Unit-4

Sure, here is an overview of some of the most popular technical analysis tools used by stock
traders:

Points and Figures Chart

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Points and figures chart

A points and figures chart is a type of chart that uses X's and O's to represent price
movements. X's represent upticks in price, while O's represent downticks in price. The size of
the X's and O's is determined by a fixed price increment, which is typically set at 3% or 4% of
the current price.

Points and figures charts are often used by traders who are looking for a simple and easy-to-
read way to visualize price trends. They are also helpful for identifying potential support and
resistance levels.

Bar Chart
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Bar Chart

A bar chart is a type of chart that uses vertical bars to represent price movements. Each bar
represents a specific time period, such as a day, a week, or a month. The height of the bar
represents the difference between the opening and closing prices for that period.

Bar charts are one of the most popular types of charts used by traders, as they are easy to
read and understand. They are also helpful for identifying trends, support and resistance
levels, and trading patterns.

Contrary Opinions Theory

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Contrary Opinions Theory

The contrary opinions theory is a trading principle that suggests that when the majority of
traders are bullish on a stock, it is time to sell, and when the majority of traders are bearish
on a stock, it is time to buy. The theory is based on the idea that the majority is often wrong,
and that by taking the opposite position of the crowd, you can increase your chances of
success.
Confidence Index RSA (RSI)

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Confidence Index RSA (RSI)

The Relative Strength Index (RSI) is a technical indicator that measures the momentum of a
stock price. The RSI is calculated by comparing the average of upticks in price over a certain
period of time to the average of downticks in price over the same period of time. The RSI is
typically displayed as a line graph, with values ranging from 0 to 100.

The RSI is often used by traders to identify overbought and oversold conditions. A RSI
reading above 70 is considered to be overbought, while a RSI reading below 30 is considered
to be oversold.

Moving Average Analysis

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Moving Average Analysis

A moving average is a technical indicator that is used to smooth out price data and identify
trends. The moving average is calculated by averaging the closing prices of a stock over a
certain period of time. The most common moving averages are the 200-day moving average,
the 50-day moving average, and the 20-day moving average.

Moving averages are often used by traders to identify support and resistance levels, and to
confirm trends.

Japanese Candlesticks

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Japanese Candlesticks

Japanese candlesticks are a type of chart that uses hollow and filled-in bars to represent
price movements. The body of the candlestick represents the difference between the
opening and closing prices, while the shadows (the wicks) represent the highest and lowest
prices traded during the period.

Japanese candlesticks are often used by traders to identify trends, reversal patterns, and
continuation patterns.

Unit- 5

Factors Influencing Valuation

Equity Valuation:

Several factors can influence the valuation of a company's equity, including:

 • Earnings: A company's current and projected earnings are significant factors driving
its valuation. Investors focus on factors like EPS (Earnings per Share) and net income.

• Dividends: Companies that pay regular dividends tend to be valued higher than those
that do not. The dividend payout ratio and dividend growth rate are crucial metrics.

• Growth: Investors are generally willing to pay a premium for companies with strong
growth prospects. This can be measured by revenue growth, market share
expansion, and new product development.

• Risk: The riskiness of a company's business model and its exposure to economic
fluctuations can impact its valuation. Beta (systematic risk) and volatility are relevant
metrics.

• Market conditions: The overall market sentiment and performance can also influence
individual company valuations.

Fixed Income Valuation:

The value of fixed income instruments, such as bonds, is determined by:

• Coupon rate: The interest rate paid on the bond, expressed as a percentage of the
face value.

• Maturity date: The date on which the issuer must repay the principal to the
bondholder.

• Credit risk: The risk that the issuer will default on its payment obligations. This is
reflected in the bond's credit rating.

• Market interest rates: The prevailing interest rates in the market impact the present
value of the bond's future cash flows.

Equity Valuation Methods:

Earnings Valuation Model:

• Uses P/E ratio (price-to-earnings ratio) to estimate the intrinsic value of a stock.
 • Calculated by dividing the current market price per share by the most recent EPS.

• Analysts may use historical and projected P/E ratios for comparison.

Dividend Model:

• Estimates the intrinsic value based on the company's dividend payout history and
future growth prospects.

• Two common models are the Zero-Growth Dividend Model and the Constant-Growth
Dividend Model.

