technical analysis and portfolio management.mainly for mg university

1. Technical Analysis
Module 4

2. Technical tools
• Dow theory
• Moving average
• Odd lot trading
• Rate Of Change(ROC)
• Chart pattern
• Efficient market hypothesis
• Random walk theory

3. Dow theory
• Dow Jones proposed this theory to explain the
movement of indices.
• Normally 3 hypothesis are there are
developed by Dow
• No single individual or buyer can influence the
major trends of the market.
• Market discounts everything
• The theory is infallible.

4. • Trend – it is the direction of the movement. The prices
of shares can either increase or fall or remain flat.
• Three directions are known as
• Rising
• Falling
• Flat trends

6. Bull market

7. • The trend may be either increasing and
decreasing
• If the market trend exhibits an increase it is
bull market
• It is divided into 3 clear-cut peaks
• Each peak is higher than the previous peak

8. • Revival of market – here more and more
investors are encouraged to buy scrip's, their
expectation about the future is high.
• Earning phase – In this phase increased profits
of corporate would result in further price rise.
• Speculation phase – Prices advances due to
inflation and speculations.

9. Bear market

10. Bear market
• Here the fall in trends leads to bear market.
• Here also there is 3 phases.
• Loss of hope – here the chances of prices
moving to high level is low.
• Recession in business – here companies will
be reporting lower profits and dividends.
• Distress selling – shares are sold below the par
value.

11. Secondary trend
• It is an intermediate trend which moves
against the main trend and leads to
correction.
• In bull market it results in a fall
• In bear market it results in an upward trend

12. Minor trend
• Here prices fluctuates daily
• Minor trends tries to correct the secondary
trend movements
• It is better for the investors to concentrate on
the primary and secondary trends.

13. Chart pattern
• Chart are the valuable and easiest tools of
technical analysis
• The graphic representation of the data helps
the investor to find out the trend of the price
without any difficulty.
• They spot the current trend for buying and
selling
• They show the past historic movement

14. Point and figure chart

15. • To predict the extent and direction of price.
• There is no indication of time and volume, it is
one dimensional
• The price changes in relation to the previous
price
• The rise in price will be marked as ‘X’
• The decline in price is recorded as ‘O’

16. Limitations
• Intra-day price movement is not shown.
• Whole numbers are taken into consideration.
This may result in the loss of information
regarding the minor fluctuations.
• Volume is not mentioned in the chart.

17. Bar chart
• It is the simplest and the most common tool
of technical analyst.
• A dot is entered to represent the highest price
at which the stock is traded and another dot
to indicate the lower price at that particular
date.
• A line is drawn to connect both the points.
• A line chart is the simplification of bar chart.

18. V-shaped reversal

19. • In ‘V’ formation there is a long sharp decline
and fast reversal. The ‘V’ pattern occurs
mostly in popular stocks where the market
interest changes quickly from hope to fear an
vice-versa.
• In the case of inverted ‘V’ the rise occurs first
and then declines.

20. Double top

21. • This type of formation signals an end of one
trend and the beginning of another.
• In double top the stock price rises to a certain
level and falls rapidly, and again rises to the
same height or more ,and turns down

22. Head and shoulder

23. • There are 3 rallies resembling the left
shoulder, a head and a right shoulder.
• A neckline is drawn connecting the lows of the
top.
• When the stock price cuts the neckline above,
it signals the bear market.

24. Inverted head and shoulder

25. • Here the reverse of the previous pattern holds
true.
• Connecting the tops of inverted head and
shoulders gives the neckline.
• It indicates the end of bear market and the
beginning of the bull market.

26. Symmetrical triangle

27. • Made up of series of fluctuations
• Tops do not attain the height of previous tops.
• Bottoms are higher than the previous bottom.
• Connecting the lower tops slanting
downwards forms a symmetrical triangle.
• Connecting the rising bottom, slanting
upwards becomes the lower trend line

28. Up flag

29. • Commonly seen on the price charts.
• It occurs either a fall or rise in the value of
scrip's.
• A bullish flag is formed by two trend lines that
stoops downwards.
• A bearish flag will be stooping upwards.

30. pennant

31. • In bullish pennant ,the lower tops form the
upper trend line.
• In bearish the upward trend line is falling and
the lower trend line is rising.

32. Random walk theory
Strongly efficient market.
all information is
reflected on prices.
Semi strong efficient
market. All public
information is reflected
on security prices.
Weakly efficient
market. all historical
information is reflected
on security prices.

