company belonging to Aditya Birla group accepts deposits with maturity from 3-5 years.
ii) Maximum limit The limit for acceptance of deposit has been based on the credit rating of the company. The NBFCs not having net owned funds ofRs 25 lakh are not entitled to accept deposits.
iii) Internet NBFCs offer interest rate higher than the commercial bank on public deposit. The interest rate differs according to maturity period. There is a disparity in the interest rate among the companies in accordance with the credit ratings and policies of the companies.
iv) Security Security of the deposits of the NBFCs is much lower than the depositsw
improve the liquidity ofNBFCs the percentage of liquid assets required to be maint
has been enhanced from 12.5 percent to 15 percent with effect from April 1999 respe
pany Law Board is authorised to direct the defaulting NBFCs to repay the deposits. I
strict rules and regulations laid down by RBI the default rate is high in the case ofNE
(B) Tax sheltered savings schemes
Tax sheltered savings schemes offer tax relief to those who participate in their schemes. The important tax sheltered savings schemes are
=> Public Provident Fund Scheme
=> National Savings Scheme
=> National Savings Certificate VIII series
a) Public provident fund scheme (PPF) PPF earns an interest rate of 12 percent per year,
which is exempted from the income tax under sec 88. The individuals and Hindu undivided families can participate in this scheme. The maximum limit per annum for the deposit is Rs. 6O,OOO. The interest is accumulated in the deposit. It provides early withdrawal facilities from 7th year and every year thereafter, the account holder has an option to withdraw 50 per cent of the balance to his credit 4 years ago or 1 year ago whichever is lower. The facility makes PPF a self-sustaining account from 7th year onwards.
b) National savings scheme (NSS) This scheme helps in deferring the tax payment. Individuals and HUF are eligible to open NSS account in the designated post office. The NSS-87 gives100per cent income tax rebate but the interest as well as the capital are fully taxable if withdrawn during their lifetime. Investments in the NSS scheme, with a lock in period of 4 years qualify for a rebate of 20 per cent under Section 88 of the Income Tax Act, subject to a maximum of Rs 12,000. The investment also earns an interest rate of 11per cent per year covered by Sec 80L. Compared to other tax savings' instruments the return offered by this scheme is lower.
On the liquidity aspect, withdrawal is permitted at any time after four years from the end of the financial year in which the account is opened. The entire amount can be withdrawn. The account can be closed on the expiry of 4 years. There is no fixed tenure for investment. One can also keep the account alive and earn interest at 11percent per annum.
As a tax saving instrument "anytime" withdrawal after 4 years is the only interesting feature to the prospective investor. The tax deduction at source at the rate of 20 percent on the entire amount withdrawn has proved too costly to the investors.
c) National savings certificate (6 yrs.) - III This scheme is offered by the post office.
These certificates come in the denominations of Rs 500, 1,000, 5,000 and 10,000. The contribution and the interest for the first 5 years are covered by Sec 88. The interest is cumulative at the rate of 12% per annum and payable biannually is covered by Sec 80L. No withdrawals are permitted. There is no deduction at maturity.
(c) Life Insurance
Life insurance is a contract for payment of a sum of money to the person assured (or to the person entitled to receive the same) on the happening of event insured against. Usually the contract provides for the payment of an amount on the date of maturity or at specified dates at periodic intervals or if unfortunate death occurs. Among other things, the contracts also provide for the payment of premium periodically to the corporation by
the policy holders. Life insunmce eliminates risk. The major advantages of life insurance are given below:
i) Protection Saving through life insurance guarantees full protection against risk of death of the saver. The full assured sum is paid, whereas in other schemes only the amount saved is paid.
ii) Easy payments For the salaried people the salary savings' schemes are introduced. Further, there is an easy instalment facility method of payment through monthly, quarterly, half yearly or yearly mode.
iii) Liquidity Loans can be raised on the security of the policy.
iv) Tax relief Tax relief in Income Tax and Wealth Tax is available for amounts paid by way of premium for life insurance subject to the tax rates in force.
MUTUAL FUNDS
Mutual fund is another investment alternate. It is of recent origin in India. Within a short span of time several financial institutions and banks have floated varieties of mutual funds. The investors with limited funds can invest in the mutual funds and can have the benefits of the stock market and money market investments as specified by the particular fund
Investment companies or investment trusts obtain funds from large number of investors through sale of units. The funds collected from the investors are placed under professional management for the benefit of the investors. The mutual funds are broadly classified into open-ended scheme and close-ended scheme.
Open-ended Scheme
The open-ended scheme offers its units on a continuous basis and accepts funds from investors continuously. Repurchase is carried out on a continuing basis thus, helping the investors to withdraw their money at any time. In other words, there is an uninterrupted entry and exit into the funds. The open-'end scheme has no maturity period and they are not listed in the stock exchanges. Investor can deal directly with the mutual fund for investment as well as redemption. The open-ended fund provides liquidity to the investors since the repurchase facility is available. Repurchase price is fixed on the basis of net asset value of the unit. In 1998 the open-ended schemes have crossed 80 in number.
Close-ended Scheme
The close-ended funds have a fixed maturity period. The first time investments are made when the close end scheme is kept open for a limited period. Once closed, the units are listed on a stock exchange. Investors can buy and sell their units only through stock exchanges. The demand and supply factors influence the prices of the units. The investor's expectation also affects the unit prices. The market price may not be the same as the net asset value.
Sometimes mutual funds with the features of close-ended and open-ended schemes are launched, known as interval funds. They can be listed' in the stock exchange or may be available for repurchase during specific periods at net asset value or related prices.
THE REAL ASSETS
(1) GOLD & SILVER
(2) ART
(3) ANTIQUES
The investment alternatives ranging from financial securities to traditional non-security investments. The financial security may be negotiable or non-negotiable.
NEGOTIABLE SECURITIES
The negotiable securities are financial securities that are transferable. The negotiable securities may yield variable income or fixed income. Securities like equity shares are variable income securities. Bonds, debentures, Indra Vikas Patras, Kisan Vikas Patras, Government securities and money market securities yield a fixed income.
Variable Income Securities
Equity shares- The equity shares attract the interest of many. The stock market classifies shares into Growth shares, Income shares, Defensive shares, Cyclical shares
and Speculative shares.
i) Growth shares The stocks that have higher rate of growth than the industrial growth rate in profitability are referred to as growth shares. For example, the list of major gainers for 1999 is dominated by software sector stocks. The HCL and Infosystems share prices increased sharply.
ii) Income shares These stocks belong to companies that have comparatively stable operations and limited growth" opportunities. The bank shares and some of the fast moving consumer goods stocks such as Cadburys, Nestle and Hindustan Lever may be termed as income shares.
iii) Defensive shares Defensive stocks are relatively unaffected by the market movements. For example, a host of pharmaceutical stocks posted returns in excess of 50 per cent in 1998. The pharmaceutical industry owing to its inherent nature of demand is not affected by the down turn in the economy.
iv) Cyclical shares The business cycle affects the cyclical shares. The upward and downward movements of the business cycle affect the business prospects of certain companies and their stock prices. Such shares provide low to moderate current yield. Capital gain may be highly variable. For example, the automobile sector stocks are affected by the business cycles.
v) Speculative shares Shares that have lot of speculative trading in them are referred to as speculative shares. During the bull and bear phases of the market, this type of shares attracts the attention of the traders.
The stocks, which fall under one category in one period may switch over to another categury in another period. The classification should not be considered rigid. For example, growth shares may be speculative shares.
Fixed Income Securities
a) Preference shares A detailed description of the preference shares is given in chapter 1. Preference shares are no longer regarded as inferior to the equity capital. Corporate like Siemens has placed Rs.150 Cr. worth of preference shares. High tax paying companies or investors prefer to subscribe to the preference shares and investors with a low tax burden would prefer to go in for debt instruments. The conversion options provided in the by preference shares also make it attractive. The biggest advantage is the tax-exempt status of the preference share's dividend.
b) Debentures Corporate debentures are an option available to the investors who are willing to sacrifice liquidity for higher return. Manufacturing companies like Gujarat Industries Power and TISCO have issued debentures. If the debentures are not actively traded in the debt segment of the capital market, the investors may have to hold the instrument till maturity. If the instruments were actively traded in the secondary market, it would have perhaps changed hands at a considerable premium, thereby lowering the
yield on par with the present interest rate. These reasons contribute towards high coupon rates on debentures.
c) Bonds Bonds are similar to the debentures but they are issued by the public sector undertakings. The value of the bond in the market depends upon the interest rate and the maturity. The coupon rate is the nominal interest rate offered on the bonds. The coupon rate is contractual involving the terms and conditions of the issuance of the debt security. Being contractual it cannot be changed during the tenure of the instrument. The investors are not affected by lowering of the bank rates. When the bank rates are lowered, actually, the value of the bonds, which are carrying interest rates above the bank rate would appreciate. lOBI and ICICI have issued various bonds to suit the needs of the investors. Some of them are deep discount bond, education benefit bond, retirement benefit bond and index bond.
