Investment analysis and portfolio management

Section A

Concept of investment: Investment is the employment of funds with the aim of getting return
on it. In general terms, investment means the use of money in the hope of making more money.
In finance, investment means the purchase of a financial product or other item of value with an
expectation of favorable future returns.

Objectives of investment:

 Safety
 return
 growth
 Capital appreciation
 Tax minimization
 Investing for retirement plans.
 Liquidity
 Risk
 Hedge against inflation

Difference bw investment and speculation

BASIS FOR
INVESTMENT SPECULATION
COMPARISON

Meaning The purchase of an asset with the Speculation is an act of conducting a risky
hope of getting returns is called financial transaction, in the hope of
investment. substantial profit.

Time horizon Longer term Short term

Risk involved Moderate risk High risk

Intent to profit Changes in value Changes in prices

BASIS FOR
INVESTMENT SPECULATION
COMPARISON

Expected rate of Modest rate of return High rate of return

return

Funds An investor uses his own funds. A speculator uses borrowed funds.

Income Stable Uncertain and Erratic

Behavior of Conservative and Cautious Daring and Careless

participants

Investment and gambling

Gambling
Gambling is defined as staking something on a contingency. Also known as betting or wagering,
it means risking money on an event that has an uncertain outcome and heavily involves chance.

Meaning of investment management: Investment management (or financial management) is

the professional asset management of various securities (shares, bonds, and other securities) and
other assets (e.g., real estate) in order to meet specified investment goals for the benefit of the
investors.

Investment management is the activity of overseeing and making decisions regarding the
investments of an individual, company, or other institution.

Investment management process:

1. Assess your goals and circumstances: The investment plan process begins during our first
meeting with a discussion of your financial and non-financial values and goals, as well as your
existing assets.
 2. Setting of investment objectives:

3. Gathering information:

4. Plan your asset allocation: Because it is so important, asset allocation is the first investment
decision. During this process, we decide how much of your portfolio to invest in each of the
different investment types, or asset classes, including stocks, bonds, real estate, commodities,
cash, short-term investments, domestic and international.

5. Evaluation of risk and return:

6. Construction of portfolio: Building on the first four steps, we construct a portfolio suited to
your needs, goals, investment horizon, and risk tolerance. The building blocks for the portfolio
are ETF’s and low cost, tax efficient index funds which provide the optimal way to implement a
diversified portfolio.

6. Portfolio evaluation and control:

7. portfolio revision

Investment alternatives:

 Equity share
 Preference shares
 Debentures and bonds
 Derivatives
 Life insurances
 Real estate
 Bank deposits
 Money market securities
 Mutual funds
 Retirement products

Features of investment avenues

 Safety of Principal: The investor, to be certain of the safety of principal, should carefully
review the economic and industry trends before choosing the types of investment.

 Liquidity: Even investor requires a minimum liquidity in his investments to meet

emergencies.
 Income Stability: Regularity of income at a consistent rate is necessary in any investment
pattern.

 Appreciation and Purchasing Power Stability: Investors should balance their portfolios to
fight against any purchasing power instability. Investors should judge price level inflation,
explore the possibility of gain and loss in the investments available to them, limitations of
personal and family considerations.

 Legality and Freedom from Care: All investments should be approved by law. Law relating
to minors, estates, trusts, shares and insurance be studied. Illegal securities will bring out many
problems for the investor.

 Tax implications: While planning an investment programme, the tax implications related to it
must be seriously considered. In particular, the amount of income an investment provides and
the burden of income tax on that income should be given a serious thought.

Types of Management Strategies

 Passive, or "buy and hold" strategy: investor buy securities and hold it for long period.
Passive management is for investors willing to accept market returns.

 Active management strategy: In active management strategy, the fund manager’s decisions
are influenced by prevailing market trends, company specific fundamentals, economic and
political events. Precisely, it is the art of market timing and stock picking.

Other investment strategies:

 Value Investing: An investment strategy made popular by Warren Buffet, the principle behind
value investing is simple: buy stocks that are cheaper than they should be. Finding stocks that
are under-priced takes a lot of research on the fundamentals of the underlying companies. And
once you’ve found them, it often takes a long time for their price to rise. This buy and hold
technique requires a patient investor but should the right call be made, handsome payoffs could
be earned.