33. • EMH can be divided into 3 categories
• Weak form, semi strong form and the strong
form

34. Portfolio Management
Mod 5

35. • A combination of securities is known as
portfolio

36. Portfolio Management
• Portfolio Management is the process of
creation and maintenance of investment
portfolio.
• Portfolio management is a complex process
which tries to make investment activity more
rewarding and less risky.

37. Major tasks involved with Portfolio
Management
1. Taking decisions about investment mix and
policy
2. Matching investments to objectives
3. Asset allocation for individuals and
institution
4. Balancing risk against performance

38. Phases of Portfolio Management
Portfolio management is a process of many activities that
aimed to optimizing the investment. Five phases can be
identified in the process:
1. Security Analysis.
2. Portfolio Analysis.
3. Portfolio Selection.
4. Portfolio revision.
5. Portfolio evaluation.
Each phase is essential and the success of each phase is
depend on the efficiency in carrying out each phase.

39. 1. Security Analysis.
Security analysis is the initial phase of the portfolio
management process. There are many types of
securities available in the market including equity
shares, preference shares, debentures and bonds.
It forms the initial phase of the portfolio
management process and involves the evaluation
and analysis of risk return features of individual
securities. The basic approach for investing in
securities is to sell the overpriced securities and
purchase under priced securities. The security
analysis comprises of Fundamental Analysis and
technical Analysis.

40. Portfolio Analysis (PA)
• PA is a technique used to analyse
organisations in relation to their
environments
• Portfolio (set, collection, assortment, range,
group)
• A biz portfolio may be any collection of
brands / products, markets, branches /
divisions, income generating assets, e.t.c
• PA is usually applied to firms with multiple
SBUs (more than one product/services,
customer categories, markets , divisions)

41. PA Introduction– Cont.
• Helps managers in taking decisions
regarding which SBUs to allocate more
or less resources to at a given strategic
point in time
• After portfolio analysis firm makes an
informed strategic choice e.g.
– To have a balanced portfolio (minimize risk
and maximize return) of all portfolios
– To actively deploy a retrenchment strategy

42. Boston Consulting Group (BCG) Model
• This is the most popular business portfolio
matrix
• It analyses the business portfolio in relation
to market share and market / industry
growth
• The above 2 variables (share & growth)
range from low to high
• A SBU is positioned in the model and the
firms strategy is guided by the SBU’s
positioning.

43. Question
marks
Cash cows Dogs
Industry/
market
growth rate
Relative market share
High
Low
The BCG(Boston Consulting Group) model
High Low
Stars

44. BCG Sections
Stars
• Business with a high market share and high
growth rate
• Generate huge sums of money
• Require huge sums of money to cope with
growth
Cash Cows
• Businesses with low growth but high
market share
• Generate huge sums of money at low cost
• Are used to develop and promote new
businesses (they are “milked”)

45. BCG Sections – Cont.
Dogs
• Have low market share in an aged industry
• The strategy is, normally to sell them off.
Question marks (Fledglings)
• Sometimes called problem children (they
need to be grown).
• They generate low cash but need a lot to
tap the high growth rate.
• They can be grown into stars, resources
allowing.
• Too much commitment to question marks
can lead to liquidity problems.

46. 3. Portfolio Selection
• During this phase, portfolio is selected on the basis of input
from previous phase Portfolio Analysis. The main target of the
portfolio selection is to build a portfolio that offer highest
returns at a given risk. The portfolios that yield good returns
at a level of risk are called as efficient portfolios. The set of
efficient portfolios is formed and from this set of efficient
portfolios, the optimal portfolio is chosen for investment. The
optimal portfolio is determined in an objective and disciplined
way by using the analytical tools and conceptual framework
provided by Markowitz’s portfolio theory.

47. Markowitz model
• Most people think that holding two stocks is
less risky than holding one stock
• They think it would be better to invest in one
stock
• It is difficult to build an optimal portfolio.

48. 48
Markowitz Portfolio Theory
Using these five assumptions, a single asset or
portfolio of assets is considered to be efficient
if no other asset or portfolio of assets offers
higher expected return with the same (or
lower) risk, or lower risk with the same (or
higher) expected return.