d) IVPs and KVPs These are saving certificates issued by the post office with the name Indira Vikas Patra (IVP) and Kisan Vikas Patra (KVP). The IVPs are in the face value of R~500, 1000 and 5000. The KVPs are in the denomination of Rs, 1000, 5000 and 10000. The capital is doubled in 5.5 years with the return of 13.47%. IVPs are like bearer bonds, transferable by hand delivery and therefore are attractive to the persons who prefer cash transactions. No income tax concession is available for this type of investment.
e) Government securities The securities issued by the Central, State Government and Quasi Government agencies are known as Government securities or gilt edged securities. As Government guaranteed security is a claim 1m the Government, it is a secured financial instrument, which guarantees the income and the capital. The rate of interest on these securities is relatively lower because of their high liquidity and safety.
f) Money market securities Money market securities have very short term maturity say less than a year. Common money market instruments are:
Treasury bills
Commercial paper
Certificate of deposit
i) Treasury bills A treasury bill is basically an instrument of short term borrowing by the Government of India. To develop the treasury bill market and provide investors with financial instruments of varying short-term maturities and to facilitate the cash management requirements of various segments of the economy, in April 1997 treasury bills of varied maturities were introduced. 14-day treasury bill on a weekly basis was introduced from June 6, 1997. In the second half of 1997-98, treasury bill of 28-day
was introduced on aucti9n basis. Further, it was decided to reintroduce 182-day treasury bills through auctions. Generally, treasury bills are of 91-days. Since the interest rates offered on the treasury bills are very low, individuals very rarely invest in them.
ii) Commercial papers Commercial paper is a short-term negotiable instrument with fixed maturity period. It is an unsecured promissory note issued by the company either directly or through bank/ merchant banks. The maturity period of commercial paper was originally three (minimum) to six (maximum) months from the date of issue. In Oct 1993, the maximum period was extended to one year. The commercial papers are sold at a discount and redeemed at their face value. The discounted value implicates the interest rate. The denomination of commercial paper is high. Mostly the companies and institutional investors favour them. The minimum maturity of CP was brought down from 3 months to 30 days.
iii) Certificate of deposit The certificate of deposit is a marketable receipt of funds deposited in a bank for a fixed period at a specified rate of interest. They are bearer documents and readily negotiable. The denominations of the CD and the interest rate on them are high. It is mainly preferred by institutional investors and companies rather than the individuals. The minimum size of the certificate is Rs 10 lakh. The additional amount is issued in multiples of Rs 5 lakh.
NON-NEGOTIABLE SECURITIES
The non-negotiable financial investment as the name itself suggests is not transferable. This is also known as non-securitised financial investments. Deposit schemes offered by the post offices, banks, companies, and non-banking financial· companies are of this category. The tax-sheltered schemes such as public provident fund, national savings certificate and national savings scheme are also non-securitised financial investments.
(A) Deposits
Deposits earn fixed rate of return. Even though bank deposits resemble fixed income securities they are not negotiable instruments. Some of the deposits are dealt subsequently.
a)Bank deposits It is the simple investment avenue open for the investors. He has to open an account and deposit the money. Traditionally the banks offered current account, savings account and fixed deposit account. The deposits in the banks are considered to be safe because of the RBI regulation. The risk averse investors prefer the bank deposits.
b) Post office deposits Like the banks, post office also offers fixed deposit facility and monthly incomescheme. Post office Monthly Income Scheme is a popular scheme for the retired. An interest rate of 13% is paid monthly. The term of the scheme is 6 years, at the end of which a bonus of 10% is paid. The annualised yield to maturity works out to be 15.01% per annum. After three years, premature closure is allowed without any penalty. If the closure is after one year, a penalty of 5% is charged.
c) NBFC deposits In recent years, there has been a significant increase in the importance of non-banking financial companies in the process of financial intermediation. The NBFC comes under the purview of the RBI.The amendment of RBI Act in Jan 1997, made registration compulsory for the NBFCs.
i) Period The maturity period ranges from few months to five years. It varies from company to company. For example, the Birla Global Finance, the company belonging to Aditya Birla group accepts deposits with maturity from 3-5 years.
ii) Maximum limit The limit for acceptance of deposit has been based on the credit rating of the company. The NBFCs not having net owned funds ofRs 25 lakh are not entitled to accept deposits.
iii) Internet NBFCs offer interest rate higher than the commercial bank on public deposit. The interest rate differs according to maturity period. There is a disparity in the interest rate among the companies in accordance with the credit ratings and policies of the companies.
iv) Security Security of the deposits of the NBFCs is much lower than the depositsw
improve the liquidity ofNBFCs the percentage of liquid assets required to be maint
has been enhanced from 12.5 percent to 15 percent with effect from April 1999 respe
pany Law Board is authorised to direct the defaulting NBFCs to repay the deposits. I
strict rules and regulations laid down by RBI the default rate is high in the case ofNE
(B) Tax sheltered savings schemes
Tax sheltered savings schemes offer tax relief to those who participate in their schemes. The important tax sheltered savings schemes are
=> Public Provident Fund Scheme
=> National Savings Scheme
=> National Savings Certificate VIII series
a) Public provident fund scheme (PPF) PPF earns an interest rate of 12 percent per year,
which is exempted from the income tax under sec 88. The individuals and Hindu undivided families can participate in this scheme. The maximum limit per annum for the deposit is Rs. 6O,OOO. The interest is accumulated in the deposit. It provides early withdrawal facilities from 7th year and every year thereafter, the account holder has an option to withdraw 50 per cent of the balance to his credit 4 years ago or 1 year ago whichever is lower. The facility makes PPF a self-sustaining account from 7th year onwards.
b) National savings scheme (NSS) This scheme helps in deferring the tax payment. Individuals and HUF are eligible to open NSS account in the designated post office. The NSS-87 gives100per cent income tax rebate but the interest as well as the capital are fully taxable if withdrawn during their lifetime. Investments in the NSS scheme, with a lock in period of 4 years qualify for a rebate of 20 per cent under Section 88 of the Income Tax Act, subject to a maximum of Rs 12,000. The investment also earns an interest rate of 11per cent per year covered by Sec 80L. Compared to other tax savings' instruments the return offered by this scheme is lower.
On the liquidity aspect, withdrawal is permitted at any time after four years from the end of the financial year in which the account is opened. The entire amount can be withdrawn. The account can be closed on the expiry of 4 years. There is no fixed tenure for investment. One can also keep the account alive and earn interest at 11percent per annum.
As a tax saving instrument "anytime" withdrawal after 4 years is the only interesting feature to the prospective investor. The tax deduction at source at the rate of 20 percent on the entire amount withdrawn has proved too costly to the investors.
c) National savings certificate (6 yrs.) - III This scheme is offered by the post office.
These certificates come in the denominations of Rs 500, 1,000, 5,000 and 10,000. The contribution and the interest for the first 5 years are covered by Sec 88. The interest is cumulative at the rate of 12% per annum and payable biannually is covered by Sec 80L. No withdrawals are permitted. There is no deduction at maturity.
(c) Life Insurance
Life insurance is a contract for payment of a sum of money to the person assured (or to the person entitled to receive the same) on the happening of event insured against. Usually the contract provides for the payment of an amount on the date of maturity or at specified dates at periodic intervals or if unfortunate death occurs. Among other things, the contracts also provide for the payment of premium periodically to the corporation by
the policy holders. Life insunmce eliminates risk. The major advantages of life insurance are given below:
i) Protection Saving through life insurance guarantees full protection against risk of death of the saver. The full assured sum is paid, whereas in other schemes only the amount saved is paid.
ii) Easy payments For the salaried people the salary savings' schemes are introduced. Further, there is an easy instalment facility method of payment through monthly, quarterly, half yearly or yearly mode.
iii) Liquidity Loans can be raised on the security of the policy.
iv) Tax relief Tax relief in Income Tax and Wealth Tax is available for amounts paid by way of premium for life insurance subject to the tax rates in force.
MUTUAL FUNDS
Mutual fund is another investment alternate. It is of recent origin in India. Within a short span of time several financial institutions and banks have floated varieties of mutual funds. The investors with limited funds can invest in the mutual funds and can have the benefits of the stock market and money market investments as specified by the particular fund
Investment companies or investment trusts obtain funds from large number of investors through sale of units. The funds collected from the investors are placed under professional management for the benefit of the investors. The mutual funds are broadly classified into open-ended scheme and close-ended scheme.
Open-ended Scheme
The open-ended scheme offers its units on a continuous basis and accepts funds from investors continuously. Repurchase is carried out on a continuing basis thus, helping the investors to withdraw their money at any time. In other words, there is an uninterrupted entry and exit into the funds. The open-'end scheme has no maturity period and they are not listed in the stock exchanges. Investor can deal directly with the mutual fund for investment as well as redemption. The open-ended fund provides liquidity to the investors since the repurchase facility is available. Repurchase price is fixed on the basis of net asset value of the unit. In 1998 the open-ended schemes have crossed 80 in number.