 Income Investing: A great way to build wealth over time, income investing involves buying
securities that generally pay out returns on a steady schedule. Bonds are the best known type of
fixed income security, but the category also includes dividend paying stocks, exchange-traded
funds (ETFs), mutual funds, and real estate investment trusts (REITs). Fixed income
 investments provide a reliable income stream with minimal risk and depending on the risk the
investor is looking to take, should comprise at least a small portion of every investment
strategy.

 Growth Investing: An investment strategy that focuses on capital appreciation. Growth

investors look for companies that exhibit signs of above-average growth, through revenues and
profits, even if the share price appears expensive in terms of metrics such as price-to-earnings or
price-to-book ratios.

 Small Cap Investing: An investment strategy fit for those looking to take on a little more risk
in their portfolio. As the name suggests, small cap investinginvolves purchasing stock of small
companies with smaller market capitalization

 Socially Responsible Investing: A portfolio built of environmentally and socially friendly

companies while staying competitive alongside other kinds of securities in a typical market
environment. In today’s modern world, investors and the general public expect companies to
maintain some social conscience, and they’re putting their money where their mouth is. SRI is
one path to seeking returns that poses a significant collateral benefit for everyone.

Approaches to investment

1. Fundamental approach: The Fundamental Approach is an attempt to identify

overvalued and undervalued securities. If stock is undervalued, investors buy it and vice
versa. According to this approach stock prices are guided by the underlying economic
(fundamental) factors. It may be predicted through the analysis of the fundamental
factors relating to the company, industry, and economy.

2. Psychological approach: the prices of securities are guided on the investor’s psychology
and emotions. If investors have positive sentiments, the price of shares will appreciate
and vice versa.

3. Academic approach: investors use academics and views of scholars such as risk and
return analysis etc. Stock price behaviour corresponds to a random walk. This means that
successive price changes are independent. As a result, past price behaviour cannot be
used to predict future price behaviour.

4. Technical Analysis: attempts to forecast the direction of investment prices by studying

past market data. Patterns in past price behavior of a security in question and the overall
market can be used to direct profitable trading strategies.
 5. Eclectic Approach:

This is the hybrid approach. Its operational implications are as follows: ·

 Conduct fundamental analysis to establish certain value ‘anchors’.

 Do technical analysis to assess the state of the market psychology. ·

 Combine fundamental and technical analyses to determine which securities are worth
buying, worth holding, and worth disposing of. ·

 Always remember higher level of return often necessitates the assumption of a higher
level of risk.

Concept of risk

A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is
caused by external or internal vulnerabilities, and that may be avoided through preemptive
action.

In finance The probability that an actual return on an investment will be lower than the expected
return. Financial risk is divided into the following categories: Basic risk, Capital risk, Country
risk, Default risk, Delivery risk, Economic risk, Exchange rate risk, Interest rate risk, Liquidity
risk, Operations risk, Payment system risk, Political risk, Refinancing risk, Reinvestment risk
etc.

Total risk = systematic risk + unsystematic risk

The standard deviation of returns is a measure of total risk. For well-diversified portfolios,
unsystematic risk is very small. Consequently, the total risk for a diversified portfolio is
essentially equivalent to the systematic risk.

Investment risk: may be defined as the probability or likelihood of occurrence of losses relative
to the expected return on any particular investment.

Types of risk

1. Systematic risk: which is out of control of the company? This type of risk is based on the
environmental factor.

2. Unsystematic risk: based in company’s internal factors. Such as wrong decisions,

mismanagement etc. this type of risk can be controlled by the company.
components of investment risk:

 Financial Risk: This is the risk associated with a company's ability to manage the
financing of its operations. Essentially, financial risk is the company's ability to pay its
debt obligations. The more obligations a company has, the greater the financial risk and
the more compensation is needed for investors.

 Liquidity Risk
 Exchange-Rate Risk: This is the risk associated with investments denominated in
a currency other than the domestic currency of the investor. For example, an American
holding an investment denominated in Canadian dollars is subject to exchange-rate, or
foreign-exchange, risk.