49. 49
Alternative Measures of Risk
• Variance or standard deviation of expected return
• Range of returns
• Returns below expectations
– Semivariance – a measure that only considers deviations
below the mean
– These measures of risk implicitly assume that investors
want to minimize the damage from returns less than some
target rate

50. 50
Expected Rates of Return
• For an individual asset - sum of the potential
returns multiplied with the corresponding
probability of the returns
• For a portfolio of assets - weighted average of
the expected rates of return for the individual
investments in the portfolio

51. Efficient Frontier
A
B
N
Return
Risk
AB
ABN

52. Efficient Frontier
A
B
N
Return
Risk
AB
Goal is to move up and
left.
WHY?
ABN

53. Efficient Frontier
Return
Risk
Low Risk
High Return
High Risk
High Return
Low Risk
Low Return
High Risk
Low Return

54. Efficient Frontier
Return
Risk
A
B
N
AB
ABN

55. Capital Asset Pricing Model
• CAPM is an framework for determining the
equilibrium expected return for risky assets.
• Relationship between expected return and
systematic risk of individual assets or securities or
portfolios.
• William F Sharpe developed the CAPM. He
emphasized that risk factor in portfolio theory is a
combination of two risk , systematic and
unsystematic risk.

56. Elements of CAPM
1. Capital Market Line – risk return relationship for
efficient portfolios.
2. Security Market Line – Graphic depiction
(representation) of CAPM and market price of risk in
capital markets.
a) Systematic Risk
b) Unsystematic Risk
3. Risk Return Relationship
4. Risk Free Rate
5. Risk Premium on market portfolios
6. Beta - - Measure the risk of an individual asset
value to market portfolio.
Assets- a). Defensive Assets and b). Aggressive
Assets.

57. Capital asset pricing model
• An individual seller or buyer cannot affect the price of the
stock
• Investors make their decision only on the basis of the
expected return
• Investors are assumed to have homogeneous expectations
during the decision making period
• The investors can lend or borrow any amount of funds at
the riskless rate of interest.the riskless rate of interest is the
rate of interest offered for the tresury bills of governmnet
security.
• There is no transaction cost
• There is no personal income tax
• Any amount of shares an individual can sell short.

58. Security Market Line
Return
Risk
.
rf
Efficient Portfolio
Risk Free
Return =

59. Security Market Line
Return
Risk
.
rf
Risk Free
Return =
Market Return = rm
Efficient Portfolio

60. Security Market Line
Return
Risk
.
rf
Risk Free
Return =
Market Return = rm
Efficient Portfolio

61. Security Market Line
Return
BETA
rf
Risk Free
Return =
Market Return = rm
1.0
Security Market Line (SML)

62. Security Market Line:
E[Ri] = RF + βi (RM – RF)
Expected
Return
Systematic
Risk
RF --
SML
RM --
1 2
| | β

63. Provides a convenient measure of systematic risk of the volatility of an asset relative to
the markets volatility.
Gauges the tendency of a security’s return to move in tandem with the overall
market’s return.
Average systematic risk
High systematic risk, more volatile than the market
Low systematic risk, less volatile than the market
CAPM
1
1
1

64. 4. Portfolio Revision
• After selecting the optimal portfolio, investor is required to
monitor it constantly to ensure that the portfolio remains
optimal with passage of time. Due to dynamic changes in the
economy and financial markets, the attractive securities may
cease to provide profitable returns. These market changes
result in new securities that promises high returns at low
risks. In such conditions, investor needs to do portfolio
revision by buying new securities and selling the existing
securities. As a result of portfolio revision, the mix and
proportion of securities in the portfolio changes.

65. Portfolio Revision
The investor should have competence and skill in the
revision of the portfolio.
The portfolio management process needs frequent
changes in the composition of stocks and bonds.
Mechanical methods are adopted to earn better
profit through proper timing.
Such type of mechanical methods are Formula Plans
and Swaps.

66. Passive Management
Passive management refers to the investor’s attempt
to construct a portfolio that resembles the overall
market returns.
The simplest form of passive management is holding
the index fund that is designed to replicate a good
and well defined index of the common stock such as
BSE-Sensex or NSE-Nifty.

67. Active Management
 Active Management is holding securities based on the
forecast about the future.
 The portfolio managers who pursue active strategy with
respect to market components are called ‘market timers’.
 The managers may indulge in ‘group rotations’.
 Group rotation means changing the investment in different
industries stocks depending on the assessed expectations
regarding their future performance.

68. 5. Portfolio Evaluation
• This phase involves the regular analysis and
assessment of portfolio performances in terms of risk
and returns over a period of time. During this phase,
the returns are measured quantitatively along with
risk born over a period of time by a portfolio. The
performance of the portfolio is compared with the
objective norms. Moreover, this procedure assists in
identifying the weaknesses in the investment
processes.