Close-ended Scheme
The close-ended funds have a fixed maturity period. The first time investments are made when the close end scheme is kept open for a limited period. Once closed, the units are listed on a stock exchange. Investors can buy and sell their units only through stock exchanges. The demand and supply factors influence the prices of the units. The investor's expectation also affects the unit prices. The market price may not be the same as the net asset value.
Sometimes mutual funds with the features of close-ended and open-ended schemes are launched, known as interval funds. They can be listed' in the stock exchange or may be available for repurchase during specific periods at net asset value or related prices.
THE REAL ASSETS
(1) GOLD & SILVER
(2) ART
(3) ANTIQUES
Corce plan
Lesson Plan
The readings referred to in the table below are recommended material from
A – Security Analysis & Portfolio Mgt. - Punithavathy Pandian
B – Investment Analysis & Portfolio Mgt. - Prasanna Chandra
C – Security Analysis & Portfolio Mgt. - Fischer, Jordan
Lecture
Topics
Readings
#
1. Introduction
A-Chapter 1
2 Investment-Meaning, nature, process
A- (pg.1-16)
B- (pg.)
C- (pg.14-17)
3&4 Alternatives of Investment
A- (pg.21-33)
B- (pg.31-55)
C- (pg.18-26)
5 Risk: Concept and components of total risk
A- (pg.139-146)
B- (pg.127-130)
C- (pg.77-95)
6& 7 Return: Measuring historical and expected return and risk
A- (pg.148-152,189-200)
B- (pg.130-145)
C- (pg.95-103)
8 systematic and unsystematic risk. Measurement of systematic risk.
A- (pg.139-146)
B- (pg.128-130)
C- (pg.84-95)
9. Objectives and benefits of investment analysis
A- (pg.)
B- (pg.312-313)
C- (pg.624-635)
10. security valuation
A- (pg.189-202)
B- (pg. )
C- (pg. )
11 & 12. Theories of fixed and variable
income securities.
A- (pg.163-171,189-201)
B- (pg.339-367,397-420)
C- (pg.)
13 &14. Efficient Market Theory;
A- (pg.283-291)
B- (pg.302-309)
C- (pg.550-567)
15 & 16 Fundamental Analysis - Economic, Industry and Company Analysis;
A- (pg.215-241)
B- (pg.428-462)
C- (pg. 113-116,142-156, 170-188)
17 & 18. Technical Analysis
A- (pg.257-276)
B- (pg.477-491)
C- (pg.522-542)
19. Portfolio – Meaning, advantages
A- (pg.319-322)
B- (pg.559-564)
C- (pg.571-574)
20 Portfolio selection
A- (pg.322-325)
B- (pg.564-570,575-575)
C- (pg.602-614)
21. Selection Problems: Markowitz portfolio theory
A- (pg.329-331)
B- (pg.)
C- (pg.575-587)
22. expected return and standard deviation for portfolios; the efficient frontier;
A- (pg331-336)
B- (pg.244-251)
C- (pg.)
23 the efficient frontier and investor utility;
the selection of the optimal portfolio;
A- (pg.337-340)
B- (pg.251-260)
C- (pg.)
24.&25 Sharpe single-index model;
A- (pg.355-364)
B- (pg.261-262)
C- (pg.587-592)
26 & 27 Capital Asset Pricing Model;
A- (pg.379-387)
B- (pg.272-287)
C- (pg.649-655)
28. Arbitrage Pricing Theory.
A- (pg.387-394)
B- (pg.287-291)
C- (pg.658-660)
29. & 30 Bond portfolio management strategies – passive portfolio strategies, active management strategies;
A- (pg.)
B- (pg.381-388)
C- (pg.376-405)
31 Portfolio revision – meaning, need, constraints
A- (pg.)
B- (pg.580-581)
C- (pg.189-191)
32 Portfolio revision strategies: formula plans - constant-dollar-value plan,
constant ratio plan, variable ratio plan;.
A- (pg.438-443)
B- (pg.)
C- (pg.)
33& 34. Portfolio performance evaluation: risk adjusted measures of performance
A- (pg.412-419)
B- (pg.581-587)
C- (pg.675-683)
The readings referred to in the table below are recommended material from
A – Security Analysis & Portfolio Mgt. - Punithavathy Pandian
B – Investment Analysis & Portfolio Mgt. - Prasanna Chandra
C – Security Analysis & Portfolio Mgt. - Fischer, Jordan
Lecture
Topics
Readings
#
1. Introduction
A-Chapter 1
2 Investment-Meaning, nature, process
A- (pg.1-16)
B- (pg.)
C- (pg.14-17)
3&4 Alternatives of Investment
A- (pg.21-33)
B- (pg.31-55)
C- (pg.18-26)
5 Risk: Concept and components of total risk
A- (pg.139-146)
B- (pg.127-130)
C- (pg.77-95)
6& 7 Return: Measuring historical and expected return and risk
A- (pg.148-152,189-200)
B- (pg.130-145)
C- (pg.95-103)
8 systematic and unsystematic risk. Measurement of systematic risk.
A- (pg.139-146)
B- (pg.128-130)
C- (pg.84-95)
9. Objectives and benefits of investment analysis
A- (pg.)
B- (pg.312-313)
C- (pg.624-635)
10. security valuation
A- (pg.189-202)
B- (pg. )
C- (pg. )
11 & 12. Theories of fixed and variable
income securities.
A- (pg.163-171,189-201)
B- (pg.339-367,397-420)
C- (pg.)
13 &14. Efficient Market Theory;
A- (pg.283-291)
B- (pg.302-309)
C- (pg.550-567)
15 & 16 Fundamental Analysis - Economic, Industry and Company Analysis;
A- (pg.215-241)
B- (pg.428-462)
C- (pg. 113-116,142-156, 170-188)
17 & 18. Technical Analysis
A- (pg.257-276)
B- (pg.477-491)
C- (pg.522-542)
19. Portfolio – Meaning, advantages
A- (pg.319-322)
B- (pg.559-564)
C- (pg.571-574)
20 Portfolio selection
A- (pg.322-325)
B- (pg.564-570,575-575)
C- (pg.602-614)
21. Selection Problems: Markowitz portfolio theory
A- (pg.329-331)
B- (pg.)
C- (pg.575-587)
22. expected return and standard deviation for portfolios; the efficient frontier;
A- (pg331-336)
B- (pg.244-251)
C- (pg.)
23 the efficient frontier and investor utility;
the selection of the optimal portfolio;
A- (pg.337-340)
B- (pg.251-260)
C- (pg.)
24.&25 Sharpe single-index model;
A- (pg.355-364)
B- (pg.261-262)
C- (pg.587-592)
26 & 27 Capital Asset Pricing Model;
A- (pg.379-387)
B- (pg.272-287)
C- (pg.649-655)
28. Arbitrage Pricing Theory.
A- (pg.387-394)
B- (pg.287-291)
C- (pg.658-660)
29. & 30 Bond portfolio management strategies – passive portfolio strategies, active management strategies;
A- (pg.)
B- (pg.381-388)
C- (pg.376-405)
31 Portfolio revision – meaning, need, constraints
A- (pg.)
B- (pg.580-581)
C- (pg.189-191)
32 Portfolio revision strategies: formula plans - constant-dollar-value plan,
constant ratio plan, variable ratio plan;.
A- (pg.438-443)
B- (pg.)
C- (pg.)
33& 34. Portfolio performance evaluation: risk adjusted measures of performance
A- (pg.412-419)
B- (pg.581-587)
C- (pg.675-683)
RISK MANAGEMENT : CONCEPT, SOURCES & TYPES OF RISK
RISK MANAGEMENT : CONCEPT, SOURCES & TYPES OF RISK
Risk in holding securities is genrally associated with possibility that realized returns will be less than the returns that were expected. Forces that contribute to variations in return price or dividend/interest constitute elements of risk. Some influences are external to the firm, cannot be controlled, and affect large numbers of securites. Other influences are internal to the firm and are controllable to a large degree.
In investments, those forces that are uncontrollabe, external and borad in their effect
are called sources of systematic risk. Conversely, controllable internal factors somewhat peculiar toindustries and/or firms are refereed to as sources of unsystematic risk.
Systematic Risk
Systematic risk refers to that portion of total variability in return caused by factors affecting the prices of all securities. Economic, political, and sociological changes are sources of systematic risk.
Their effect is to cause prices of nearly all individual common stocks and/or all indivdidual bonds to move together in the same manner. For example, if the economy is moving toward a recession and corporate profits shift downward, stock prices may decline across a broad front.
On the average, 50 percent of the variation in a stock’s price can be explained by variation in the market index. In other words, about one-half the total risk in an average common stock is systematic risk. Systematic risk includes:
Market Risk
Maket risk is caused by investor reaction to tangible as well as intangible events. Expectaitions of lower corporate profits in general may cause the larger body of common to fall in price.
The basis for the reaction is a set of real, tangible events political, social, or economic.