 Country-Specific Risk: This is the risk associated with the political and economic
uncertainty of the foreign country in which an investment is made.
  Business risk: The market value of your investment in equity shares depends upon the
performance of the company you invest in. If a company's business suffers and the
company does not perform well, the market value of your share can go down sharply.

 Purchasing power risk, or inflation risk

 Interest rate risk

 Market risk: Market risk is the risk of movement in security prices due to factors that
affect the market as a whole. Natural disasters can be one such factor.

Measurement of risk

 Standard deviation
 Regression equation
 Co variance

Concept of return: Return, also called return on investment, is the amount of money you
receive from an investment.

What is a Yield: Yield refers to the earnings generated and realized on an investment over a
particular period of time, and is expressed in terms of percentage based on the invested amount
or on the current market value or on the face value of the security. It includes the interest earned
or dividends received from holding a particular security. Depending on the nature and valuation
(fixed/fluctuating) of the security, yields may be classified as known or anticipated.
Yield = Net Realized Return / Principal Amount

Expected yield: the expected rate of return an investor expect from investment.

Actual yield: the actual return an investor gets from a specific asset or investment at the end of
period.

Holding Period Return/Yield: Holding period return is the total return received from holding
an asset or portfolio of assets over a period of time, known as the holding period, generally
expressed as a percentage. Holding period return is calculated on the basis of total returns from
the asset or portfolio (income plus changes in value). It is particularly useful for comparing
returns between investments held for different periods of time.
The Formula for Holding Period Return Is
Holding Period Return (HPR) and annualized HPR for returns over multiple years can be
calculated as follows:

Holding period yield = income + (end of period value – initial value) / initial value

Efficient market theory/the random walk theory

What a random walk is?

As outlined by the Random Walk Theory, neither technical analysis, which is the study of past
stock prices in an attempt to estimate future prices, nor fundamental analysis, which is a study of
the overall financial health of the economy, industry and the business of the company, would
enable an investor to beat the market.
In finance, the hypothesis assumes that financial markets stock price changes are the random
events.

The random walk theory was propounded by professor Eugene fama. it states that market and
securities prices are random and not influenced by past events. It states that an efficient market
fully reflects the available information in share prices. Hence if the market are efficient, security
prices will reflect normal returns for level of risk associated with the security. Fama suggested
that there are three forms of market on the basis of market efficiency and type of information
considered in the market. i.e. weak form, semi strong form and strong form.

The Random Walk Theory assumes that the price of each security in the stock market follows a
random walk. The Random Walk Theory also assumes that the movement in the price of one
security is independent of the movement in the price of another security.

What is efficient market?

Market where all pertinent information is available to all participants at the same time, and where
prices respond immediately to available information. Stock markets are considered the best
examples of efficient markets.

In an efficient capital market, security prices adjust rapidly to the infusion of new information
therefore current stock prices truly reflect all available information. In other words capital market
is informationally efficient market. The stock prices are unbiased reflection of all currently
available information at a point of time including the risk involved in the security.

Assumptions of EMT:

1. Presence of large number of participants

2. Infusion of information in random order
 3. Buy and sell decisions of investors cause change in stock prices to adjust rapidly to
reflect new information.
4. Perfect information about market trends and profit of firms.
5. All investors have same knowledge
6. All investors are rational.

Hypothesis of efficient market theory

The efficient market hypothesis states that share prices reflect all relevant information.
According to the EMH, stocks always trade at their fair value on stock exchanges, making it
impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.

As such, it should be impossible to outperform the overall market through expert stock selection
or market timing, and the only way an investor can possibly obtain higher returns is by
purchasing riskier investments.

Forms/variations/sub hypothesis of EMH

There are three forms of EMH: weak, semi-strong, and strong.

Weak form: It assumes that current stock prices fully reflect all security market information,
including historical stock prices, rate of return, trading volume and other market related
information.

As per this EMH there is no relation between historical data and future returns. It concludes that
excess returns cannot be achieved using technical analysis.