• These models discount the expected future dividend stream to present value using
an appropriate discount rate.

Intrinsic Value Method:

• Aims to determine the "true" value of a stock based on its future cash
flows, potential growth, and underlying assets.

• Requires complex analysis and financial modeling.

• Various methods, including discounted cash flow analysis, are used.

Calculation of Present and Forecasted Price:

• Present value calculators or spreadsheet formulas are used to discount future cash
flows to present value.

• Forecasted prices are based on projected earnings, dividends, and growth rates.

Valuation of Fixed Income Instruments:

• Present Value: Calculates the current worth of a future cash flow, discounted by an
appropriate interest rate.

• Future Value: Computes the future worth of a present investment, considering the
interest rate and time period.
 • Simple Yield: The annual return on a bond calculated as the coupon rate divided by
the face value.

• Holding Period Yield: The total return on a bond held for a specific period, including
both interest income and capital appreciation or depreciation.

• Maturity Yield: The yield earned if a bond is held until maturity.

• Annuities: Series of equal payments made at regular intervals over a set

period. Present and future values of annuities can be calculated using specific
formulas.

Portfolio Net-Worth Calculation:

• The total value of all assets in a portfolio minus all liabilities.

• Includes the current market value of stocks, bonds, cash, and other investments.

• Liabilities, such as outstanding loans or margin debt, are deducted.

• Tracking net worth helps investors monitor their financial progress and make
informed investment decisions.

Bonds

Bonds are debt securities, similar to loans, that represent money borrowed by a corporation
or government from an investor. When you purchase a bond, you are essentially lending
money to the issuer, who promises to repay you the principal amount (the amount you
loaned) plus interest over time. Bonds are considered to be relatively low-risk investments,
as they are typically backed by the assets of the issuer.

Types of Bonds

There are many different types of bonds, but some of the most common include:

• Corporate bonds: Issued by corporations to raise capital for various purposes, such as
financing new projects or expanding operations.
Corporate Bonds

• Government bonds: Issued by national, state, or local governments to finance their

operations.

Government Bonds

• Municipal bonds: Issued by local governments to finance public projects, such as

schools, roads, and hospitals. The interest income from municipal bonds is often
exempt from federal income taxes.

Municipal Bonds

• Treasury bonds: Issued by the U.S. Treasury Department and are considered to be
the safest type of bond investment.

Treasury Bonds

Bond Return

The return on a bond is the amount of money that an investor can expect to earn on their
investment. This includes the interest payments that the bondholder receives, as well as any
capital gains or losses that may occur if the bond is sold before maturity.

Bond Yield

The yield on a bond is a measure of its rate of return. It is expressed as a percentage and is
calculated by dividing the annual interest payment by the current market price of the bond.
The yield on a bond is also affected by the maturity date of the bond, the creditworthiness
of the issuer, and the prevailing interest rates.

Current Yield

The current yield is the annual interest payment divided by the current market price of the
bond. It is a simple measure of the bond's return, but it does not take into account the time
value of money.

Yield to Maturity (YTM)

The yield to maturity (YTM) is a more sophisticated measure of the bond's return. It takes
into account the time value of money, as well as the bond's coupon payments, maturity
date, and current market price. The YTM is the rate of return that an investor would earn if
they bought the bond at the current market price and held it to maturity.

Price-Yield Relationship

The price of a bond and its yield are inversely related. This means that as the price of a bond
goes up, its yield goes down, and vice versa. This relationship is because the price of a bond
reflects the present value of its future cash flows. When interest rates rise, the present value
of these cash flows decreases, and the price of the bond falls. As a result, the yield on the
bond increases.

Bond Valuation

Bond valuation is the process of determining the fair market value of a bond. There are two
main methods of bond valuation: the discounted cash flow (DCF) method and the yield to
maturity (YTM) method.

• The DCF method: This method involves discounting all of the bond's future cash
flows (coupon payments and principal repayment) to their present value using the
appropriate discount rate. The discount rate is typically the market yield for a bond
with similar characteristics, such as maturity date and credit risk.

• The YTM method: This method involves finding the discount rate that makes the
present value of the bond's future cash flows equal to the current market price of the
bond. The YTM is the rate of return that an investor would earn if they bought the
bond at the current market price and held it to maturity.