Intangible events are related to market psychology
Interest-Rate Risk
Interest-rate risk refers to the uncertainty of future market values and of the size of future income, caused by fluctuations in the general level of interest rates.
Purchasing-Power Risk
Market risk and interest-rate risk can be definded in terms of uncertainties as to the amount of current dollars to be received by an investor. Purchasing-power risk is the uncertainityof the purchasing power of the amounts to be received. In more everyday terms, purchasing-power risk refers to the impact of inclation or deflation on an investment.
Unsystematic Risk
Unsystematic risk is the portion of total risk that is unique or peculiar to a firm or an industry, above and beyond that affecting securites markets in general. Factors such as management capability, consumder preferences, and labor strikes can cause unsystematic variability of returns for a company’s stock. Because these factors affect one industry and/or one firm, they must be examined separately for each company.
Unsystematic risk includes:
Business Risk
Business risk is a function of the operating conditions faced by a firm Business risk can bedivided into two broad categories: external and internal.
Internal business risk is largely asociated with the efficiency with which a firm conducts its operations with in the broader operating environment imposed upon it. Each firm has its own set of internal risks, and the degree to which it is successful in coping with them is reflectedin operating efficienty.
External business riskis the result of operating conditions imposes upon the firm by circumstances beyond its control. Each frim also faces its own set of external risks, depending upon the specific operating environmental factors with which it must deal.
Financial Risk
Financial risk is associated with the way in which a company finaces its activities. We usually gauge finacial risk by looking at the capital structure of a firm. The presence of borrowed
money of debt in the capital structure creates fixed payment in the form of interest that must be sustained by the firm..
Financial risk is avoidable risk to the extent that managements have the freedom to decide to borrow or not to borrow funds. A firm with no debt financing has no financial risk. By engaging in debt financing, the firm changes the characteristic of the earnings stream available to the common-stock holders.
Speciafically, the reliance on debt financing, called financial leverage, has at three important effects on common-stock holders. Debt financing
(1) increases the variability of their returns,
(2) affects their expectations concerning their returns,and
(3) increases their risk of being ruined.
Can we Reduce the Risk Exposure?
Every investor wants to guard himself from the risk. This can be done by understanding the nature of the risk and careful planning.
Market Risk Protection
(a.)The investor has to study the price behaviour of the stock. Usually history repeats itself even though it is not in perfect form. The stock that shows a growth pattern may continue
to do so for some more period.
(b.) The standard deviation and beta are available for the stocks that are included in the indices. The National Stock Exchange News bulletin provides this information.
Looking at the beta values, the investor can gauge the risk factor and make wise decision according to his risk tolerance.
Further, the investor should be prepared to hold the stock for a period of time to reap the benefits of the rising trends in the market. He should be careful in the timings of the purchase and sale of the stock. He should purchase it at the lower level and should exit at a higher level.
Protection Against Interest Rate Risk
(a.) Often suggested solution for this is to hold the investment sells it in the middle due to fall in the interest rate, the capital invested would experience tolerance.
(b.) The investors can also buy treasury bills and bonds of short maturity. The portfolio manager can invest in the treasury bills and the money can be reinvested in the market to suit the prevailing interest rate.
(c.) Another suggested solution is to invest in bonds with different maturity dates. When the bonds mature in different dates, reinvestment can be done according to the changes in the investment climate. Maturity diversification can yield the best results.
Protection Against Inflation
(a.) The general opinion is that the bonds or debentures with fixed return cannot solve the problem. If the bond yield is 13 to 15 % with low risk factor, they would provide hedge
against the inflation .
(b.) Another way to avoid the risk is to have investment in short-term securities and to avoid long term investment. The rising consumer price index may wipe off the real rate of interest in the long term.
(c.) Investment diversification can also solve this problem to a certain extent. The investor has to diversify his investment in real estates, precious metals, arts and antiques along with
the investment in securities. One cannot assure that different types of investments would provide a perfect hedge against inflation. It can minimise the loss due to the fall in the purchasing power.
Protection Against Business and Financial Risk
(a.) To guard against the business risk, the investor has to analyse the strength and weakness of the industry to which the company belongs. If weakness of the industry is too much of government interference in the way of rules and regulations, it is better to avoid it.
(b.) Analysing the profitability trend of the company is essential. The calculation of standard deviation would yield the variability of the return. If there is inconsistency in the earnings, it is better to avoid it. The investor has to choose a stock of consistent track record.(c.) The financial risk should be minimised by analysing the capital structure of the company. If the debt equity ratio is higher, the investor should have a sense of caution. Along with the capital structure analysis,. he should also take into account of the interest payment. In a boom period, the investor can select a highly levered company but not in a recession
Risk in holding securities is genrally associated with possibility that realized returns will be less than the returns that were expected. Forces that contribute to variations in return price or dividend/interest constitute elements of risk. Some influences are external to the firm, cannot be controlled, and affect large numbers of securites. Other influences are internal to the firm and are controllable to a large degree.
In investments, those forces that are uncontrollabe, external and borad in their effect
are called sources of systematic risk. Conversely, controllable internal factors somewhat peculiar toindustries and/or firms are refereed to as sources of unsystematic risk.
Systematic Risk
Systematic risk refers to that portion of total variability in return caused by factors affecting the prices of all securities. Economic, political, and sociological changes are sources of systematic risk.
Their effect is to cause prices of nearly all individual common stocks and/or all indivdidual bonds to move together in the same manner. For example, if the economy is moving toward a recession and corporate profits shift downward, stock prices may decline across a broad front.
On the average, 50 percent of the variation in a stock’s price can be explained by variation in the market index. In other words, about one-half the total risk in an average common stock is systematic risk. Systematic risk includes:
Market Risk
Maket risk is caused by investor reaction to tangible as well as intangible events. Expectaitions of lower corporate profits in general may cause the larger body of common to fall in price.
The basis for the reaction is a set of real, tangible events political, social, or economic.
Intangible events are related to market psychology
Interest-Rate Risk
Interest-rate risk refers to the uncertainty of future market values and of the size of future income, caused by fluctuations in the general level of interest rates.
Purchasing-Power Risk
Market risk and interest-rate risk can be definded in terms of uncertainties as to the amount of current dollars to be received by an investor. Purchasing-power risk is the uncertainityof the purchasing power of the amounts to be received. In more everyday terms, purchasing-power risk refers to the impact of inclation or deflation on an investment.
Unsystematic Risk
Unsystematic risk is the portion of total risk that is unique or peculiar to a firm or an industry, above and beyond that affecting securites markets in general. Factors such as management capability, consumder preferences, and labor strikes can cause unsystematic variability of returns for a company’s stock. Because these factors affect one industry and/or one firm, they must be examined separately for each company.
Unsystematic risk includes:
Business Risk
Business risk is a function of the operating conditions faced by a firm Business risk can bedivided into two broad categories: external and internal.
Internal business risk is largely asociated with the efficiency with which a firm conducts its operations with in the broader operating environment imposed upon it. Each firm has its own set of internal risks, and the degree to which it is successful in coping with them is reflectedin operating efficienty.
External business riskis the result of operating conditions imposes upon the firm by circumstances beyond its control. Each frim also faces its own set of external risks, depending upon the specific operating environmental factors with which it must deal.
Financial Risk
Financial risk is associated with the way in which a company finaces its activities. We usually gauge finacial risk by looking at the capital structure of a firm. The presence of borrowed
money of debt in the capital structure creates fixed payment in the form of interest that must be sustained by the firm..
Financial risk is avoidable risk to the extent that managements have the freedom to decide to borrow or not to borrow funds. A firm with no debt financing has no financial risk. By engaging in debt financing, the firm changes the characteristic of the earnings stream available to the common-stock holders.
Speciafically, the reliance on debt financing, called financial leverage, has at three important effects on common-stock holders. Debt financing
(1) increases the variability of their returns,
(2) affects their expectations concerning their returns,and
(3) increases their risk of being ruined.
Can we Reduce the Risk Exposure?
Every investor wants to guard himself from the risk. This can be done by understanding the nature of the risk and careful planning.
Market Risk Protection
(a.)The investor has to study the price behaviour of the stock. Usually history repeats itself even though it is not in perfect form. The stock that shows a growth pattern may continue
to do so for some more period.
(b.) The standard deviation and beta are available for the stocks that are included in the indices. The National Stock Exchange News bulletin provides this information.
Looking at the beta values, the investor can gauge the risk factor and make wise decision according to his risk tolerance.
Further, the investor should be prepared to hold the stock for a period of time to reap the benefits of the rising trends in the market. He should be careful in the timings of the purchase and sale of the stock. He should purchase it at the lower level and should exit at a higher level.
Protection Against Interest Rate Risk
(a.) Often suggested solution for this is to hold the investment sells it in the middle due to fall in the interest rate, the capital invested would experience tolerance.
(b.) The investors can also buy treasury bills and bonds of short maturity. The portfolio manager can invest in the treasury bills and the money can be reinvested in the market to suit the prevailing interest rate.