Semi strong form: The semi-strong form of EMH assumes that current stock prices adjust
rapidly to the release of all new public informationlike dividend announcement, P/E ratio,
dividend yield, stock splits, economic news, political news etc. It concludes that excess returns
cannot be achieved using fundamental analysis.

It encompasses the weak form of EMH because market information considered in weak form is
public. Public information also include non-market information.

Strong form: This hypothesis contends that stock prices fully reflect all information from
public and private sources. Therefore, no investor can earn above average returns persistently.
Strong form EMH encompasses both of the prior EMHs.

This market form assumes the presence of perfect market where all information is cost free and
available to everyone at the same time. It concludes that excess returns are impossible to achieve
consistently.
 Section – B

Fundamental and technical analysis

Fundamental Analysis studies all those factors which have an impact on the stock price of the
company in future, such as financial statement, management process, industry, etc. it includes
detailed examination of the basic factors which influence the interest of the economy, industry
and company. It analyzes the intrinsic value of the firm to identify whether the stock is under-
priced or over-priced. On the other hand, technical analysis uses past charts, patterns and trends
to forecast the price movements of the entity in the coming time.

BASIS FOR
FUNDAMENTAL ANALYSIS TECHNICAL ANALYSIS
COMPARISON

Meaning Fundamental Analysis is a practice of Technical analysis is a method

analyzing securities by determining the of determining the future price
intrinsic value of the stock. of the stock using charts to
identify the patterns and
trends.

Relevant for Long term investments Short term investments

Function Investing Trading

Objective To identify the intrinsic value of the stock. To identify the right time to
enter or exit the market.

Decision making Decisions are based on the information Decisions are based on market
available and statistic evaluated. trends and prices of stock.

Focuses on Both Past and Present data. Past data only.

Form of data Economic reports, news events and Chart Analysis

industry statistics.

Future prices Predicted on the basis of past and present Predicted on the basis of
performance and profitability of the charts and indicators.
BASIS FOR
FUNDAMENTAL ANALYSIS TECHNICAL ANALYSIS
COMPARISON

company.

Type of trader Long term position trader. Swing trader and short term
day trader.

Assumptions of fundamental analysis: When you use fundamental analysis, you must assume
that the reported financial information is legitimate and correct. Experts also often assume that a
company's past performance and metrics may continue into the future. You also assume certain
factors about the economy and market conditions, and hope they will continue to be favorable
from the time of your analysis into the future.

Economic analysis

It refers to the analysis of all those economic factors that influence security prices.

Macro Economic Analysis

1. Growth Rate of GDP

2. Industry Growth Rate
3. Agriculture and Monsoons
4. Savings and Investments
5. Money Supply
6. Price Level
7. Balance of Payment, Exchange Rate, Forex Reserve
8. Infrastructural Facilities
9. Research and Technical Development
10. Natural Resources
11. Population

Forecasting Techniques

 Surveys
 Indicators
 Diffusion Index
 Economic Models (correlation, regression, trend analysis, time series etc)
 Industry analysis

A market assessment tool designed to provide a business with an idea of the complexity of a
particular industry. Industry analysis involves reviewing the economic, political and market
factors that influence the way the industry develops. Industry analysis is a market assessment
tool used by businesses and analysts to understand the competitive dynamics of an industry. It
helps them get a sense of what is happening in an industry i.e., demand-supply statistics, degree
of competition within the industry, state of competition of the industry with other emerging
industries, future prospects of the industry taking into account technological changes, credit
system within the industry, and the influence of external factors on the industry.

Types of industry analysis

There are three commonly used and important methods of performing industry analysis. The
three methods are:

1. Competitive Forces Model (Porter’s 5 Forces)

2. Broad Factors Analysis (PEST Analysis)
3. SWOT Analysis

Sensitivity to the business cycle

Industries vary in their sensitivity to the business cycle. The sensitivity of Firm’s Earning is
determined by the three factors:

1. Sensitivity of Sales to Business Conditions: If manufactured product is a necessity, the

Sensitivity of Sales to Business Conditions will be low and vice-versa.

2. Operating Leverage: High Fixed Cost leads to High OL i.e. Profits are more sensitive to
business conditions. On the other hand High Variable Cost leads to Low OL.