Factors that Affect Bond Valuation

A number of factors can affect the valuation of a bond, including:

• Coupon rate: The coupon rate is the annual interest payment that the bond issuer
pays to the bondholders. A higher coupon rate will result in a higher bond valuation.
 • Maturity date: The maturity date is the date on which the bond issuer must repay
the principal amount of the bond to the bondholders. A longer maturity date will
result in a lower bond valuation.

• Credit risk: Credit risk is the risk that the bond issuer will default on its obligation to
pay the bondholders. A higher credit risk will result in a lower bond valuation.

• Interest rates: Interest rates are the rates at which borrowers and lenders are willing
to exchange money for a period of time. When interest rates rise, bond prices fall,
and vice versa.

Unit-6

Derivatives: An Introduction

Derivatives are financial contracts that derive their value from an underlying asset or
benchmark. The underlying asset can be a commodity, such as oil or gold, a stock, a bond, or
even an index, such as the Nifty 50 or the S&P 500. The value of a derivative contract will
fluctuate with the value of the underlying asset.

Features of Derivatives

• Leverage: Derivatives allow traders to take on large positions with relatively small
amounts of capital. This can magnify both profits and losses.

• Risk management: Derivatives can be used to hedge against risk, such as the risk of a
decline in the price of an underlying asset.

• Speculation: Derivatives can also be used for speculation, in an attempt to profit

from expected movements in the price of an underlying asset.

Types of Derivatives

There are two main types of derivatives:

• Commodity derivatives: These derivatives have an underlying asset that is a

commodity, such as oil, gold, or agricultural products.
 • Financial derivatives: These derivatives have an underlying asset that is a financial
instrument, such as a stock, a bond, or an index.

Commodity Derivatives

Commodity derivatives include:

• Futures contracts: These contracts obligate the buyer to purchase, or the seller to
sell, an underlying asset at a predetermined price on a future date.

• Options contracts: These contracts give the buyer the right, but not the obligation, to
buy or sell an underlying asset at a predetermined price on or before a future date.

• Forwards contracts: These contracts are similar to futures contracts, but they are not
traded on exchanges.

Commodity Derivative Market in India

The commodity derivative market in India is regulated by the Securities and Exchange Board
of India (SEBI). The largest commodity exchanges in India are the National Commodity and
Derivatives Exchange (NCDEX) and the Multi Commodity Exchange of India (MCX).

Financial Derivatives

Financial derivatives include:

• Futures contracts: These contracts are similar to commodity futures contracts, but
they have an underlying asset that is a financial instrument.

• Options contracts: These contracts are similar to commodity options contracts, but
they have an underlying asset that is a financial instrument.

• Swaps: These contracts are agreements between two parties to exchange cash flows
based on predetermined parameters.

Financial Derivative Market in India

The financial derivative market in India is also regulated by SEBI. The largest financial
derivative exchanges in India are the National Stock Exchange of India (NSE) and the Bombay
Stock Exchange (BSE).

Futures

Meaning:

A futures contract is a legal agreement between two parties to buy or sell an underlying
asset at a predetermined price on a future date. Futures contracts are traded on exchanges,
and they are standardized contracts, meaning that the terms of the contract are the same
for all traders.

Index Futures:

An index futures contract is a futures contract that has an underlying asset that is an index,
such as the Nifty 50 or the S&P 500. The value of an index futures contract will fluctuate
with the value of the underlying index.

Valuation of Index Futures:

The value of an index futures contract is determined by the following formula:

F = Index (t) + P*N

Where:

• F is the value of the futures contract

• Index (t) is the value of the underlying index at time t

• P is the price of the futures contract

• N is the number of contracts

Arbitrage

Arbitrage is the simultaneous buying and selling of an asset in different markets in order to
profit from price differences. Arbitrage is possible because markets are not always
completely efficient, and there may be temporary differences in the price of an asset in
different markets.

Hedging

Hedging is the use of derivatives to reduce or eliminate risk. For example, a farmer might sell
a futures contract on corn to hedge against the risk of a decline in the price of corn.

Pricing Index Futures

The price of an index futures contract is determined by the supply and demand for the
contract. The supply of the contract is determined by the number of traders who are willing
to sell the contract, and the demand for the contract is determined by the number of traders
who are willing to buy the contract.

Advantages of Index Futures

Index futures offer several advantages, including:

• Leverage: Index futures allow traders to take on large positions with relatively small
amounts of capital.