(c.) Another suggested solution is to invest in bonds with different maturity dates. When the bonds mature in different dates, reinvestment can be done according to the changes in the investment climate. Maturity diversification can yield the best results.
Protection Against Inflation
(a.) The general opinion is that the bonds or debentures with fixed return cannot solve the problem. If the bond yield is 13 to 15 % with low risk factor, they would provide hedge
against the inflation .
(b.) Another way to avoid the risk is to have investment in short-term securities and to avoid long term investment. The rising consumer price index may wipe off the real rate of interest in the long term.
(c.) Investment diversification can also solve this problem to a certain extent. The investor has to diversify his investment in real estates, precious metals, arts and antiques along with
the investment in securities. One cannot assure that different types of investments would provide a perfect hedge against inflation. It can minimise the loss due to the fall in the purchasing power.
Protection Against Business and Financial Risk
(a.) To guard against the business risk, the investor has to analyse the strength and weakness of the industry to which the company belongs. If weakness of the industry is too much of government interference in the way of rules and regulations, it is better to avoid it.
(b.) Analysing the profitability trend of the company is essential. The calculation of standard deviation would yield the variability of the return. If there is inconsistency in the earnings, it is better to avoid it. The investor has to choose a stock of consistent track record.(c.) The financial risk should be minimised by analysing the capital structure of the company. If the debt equity ratio is higher, the investor should have a sense of caution. Along with the capital structure analysis,. he should also take into account of the interest payment. In a boom period, the investor can select a highly levered company but not in a recession
question bank
SAPM QUESTION BANK
1. Discuss in detail the role assigned to SEBI in the development and regulation of capital market in India and the problems facing it.
2. How would you measure Market Risk, Business Risk, Interest Rate Risk and Inflation Risk?
3. Using CAPM, how do you go about calculating risk premium for a given equity share. Elucidate.
4. What are. the basic assumptions of Arbitrage Pricing Theory? State its merits and demerits.
5. "In an efficient capital market, individual security prices fully reflect all available information". Discuss.
6. What do you mean by Company Analysis? What financial statements are helpful in understanding the company's prospects?
7. Explain EMH in its various forms and state its assumptions and uses.
8. Explain 'Dow Theory'. How can it be used to determine the direction of the stock market?
9. Explain the Security Market Line with the help of a diagram. How does it differ from the Capital Market Line?
10. What is Portfolio Theory? Explain the assumptions and principles underlying the portfolio theory.
11. As an investment consultant, what features would you suggest to be included in the investment bunch of a client? Explain these features briefly.
12. Why does diversification lead to a reduction in unique risk? Explain both intuitively and mathematically.
13. What is an income fund? Explain its objective and investment priorities.
14. Portfolios that buy new securities and sell old holdings frequently will outperform portfolios that are managed more passively. Do you agree with this statement?
15. What does the efficient market hypothesis imply with respect to technical market analysis, fundamental analysis, and portfolio policy of investors?
16. Based on the current theoretical and empirical development of APT, do you think that this approach offers a practical alternative to the CAPM for individual investors?
17.What factors should be considered while revising a portfolio?
18 Explain any four of the following:
(a). Discuss the essence of Technical Analysis.(b). Define the efficient market hypothesis.(c). What is meant by portfolio risk?(d). Discuss any two weakness of MARKOWITZ approach.
19. Explain:
(a). What is the significance of Beta in portfolio selection?(b). Mention any two assumptions used in capital Asset Pricing Model.(c). What do you meant by risk less arbitrage opportunity?(d). Mention two advantages of managed portfolios.(e). How do volume and breadth of market indicate the trend of the market?20. “Option and futures are zero-sum games”. What do you think is meant by this statement?
21. What factors are important in determining the investment appeal of warrant?
22. Discuss the various types of charts used by chartist to predict the prices and volumes for their analysis of individual stocks.
23. Does the Random Work Theory suggest that rice levels are random? Explain.
24. Define the Efficient Market Hypothesis in each of its three forms. What are its implications?
25. Explain how the efficient frontier is determined using Markowitz approach.
26. Under the CAPM, what is the efficient set called? If there is buying and selling of a risk-free Asset, what happens to the efficient set.
27. What are the advantages and disadvantages of the Arbitrage Pricing Theory over the Capital Asset Pricing Model?
28. Discuss the Main guidelines given by SEBI for mutual funds?
29. What is meant by mutual funds? Explain its types.30. Explain:a) Mention the two primary objectives of investment.b) Explain the process of investment undertaken by the investor.c) What do you mean by economic forecasting?d) How is the economic growth related to stock prices?e) Why is industry analysis important?f) What is SWOT analysis?
Q31. What are the basic assumptions and limitations of CAPM model?
Q32. List down any five differences between futures contract and forward contract.
Q33. Explain the modern approach in the construction of the portfolio.
Q34. Discuss the scope of index futures in Indian capital market.
Q35. How does technical analysis differ from the fundamental analysis?
Q36. How do volume and breadth of the market indicate the trend of the market?
Q37. What are point and figure chart, and how it is used?
Q38. Explain the strong form of market efficiency with empirical evidences.
Q39. Carry out SWOT analysis for any industry of your choice.
Q40. Explain the factors that have the most significant effect on the industry’searnings.
Q41. Outline the basic characteristics of an investment programme.
Q42. Investment and speculation are somewhat different and yet similar in certainrespect. Explain.
Q.43 Explain :
a) Mention the significance of ratio analysis.b) What do you mean by bar charting?c) Explain random walk hypothesis.d) Mention two objectives of Dow Theory.
44. "No Investment Decisions are made wiihout calculating risk." Do you agree ? As an Investment Manager of a firm, discuss the various steps involved in the investment decision making process.45. What are the various methods of floating the new issue ? Discuss the roles played by the Underwriter and the Bankers to the issue.46. Vamsi is considering the purchase of a bond currently selling at Rs. 878.50. The bond has four years to maturity, face value of Rs. 1,000 and 8% coupon rate. The next annual interest payment is due after one year from today. The required rate of return is 10%.(i) Calculate the intrinsic value (prerent value) of the bond. Should Vamsi buy the bond ?(ii) Calculate the yield to maturing of the bond.47. Explain fully the role played by the SEBI in the securities market as a regulator and as a developer of the capital market.48. What are the major criticisms of the technical analysis ? Do the technical analysis and the fundamental analysis give complementary information about securities for making informal decisions ? Explain.
49. Explain
a) Explain briefly capital Market line.
b) Explain the process of calculating the portfolio return.
c) What is meant by security market line?
d) Distinguish between put and call options.
e) What are the basic features of futures
50. Discuss the Markowitz Theory of Portfolio Selection. How does Markowitz Theory help in planning an investor's portfolio ?51 An aggressive Mutul Fund promises an expected rate of retum of 18% with a standard deviation of 22%. On the other hand, a conservative mutual fund promises an expected rate of return of 16% and fluctuations of 13%.(i) In which of the funds would you like to invest ?(ii) Would you like io invest in both the funds ?(iii) If you can borrow money from you provident fund at an opportunity cost of 15%, in which fund would you invest your money ?52. Explain the concept of 'Mutual Fund'. What factors should be considered before selecting a Mutual Fund ? Discuss the present state of the Muiual Funds in India and outline the risks involved in investing in Mutual Funds.53. What is Technical Analysis ? Explain it's limitations.
54. Distinguish between Bond and Debenture. 55 What are the various types of risk in portfolio management ? Also discuss relationship between them.
56 What is importance of diversification in portfolio management
57.(a) Define efficient market hypothesis in each of its its three forms.(b) Explain in detail Random Walk Theory. 58. Explain connectivity between primary market and secondary market.
59. Distinguish between capital market line and security market line.60 (a) Explain in brief various intermediaries of financial market and in detail explain "Broker" and different types of broker.(b) Role of underwriters. 61 A bond has a remaining maturity of 5 years. It pays a coupon of 8% annually for first two years and 10% for next three years and is currently trading at Rs. 140. If Mr. X expected yield is 10%, calculate price of the bond of maturity if it redeemed at a premium of Rs. 2. Should Mr. X buy these bonds at Rs. 94 ?
62. What is the value of zero-coupon bond that has 10 years remaining to maturity and has yield to maturity of 10% and when we know that half of the face is redeemed after 5 years.
63. List out various investment options ? Explain any five of them in detail.
Q.64 Explain: (a) Dow theory(b) Odd lot trading(c) Point and Figure charts(d) Serial bond(e) Superfluous Diversification(f) Market Risk65.(a) What are the two major types of information necessary for security analysis(b) What are the features of preference shares.
(c) . What do you mean by underwriting.
66(a). What do you understand by fundamental approach to security analysis (b) . Explain the three types of trends in stock prices(c). What do you infer from the moving average theory of technical analysis
67. (a) . What is an index fund.(b) What is the difference between SML AND CML.(c). What is demutualization of stock exchanges
68. As an investment advisor what features would you suggest to be included in the investment bunch of a client explain the features briefly.69. security analysis requires as first step the sources of information on the basis of which analysis is made. What are different types of information used for security analysis70. Who are the key players involved in the new issues market.