• Diversification: Index futures can be used to diversifyIndex futures and options are
financial instruments that are used to trade on the future price of an underlying
index. Index futures are contracts that specify the price at which an index will be
traded at a future date. Options are contracts that give the holder the right, but not
the obligation, to buy or sell an index at a specified price on or before a specified
date.

• Advantages of Index Futures

• Diversification: Index futures allow you to trade on the overall performance of an

entire market or sector, rather than focusing on individual stocks. This can help to
reduce your risk and improve your overall returns.

• Leverage: Index futures are highly leveraged investments, which means that you can
control a large amount of value with a relatively small amount of money. This can be
 a great way to make big profits, but it can also lead to big losses if you are not
careful.

• Efficiency: Index futures are very liquid, which means that they are easy to buy and
sell. This makes them a good choice for traders who want to enter and exit trades
quickly.

• Tax advantages: Index futures are considered to be capital gains investments, which
means that they are taxed at a lower rate than ordinary income. This can be a
significant advantage for long-term investors.

• Disadvantages of Index Futures

• Risk: Index futures are risky investments, and you could lose a significant amount of
money if you are not careful.

• Margin requirements: Index futures require margin, which is a deposit that you must
make with your broker. This deposit can be as high as 50% of the value of the
contract.

• Volatility: Index futures are volatile investments, and their prices can fluctuate
significantly in a short period of time. This can make it difficult to time your trades
correctly.

• Options

• An option is a contract that gives the holder the right, but not the obligation, to buy
or sell an underlying asset at a specified price (the strike price) on or before a
specified date (the expiry date). The buyer of an option pays a premium to the seller
of the option.

• Types of Options

• There are two types of options: calls and puts.

• Call options: A call option gives the holder the right, but not the obligation, to buy
the underlying asset at the strike price on or before the expiry date.
• Put options: A put option gives the holder the right, but not the obligation, to sell the
underlying asset at the strike price on or before the expiry date.

• Options Pricing

• The price of an option is determined by a number of factors, including the underlying

asset price, the strike price, the time to expiry, the volatility of the underlying asset,
and the interest rate.

• Options Price Changes

• The price of an option will change based on changes in the underlying asset price,
the time to expiry, and the volatility of the underlying asset.

• Options Risks

• Options are risky investments, and you could lose the entire amount of money that
you paid for the premium.

• Market Structure

• The options market is organized into exchanges where options are traded. The two
largest options exchanges in the United States are the Chicago Board Options
Exchange (CBOE) and the International Securities Exchange (ISE).

• Futures v/s Options

• Index futures and options are both financial instruments that are used to trade on
the future price of an underlying index. However, there are some key differences
between the two.

• Futures: Index futures are contracts that specify the price at which an index will be
traded at a future date. The holder of a futures contract is obligated to buy or sell the
index at the agreed-upon price.

• Options: Options are contracts that give the holder the right, but not the obligation,
to buy or sell an index at a specified price on or before a specified date. The holder of
an options contract is not obligated to exercise the option if it is not in their favor.
 • Option Trading Strategies

• There are a number of option trading strategies that can be used to achieve different
investment goals. Some common option trading strategies include:

• Covered calls: A covered call involves selling a call option on an underlying asset that
you already own. This strategy can be used to generate income from the premium
that you receive from selling the option.

• Protective puts: A protective put involves buying a put option on an underlying asset
that you already own. This strategy can be used to protect yourself from losses if the
price of the underlying asset declines.

• Straddles: A straddle involves buying a call option and a put option with the same
strike price and expiry date. This strategy is used to bet on the volatility of the
underlying asset.

• Strangles: A strangle involves buying a call option and a put option with different
strike prices but the same expiry date. This strategy is also used to bet on the
volatility of the underlying

Unit-7

Portfolio management is the process of selecting, constructing, and overseeing a collection

of investments to meet an investor's individual needs and objectives. It involves balancing
risk and return, diversification, and actively managing the portfolio over time.

Return on Portfolio:

The return on a portfolio is the total profit earned from all investments in the portfolio,
expressed as a percentage of the total investment amount. It can be measured in terms of
capital appreciation (increase in the value of investments) and income (dividends, interest).

Risk on Portfolio:

Portfolio risk is the uncertainty of future returns on investments within the portfolio. It can
be measured through various metrics like standard deviation, beta, and Value at Risk (VaR).
Portfolio Managers:

Portfolio managers are professionals who oversee the investment decisions and activities for
individual or institutional investors. They are responsible for analyzing markets, selecting
investments, constructing and managing portfolios, and achieving client's financial goals.

SEBI Guidelines for Portfolio Managers:

The Securities and Exchange Board of India (SEBI) regulates the activities of portfolio
managers in India. They have laid down various guidelines, including:

• Minimum net worth requirements

• Registration and licensing requirements

• Code of conduct and ethical practices

• Investment management procedures

• Reporting and disclosure requirements

Portfolio Management Services:

Portfolio management services are offered by financial institutions, wealth management

firms, and individual portfolio managers. These services typically include:

• Investment analysis and research

• Portfolio construction and diversification

• Asset allocation and risk management

• Ongoing monitoring and portfolio rebalancing

• Performance reporting and tax advice

Efficient Market Hypothesis (EMH):

EMH states that all available information is already reflected in market prices, making it
impossible to consistently outperform the market through active management.
Portfolio Theory:

• Contribution of William Sharpe and Harry Markowitz:

o Sharpe developed the Capital Asset Pricing Model (CAPM), which explains the
relationship between risk and return.

o Markowitz introduced the concept of Modern Portfolio Theory (MPT), which

emphasizes diversification and efficient frontier analysis in portfolio
construction.

• Single Index Model: This model simplifies portfolio analysis by assuming that all risk
in a diversified portfolio can be explained by its exposure to the market.

• Capital Asset Pricing Model (CAPM): This model describes the relationship between
the expected return of an asset and its systematic risk (beta). It is widely used for
asset pricing and portfolio optimization.

• Arbitrage Pricing Theory (APT): APT extends CAPM by suggesting that multiple
factors, not just the market, influence expected returns. It allows for a more flexible
analysis of risk and return relationships.

harpe Ratio:

The Sharpe Ratio measures the average return earned per unit of risk. It is calculated by
dividing the portfolio's excess return (return over the risk-free rate) by its standard deviation.
A higher Sharpe Ratio indicates better risk-adjusted performance.

Treynor Ratio:

The Treynor Ratio measures the additional return earned per unit of systematic risk (beta). It
is calculated by dividing the portfolio's excess return by its beta. A higher Treynor Ratio
indicates superior performance relative to the market risk taken.

Jensen Ratio:
The Jensen Ratio measures the alpha of a portfolio, which is the excess return earned after
adjusting for market risk and the risk-free rate. A positive Jensen Ratio indicates that the
portfolio manager has outperformed the market after adjusting for risk.

International Portfolio Investment and Management:

Risk and Return in International Diversification:

International diversification can offer benefits such as:

• Risk reduction: By investing in assets across different countries, investors can reduce
their exposure to specific market risks.

• Increased return potential: International markets may offer higher potential returns
than domestic markets.

• Access to new investment opportunities: Investors can gain access to assets and
sectors not available in their home market.

However, international diversification also involves additional risks such as:

• Currency risk: Fluctuations in exchange rates can impact portfolio returns.

• Political risk: Political instability in foreign countries can lead to losses.

• Liquidity risk: Investors may find it difficult to quickly sell their holdings in some
international markets.

Trends in Portfolio Management:

• Growth of passive investing: Index funds and ETFs are becoming increasingly popular
due to their low fees and diversification benefits.

• Increased focus on ESG factors: Environmental, social, and governance factors are
increasingly being considered in investment decisions.

• Personalization of investment solutions: Robo-advisors and other technology-driven

platforms are offering customized portfolio management services.
 • Focus on alternative assets: Investors are allocating more capital to alternative assets
such as private equity, hedge funds, and real estate.

Strategies:

Active Management:

• Actively selects individual stocks or bonds in an attempt to outperform the market.

• Requires research expertise and may involve higher fees.

Passive Management:

• Tracks a market index, providing broad market exposure.

• Offers lower fees and diversification benefits.

Fees:

• Portfolio management fees can vary depending on the type of service, investment
strategy, and account size.

• Understanding fee structures is crucial for evaluating the value of different portfolio
management options.

Choosing the right portfolio management strategy and evaluating its performance through
appropriate metrics is essential for achieving long-term investment goals.