71. What are the objectives and functions of SEBI72. Industry life cycle exhibits the status of the industry and gives the clue to entry and exit for investors. Elucidate.73. How does ratio analysis reflect the financial health of a company.74. How would you use ROC to predict the stock price movement . kindly elucidate with example.75.Chart patterns are helpful in predicting the stock price movement comment.76. What are the basic assumptions of CAPM. What are the advantages of adopting CAPM model in the portfolio management.77. What factors might an individual take into account in determining his or her investment policy? Distinguish between technical and fundamental Security Analysis.
78. Discuss why the concepts of covariance and diversification are closely related.
79. Assume the two securities, A and B, constitute the market portfolio. Their proportions and variances are .39, 160, and .61, 340, respectively.The covariance of the two securities is 190. Calculate the betas of the two securities.
80. How would you expect yield spreads to respond to the following macroeconomic events: recession, high inflation, Tax cuts, Stock Market decline, improved trade balance? Explain the reasoning behind each of your answers.
81. How would an increase in the perceived riskiness of a common stock’s future cash flows affect its price-earnings ratio? Explain intuitively and Mathematically.
82. Give an example of an industry you feel has positive competitive conditions for your selection as an industry to invest in. Why have you selected this industry?
83. A ratio spread amounts to buying a call option and selling two call options. The exercise price of the option purchased is loss than that of the two options sold. How does this strategy differ from a more regular bull or bear spread?
84. Analysis of mutual fund performance has been extensive. What does the evidence indicate about the ability of mutual fund managers, as a group, to produce positive abnormal returns consistently?
85. Explain any FOUR of the following: (a) Zero Coupon Bonds.(b) Yield-to-maturity.(c) Underwriters(d) Technical Analysis(e) Sweat Equity.(f) Return on equity
86. What is meant by fundamental analysis? How does fundamental analysis differ from technical analysis?87. Explain the Sharper Index Model? How does it differ from Markowitz model?88. Explain CAPM theory and its validity in the stock market.89. What are the statistical tools used to measure the risk of securities return? Explain.90. Discuss the relationship between fundamental analysis and efficient market hypothesis.91. The Company ABC’s next year dividend per share is expected to be Rs.3.50. The dividend in subsequent years is expected to grow at a rate of 10% per year. If the required rate of return is 15% per year, what should be its price? The prevailing market price is Rs.75.92. The following information is available.Stock A Stock BExpected return 16% 12%Standard deviation 15% 8%Coefficient of correlation 0.60.(a) What is the covariance between stocks A and B?(b) What is the expected return and risk of a portfolio in which A and B have weights of 0.6 and 0.4?
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93. Define Risk. What are different types of risks ? Explain the methods of risks handling.
94. Explain briefly the functions of the Stock Market in India. Critically evaluate the role of SEBI as stock market developer and regulator.
95.Define Industry Analysis and bring out its relevance for selecting equity snlares for investment.
96. Why should an investor include non-security forms of investment in his portfolio ? Outline the various investment avenues in the Indian Money Market.
97. What is the risk of a Portfolio ? Under what conditions can the portfolio risk be minimized ?
98.What is efficient frontier ? Explain about the capital market line and choice of an optimal portfolio, if borrowing rate is allowed to exceed the lending rate.
(b) A security pays a dividend of Rs. 385 and currently sells at Rs. 83. The security is expected to sell at Rs. 90 at the end of the year. The security has a beta of 1.15. The risk free rate is 5 per cent and the expected return on market index is 12 per cent.
Assess whether the security is correctly priced.
99. What are benchmark portfolios ? How are they used to evaluate the performance of a portfolio manag er ? Discuss with suitable examples.
100 . Write short notes on any FOUR of the following :
(a) Agency Cost
(b) Dow Theory
(c) E.l.C. Approach
(d) Filter Test
(e) Market Breadth Index(f) Technical Analysis
1. Discuss in detail the role assigned to SEBI in the development and regulation of capital market in India and the problems facing it.
2. How would you measure Market Risk, Business Risk, Interest Rate Risk and Inflation Risk?
3. Using CAPM, how do you go about calculating risk premium for a given equity share. Elucidate.
4. What are. the basic assumptions of Arbitrage Pricing Theory? State its merits and demerits.
5. "In an efficient capital market, individual security prices fully reflect all available information". Discuss.
6. What do you mean by Company Analysis? What financial statements are helpful in understanding the company's prospects?
7. Explain EMH in its various forms and state its assumptions and uses.
8. Explain 'Dow Theory'. How can it be used to determine the direction of the stock market?
9. Explain the Security Market Line with the help of a diagram. How does it differ from the Capital Market Line?
10. What is Portfolio Theory? Explain the assumptions and principles underlying the portfolio theory.
11. As an investment consultant, what features would you suggest to be included in the investment bunch of a client? Explain these features briefly.
12. Why does diversification lead to a reduction in unique risk? Explain both intuitively and mathematically.
13. What is an income fund? Explain its objective and investment priorities.
14. Portfolios that buy new securities and sell old holdings frequently will outperform portfolios that are managed more passively. Do you agree with this statement?
15. What does the efficient market hypothesis imply with respect to technical market analysis, fundamental analysis, and portfolio policy of investors?
16. Based on the current theoretical and empirical development of APT, do you think that this approach offers a practical alternative to the CAPM for individual investors?
17.What factors should be considered while revising a portfolio?
18 Explain any four of the following:
(a). Discuss the essence of Technical Analysis.(b). Define the efficient market hypothesis.(c). What is meant by portfolio risk?(d). Discuss any two weakness of MARKOWITZ approach.
19. Explain:
(a). What is the significance of Beta in portfolio selection?(b). Mention any two assumptions used in capital Asset Pricing Model.(c). What do you meant by risk less arbitrage opportunity?(d). Mention two advantages of managed portfolios.(e). How do volume and breadth of market indicate the trend of the market?20. “Option and futures are zero-sum games”. What do you think is meant by this statement?
21. What factors are important in determining the investment appeal of warrant?
22. Discuss the various types of charts used by chartist to predict the prices and volumes for their analysis of individual stocks.
23. Does the Random Work Theory suggest that rice levels are random? Explain.
24. Define the Efficient Market Hypothesis in each of its three forms. What are its implications?
25. Explain how the efficient frontier is determined using Markowitz approach.
26. Under the CAPM, what is the efficient set called? If there is buying and selling of a risk-free Asset, what happens to the efficient set.
27. What are the advantages and disadvantages of the Arbitrage Pricing Theory over the Capital Asset Pricing Model?
28. Discuss the Main guidelines given by SEBI for mutual funds?
29. What is meant by mutual funds? Explain its types.30. Explain:a) Mention the two primary objectives of investment.b) Explain the process of investment undertaken by the investor.c) What do you mean by economic forecasting?d) How is the economic growth related to stock prices?e) Why is industry analysis important?f) What is SWOT analysis?
Q31. What are the basic assumptions and limitations of CAPM model?
Q32. List down any five differences between futures contract and forward contract.
Q33. Explain the modern approach in the construction of the portfolio.
Q34. Discuss the scope of index futures in Indian capital market.
Q35. How does technical analysis differ from the fundamental analysis?
Q36. How do volume and breadth of the market indicate the trend of the market?
Q37. What are point and figure chart, and how it is used?
Q38. Explain the strong form of market efficiency with empirical evidences.
Q39. Carry out SWOT analysis for any industry of your choice.
Q40. Explain the factors that have the most significant effect on the industry’searnings.
Q41. Outline the basic characteristics of an investment programme.
Q42. Investment and speculation are somewhat different and yet similar in certainrespect. Explain.
Q.43 Explain :
a) Mention the significance of ratio analysis.b) What do you mean by bar charting?c) Explain random walk hypothesis.d) Mention two objectives of Dow Theory.
44. "No Investment Decisions are made wiihout calculating risk." Do you agree ? As an Investment Manager of a firm, discuss the various steps involved in the investment decision making process.45. What are the various methods of floating the new issue ? Discuss the roles played by the Underwriter and the Bankers to the issue.46. Vamsi is considering the purchase of a bond currently selling at Rs. 878.50. The bond has four years to maturity, face value of Rs. 1,000 and 8% coupon rate. The next annual interest payment is due after one year from today. The required rate of return is 10%.(i) Calculate the intrinsic value (prerent value) of the bond. Should Vamsi buy the bond ?(ii) Calculate the yield to maturing of the bond.47. Explain fully the role played by the SEBI in the securities market as a regulator and as a developer of the capital market.48. What are the major criticisms of the technical analysis ? Do the technical analysis and the fundamental analysis give complementary information about securities for making informal decisions ? Explain.
49. Explain
a) Explain briefly capital Market line.
b) Explain the process of calculating the portfolio return.
c) What is meant by security market line?
d) Distinguish between put and call options.
e) What are the basic features of futures
50. Discuss the Markowitz Theory of Portfolio Selection. How does Markowitz Theory help in planning an investor's portfolio ?51 An aggressive Mutul Fund promises an expected rate of retum of 18% with a standard deviation of 22%. On the other hand, a conservative mutual fund promises an expected rate of return of 16% and fluctuations of 13%.(i) In which of the funds would you like to invest ?(ii) Would you like io invest in both the funds ?(iii) If you can borrow money from you provident fund at an opportunity cost of 15%, in which fund would you invest your money ?52. Explain the concept of 'Mutual Fund'. What factors should be considered before selecting a Mutual Fund ? Discuss the present state of the Muiual Funds in India and outline the risks involved in investing in Mutual Funds.53. What is Technical Analysis ? Explain it's limitations.
54. Distinguish between Bond and Debenture. 55 What are the various types of risk in portfolio management ? Also discuss relationship between them.
56 What is importance of diversification in portfolio management
57.(a) Define efficient market hypothesis in each of its its three forms.(b) Explain in detail Random Walk Theory. 58. Explain connectivity between primary market and secondary market.
59. Distinguish between capital market line and security market line.60 (a) Explain in brief various intermediaries of financial market and in detail explain "Broker" and different types of broker.(b) Role of underwriters. 61 A bond has a remaining maturity of 5 years. It pays a coupon of 8% annually for first two years and 10% for next three years and is currently trading at Rs. 140. If Mr. X expected yield is 10%, calculate price of the bond of maturity if it redeemed at a premium of Rs. 2. Should Mr. X buy these bonds at Rs. 94 ?
62. What is the value of zero-coupon bond that has 10 years remaining to maturity and has yield to maturity of 10% and when we know that half of the face is redeemed after 5 years.
63. List out various investment options ? Explain any five of them in detail.
Q.64 Explain: (a) Dow theory(b) Odd lot trading(c) Point and Figure charts(d) Serial bond(e) Superfluous Diversification(f) Market Risk65.(a) What are the two major types of information necessary for security analysis(b) What are the features of preference shares.
(c) . What do you mean by underwriting.
66(a). What do you understand by fundamental approach to security analysis (b) . Explain the three types of trends in stock prices(c). What do you infer from the moving average theory of technical analysis
67. (a) . What is an index fund.(b) What is the difference between SML AND CML.(c). What is demutualization of stock exchanges
68. As an investment advisor what features would you suggest to be included in the investment bunch of a client explain the features briefly.69. security analysis requires as first step the sources of information on the basis of which analysis is made. What are different types of information used for security analysis70. Who are the key players involved in the new issues market.
71. What are the objectives and functions of SEBI72. Industry life cycle exhibits the status of the industry and gives the clue to entry and exit for investors. Elucidate.73. How does ratio analysis reflect the financial health of a company.74. How would you use ROC to predict the stock price movement . kindly elucidate with example.75.Chart patterns are helpful in predicting the stock price movement comment.76. What are the basic assumptions of CAPM. What are the advantages of adopting CAPM model in the portfolio management.77. What factors might an individual take into account in determining his or her investment policy? Distinguish between technical and fundamental Security Analysis.
78. Discuss why the concepts of covariance and diversification are closely related.
79. Assume the two securities, A and B, constitute the market portfolio. Their proportions and variances are .39, 160, and .61, 340, respectively.The covariance of the two securities is 190. Calculate the betas of the two securities.
80. How would you expect yield spreads to respond to the following macroeconomic events: recession, high inflation, Tax cuts, Stock Market decline, improved trade balance? Explain the reasoning behind each of your answers.
81. How would an increase in the perceived riskiness of a common stock’s future cash flows affect its price-earnings ratio? Explain intuitively and Mathematically.
82. Give an example of an industry you feel has positive competitive conditions for your selection as an industry to invest in. Why have you selected this industry?
83. A ratio spread amounts to buying a call option and selling two call options. The exercise price of the option purchased is loss than that of the two options sold. How does this strategy differ from a more regular bull or bear spread?
84. Analysis of mutual fund performance has been extensive. What does the evidence indicate about the ability of mutual fund managers, as a group, to produce positive abnormal returns consistently?
85. Explain any FOUR of the following: (a) Zero Coupon Bonds.(b) Yield-to-maturity.(c) Underwriters(d) Technical Analysis(e) Sweat Equity.(f) Return on equity
86. What is meant by fundamental analysis? How does fundamental analysis differ from technical analysis?87. Explain the Sharper Index Model? How does it differ from Markowitz model?88. Explain CAPM theory and its validity in the stock market.89. What are the statistical tools used to measure the risk of securities return? Explain.90. Discuss the relationship between fundamental analysis and efficient market hypothesis.91. The Company ABC’s next year dividend per share is expected to be Rs.3.50. The dividend in subsequent years is expected to grow at a rate of 10% per year. If the required rate of return is 15% per year, what should be its price? The prevailing market price is Rs.75.92. The following information is available.Stock A Stock BExpected return 16% 12%Standard deviation 15% 8%Coefficient of correlation 0.60.(a) What is the covariance between stocks A and B?(b) What is the expected return and risk of a portfolio in which A and B have weights of 0.6 and 0.4?
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93. Define Risk. What are different types of risks ? Explain the methods of risks handling.
94. Explain briefly the functions of the Stock Market in India. Critically evaluate the role of SEBI as stock market developer and regulator.
95.Define Industry Analysis and bring out its relevance for selecting equity snlares for investment.
96. Why should an investor include non-security forms of investment in his portfolio ? Outline the various investment avenues in the Indian Money Market.
97. What is the risk of a Portfolio ? Under what conditions can the portfolio risk be minimized ?
98.What is efficient frontier ? Explain about the capital market line and choice of an optimal portfolio, if borrowing rate is allowed to exceed the lending rate.
(b) A security pays a dividend of Rs. 385 and currently sells at Rs. 83. The security is expected to sell at Rs. 90 at the end of the year. The security has a beta of 1.15. The risk free rate is 5 per cent and the expected return on market index is 12 per cent.
Assess whether the security is correctly priced.
99. What are benchmark portfolios ? How are they used to evaluate the performance of a portfolio manag er ? Discuss with suitable examples.
100 . Write short notes on any FOUR of the following :
(a) Agency Cost
(b) Dow Theory
(c) E.l.C. Approach
(d) Filter Test
(e) Market Breadth Index(f) Technical Analysis
Assignment sheets
Assignment-I
Issue date: 06-02-09 Due date: 11-02-09
Q. How do the following investments compare in terms of return, risk, marketability, tax shelter, & convenience:
(a) Equity shares, (b) Non convertible debentures, (c) Equity schemes,(d) Debt Schemes, (e) Bank deposits, (f) Public provident fund, (g) Life insurance, (h) Residential house,
(i) Gold & Silver
Assignment-II
Issue date:26-02-09 Due date:5-03-09
Q1Define the various form of the market efficiency. What do they have in common?
Q2 How does efficient market hypothesis differs from the technical analysis? Also discuss the relationship between fundamental analysis & EMH.
Assignment-III
Issue date: Due date:
Q 1. Explain CAPM theory with SML & CML & the validity of CAPM in the stock market? How it is different from APT?
Q 2. What is Portfolio Revision? What are its constraints & strategies?
Assignment-IV
Issue date: Due date:
Q1. “Portfolio Evaluation essentially comprises two functions, performance measurement & performance evaluation.” Discuss.
. Q.2 Discuss the basic Guidelines for Investment Decision
Gurgaon Institute of Technology and Management
Department: MBA
Semester : 4th
Subject Name &Code : Security Analysis & portfolio
management
Faculty : Meenu Sharma
Issue date: 06-02-09 Due date: 11-02-09
Q. How do the following investments compare in terms of return, risk, marketability, tax shelter, & convenience:
(a) Equity shares, (b) Non convertible debentures, (c) Equity schemes,(d) Debt Schemes, (e) Bank deposits, (f) Public provident fund, (g) Life insurance, (h) Residential house,
(i) Gold & Silver
Assignment-II
Issue date:26-02-09 Due date:5-03-09
Q1Define the various form of the market efficiency. What do they have in common?
Q2 How does efficient market hypothesis differs from the technical analysis? Also discuss the relationship between fundamental analysis & EMH.
Assignment-III
Issue date: Due date:
Q 1. Explain CAPM theory with SML & CML & the validity of CAPM in the stock market? How it is different from APT?
Q 2. What is Portfolio Revision? What are its constraints & strategies?
Assignment-IV
Issue date: Due date:
Q1. “Portfolio Evaluation essentially comprises two functions, performance measurement & performance evaluation.” Discuss.
. Q.2 Discuss the basic Guidelines for Investment Decision
Gurgaon Institute of Technology and Management
Department: MBA
Semester : 4th
Subject Name &Code : Security Analysis & portfolio
management
Faculty : Meenu Sharma
Tuesday, January 20, 2009
Technical Analysis
LECTURE NO.-18
TECHNICAL ANALYSIS
While fundamental analysis and security evaluation explain why share prices fluctuate, how they are determined and what to buy or sell, the technical analysis will help the decision when to buy and sell. The traditional theory of capital market efficiency postulates that entry into the market at any time would lead to the same average return as that of the market.
But in the real world of imperfections, there are investors who have burnt ehrifingers by entering the market at the wrong time. Investment timing is, therefore, crucial as the market is continuously jolted by waves of buying and selling and prices are moving in trends and cycles and are never stable. The Stock market is different from other markets, as there is a continuous buying and selling and bid and offer rates as under a system of auctions. The resultant prices, led by the sheer force of the market, may fluctuate either way ad may exhibit waves or trends. Entry and exit in the market will, therefore, make all the differece to the spread between buying and selling prices and the profits or losses.
Timing of investment is, therefore, of vital importance for trading in the stock market.
Basic Tenets of Technical Analysis Technical analysis of the market is based on some basic tenets, namely, that all fundamental factors are discounted by the market and are reflected in prices. Secondly, these prices move in trends or waves which can be both upward or downward depending on the sentiment, psychology and emotions of operators or traders. Thirdly, the present trends are influenced by the past trends and the projection of future trends is possible by an analysis of past price trends. Analysis of historical trends confirmed the above principles asnd the Random Walk theory explaining the randomness of price changes has been found to be not applicable by the technical analysis in practice.
Tools of Technical Analysis
1. Daily Fluctuation or Volatility
Open, High, Low and Close are quoted. Changes between Open and Close or High and Low can be taken in absolute points or in percentages to reflect the daily volatility. Such
fluctuation can be worked out on weekly, monthly or yearly basis also to reflect the general volatility of the market.
2. Floating Stock and Volume of Trade
Floating stock is the total number of shares available for trading with the public and volume of trade is any part of that floating stock. The higher this proportion, the higher is the liquidity of a share which is to be purchased or sold. Volume trends are also a supporting indicator to the price trends to interpret the market.
3. Price Trends and Volume Trends
The Chartist method and Moving average method can be used to depict these trends.
4. Rate of Change of prices and Volumes or the ROC Method
This is useful like the moving average method to idicate more clearly the buy and sell signals. The Chartist method is useful to indicate the directions and the trend reversals. ROC is calculated by dividing the today’s price by the price five days back or few days back. It can be expressed as percentage or positive or negative change. Thus they can be moving around 100, in the case of percentages or zero line, in the case of positive and negative percentage changes.
5. Japanese Candlestick Method
There are three main types of Candlesticks with each day’s trade being shown in the form of candlesticks. Each stick has the body of the candle and a shadow. The body shows the open and close prices while the shadow shows the high and low prices. the three main types are as follows :
a. Closing price is higher than open price (White candlestick).
b. Closing price is lower than the open price (Black stick).
c. Open and Close are at the same level (Doji candlestick).
This method will indicate any likely changes in trends in the short-run.
6. Dow Theory
There are three major trends in this theory. Minor, intermediate and major trends representing daily or weekly, monthly and yearly trends in prices respectively comparing the price trends to waves, tides and ripples.
7. Elliot Wave Theor
The market is unfolded by a basic rhythm or pattern of 5 waves up to be corrected by three waves down with a total of 8 waves - a phiolosophy of price trends.
8. Theory of Gaps
Gaps in price between any two days causing a discountinuity is called a gap. The high of one day may be lower than the low of the preiovus day when prices are falling. Gaps indicate the likely acceleration of the trend or reversal. Gaps are of different categories, namely :
a. Common gaps - When prices move in a narrow range, a gap can occur in prices.
b. Break out gaps - When price trend is likely to change, a gap can occur in either direction. This gives a break to congestion in any direction.
c. Runaway gaps - Thse gaps occur continuously in a downward phase or an upward phase, accelerating or decelerating the trends.
d. Exhaustion gaps - These occur when the rally is getting exhausted. When the runaway gap is coming to an end, there can be exhaustion gap to indicate the likely completion
of the uptrend.
9. Advance DEcline Line or Spread of the Market :
The ratio between Advances to declines will indicate the relative strength of upward or downward phase. When the advances are increasing over declines it is an upward phase and the reverse indicates the down ward phase.
10. Relative Strength Index (RSI) of Wells Wilder :
It is an oscillator used to identify the inherent strength or weakness
of particular scrip. R.S.I. is calcualted for one scrip while RSC or the relative
strength comparative, is the ratio of two prices of two different scrips, used for comparison of two or more scrips. RSI can be calcualted for any number of days say 5 or 10 etc. to indicate the strength of price trend.
TECHNICAL ANALYSIS
While fundamental analysis and security evaluation explain why share prices fluctuate, how they are determined and what to buy or sell, the technical analysis will help the decision when to buy and sell. The traditional theory of capital market efficiency postulates that entry into the market at any time would lead to the same average return as that of the market.
But in the real world of imperfections, there are investors who have burnt ehrifingers by entering the market at the wrong time. Investment timing is, therefore, crucial as the market is continuously jolted by waves of buying and selling and prices are moving in trends and cycles and are never stable. The Stock market is different from other markets, as there is a continuous buying and selling and bid and offer rates as under a system of auctions. The resultant prices, led by the sheer force of the market, may fluctuate either way ad may exhibit waves or trends. Entry and exit in the market will, therefore, make all the differece to the spread between buying and selling prices and the profits or losses.
Timing of investment is, therefore, of vital importance for trading in the stock market.
Basic Tenets of Technical Analysis Technical analysis of the market is based on some basic tenets, namely, that all fundamental factors are discounted by the market and are reflected in prices. Secondly, these prices move in trends or waves which can be both upward or downward depending on the sentiment, psychology and emotions of operators or traders. Thirdly, the present trends are influenced by the past trends and the projection of future trends is possible by an analysis of past price trends. Analysis of historical trends confirmed the above principles asnd the Random Walk theory explaining the randomness of price changes has been found to be not applicable by the technical analysis in practice.
Tools of Technical Analysis
1. Daily Fluctuation or Volatility
Open, High, Low and Close are quoted. Changes between Open and Close or High and Low can be taken in absolute points or in percentages to reflect the daily volatility. Such
fluctuation can be worked out on weekly, monthly or yearly basis also to reflect the general volatility of the market.
2. Floating Stock and Volume of Trade
Floating stock is the total number of shares available for trading with the public and volume of trade is any part of that floating stock. The higher this proportion, the higher is the liquidity of a share which is to be purchased or sold. Volume trends are also a supporting indicator to the price trends to interpret the market.
3. Price Trends and Volume Trends
The Chartist method and Moving average method can be used to depict these trends.
4. Rate of Change of prices and Volumes or the ROC Method
This is useful like the moving average method to idicate more clearly the buy and sell signals. The Chartist method is useful to indicate the directions and the trend reversals. ROC is calculated by dividing the today’s price by the price five days back or few days back. It can be expressed as percentage or positive or negative change. Thus they can be moving around 100, in the case of percentages or zero line, in the case of positive and negative percentage changes.
5. Japanese Candlestick Method
There are three main types of Candlesticks with each day’s trade being shown in the form of candlesticks. Each stick has the body of the candle and a shadow. The body shows the open and close prices while the shadow shows the high and low prices. the three main types are as follows :
a. Closing price is higher than open price (White candlestick).
b. Closing price is lower than the open price (Black stick).
c. Open and Close are at the same level (Doji candlestick).
This method will indicate any likely changes in trends in the short-run.
6. Dow Theory
There are three major trends in this theory. Minor, intermediate and major trends representing daily or weekly, monthly and yearly trends in prices respectively comparing the price trends to waves, tides and ripples.
7. Elliot Wave Theor
The market is unfolded by a basic rhythm or pattern of 5 waves up to be corrected by three waves down with a total of 8 waves - a phiolosophy of price trends.
8. Theory of Gaps
Gaps in price between any two days causing a discountinuity is called a gap. The high of one day may be lower than the low of the preiovus day when prices are falling. Gaps indicate the likely acceleration of the trend or reversal. Gaps are of different categories, namely :
a. Common gaps - When prices move in a narrow range, a gap can occur in prices.
b. Break out gaps - When price trend is likely to change, a gap can occur in either direction. This gives a break to congestion in any direction.
c. Runaway gaps - Thse gaps occur continuously in a downward phase or an upward phase, accelerating or decelerating the trends.
d. Exhaustion gaps - These occur when the rally is getting exhausted. When the runaway gap is coming to an end, there can be exhaustion gap to indicate the likely completion
of the uptrend.
9. Advance DEcline Line or Spread of the Market :
The ratio between Advances to declines will indicate the relative strength of upward or downward phase. When the advances are increasing over declines it is an upward phase and the reverse indicates the down ward phase.
10. Relative Strength Index (RSI) of Wells Wilder :
It is an oscillator used to identify the inherent strength or weakness
of particular scrip. R.S.I. is calcualted for one scrip while RSC or the relative
strength comparative, is the ratio of two prices of two different scrips, used for comparison of two or more scrips. RSI can be calcualted for any number of days say 5 or 10 etc. to indicate the strength of price trend.
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