3. Financial Leverage: Higher the degree of FL the greater the sensitivity to a business
cycle.

Industry Life Cycle

The industry life cycle refers to the evolution of an industry or business through various stages.
The four phases of an industry life cycle are the introduction, growth, maturity, and decline
stages.
 Introduction Phase: The introduction, or startup, phase involves the development and early
marketing of a new product or service. Innovators often create new businesses to enable the
production of the new offering. Information on the products and industry participants are often
limited, so demand tends to be unclear. Consumers of the goods and services need to learn more
about them, while the new providers are still developing and honing the offering. The industry
tends to be highly fragmented in this stage. Participants tend to be unprofitable because expenses
are incurred to develop and market the offering while revenues are still low.

 Growth Phase: Consumers in the new industry have come to understand the value of the new
offering, and demand grows rapidly. A handful of important players usually become apparent,
and they compete to establish a share of the new market. Immediate profits usually are not top
priority as companies spend on research and development or marketing. Business processes are
improved, and geographical expansion is common. Once the new product has demonstrated
viability, larger companies in adjacent industries tend to enter the market through acquisitions or
internal development.

 Maturity Phase: During this period growth slows, focus shifts toward expense reduction.
Market share, cash flow, and profitability become the primary goals of the remaining companies
now that growth is relatively less important. Price competition becomes much more relevant as
product differentiation declines with consolidation.

 Decline Phase: The decline phase marks the end of an industry's ability to support growth.
Obsolescence and evolving end markets negatively impact demand, leading to declining
revenues. This creates margin pressure, forcing weaker competitors out of the industry. Further
consolidation is common as participants seek synergies and further gains from scale.

Factors causing Variation in Stages:

 Change in Social Habits

 Government Regulation
 Change in Technology
 Change in Labour Cost etc.

Profit Potential: Porter Model

Michael Porter argued that the profit potentiality of the business depends upon the following five
basic competitive forces:

1. Threat of new entrants

2. Rivalry among Existing Firms
 3. Pressure from Substitute Products
4. Bargaining Power of Buyers
5. Bargaining Power of Sellers

Company analysis

Meaning: It is a study of the variables that influence the future of a firm both qualitatively and
quantitatively. It assess the firm’s competitive position, profitability and efficiency.

The company analysis helps ascertain various aspects of a company’s health. Usually presented in a
written format, the analysis focuses on:

 Feasibility
 Productivity
 Corporate financial health

These three factors built into the company’s strengths, weaknesses, and immediate threats. Thereby, it
helps the company take the necessary steps to handle any unfavourable situations and use positive
outcomes to their maximum benefit.
 Company Analysis

Strategy Accounting Financial

Analysis Analysis Analysis

Focusing
Firm Competitive SWOT
a
Strategies Analysis
Strategy

Defensiv Offensiv Different

e e Low-cost iation
Strategy Strategy Strategy Strategy Competit
ive Corporat
Analysis e
Analysis

Components of company analysis

1. Financial analysis

The financial analysis includes an examination of financial records for a period of three to five years. A
financial analysis is important to understand the financial health of the company.

Analysis of financial status typically includes:

 Examination of balance sheets and difference between gross and net profit
 Cash flow Analysis gives the status of ‘money in’ and ‘money out’
 Income statements highlight the sources of income and revenue generation activities
 Percentage of shareholders equity, share growth rates and evaluation of other securities
 Review of expenses in relation to company revenues
 Analysis of the company’s debt and investments
 Profitability and related growth from the previous accounting periods

2. Strategic analysis: Strategic analysis is a process that involves researching an organization’s

business environment within which it operates. Strategic analysis is essential to formulate
 strategic planning for decision making and smooth working of that organization. Firm’s strategic
analysis includes:
 Firm Competitive Strategies

 Focusing a Strategy

 SWOT Analysis

i. Firm Competitive Strategies

 Defensive strategy: Defensive marketing strategies refer to the actions of a market leader to
protect its market share, profitability, product positioning, and mind share against an emerging
competitor. If not undertaken, some amount of customers will leave the established business in
favor of the competitor—who can even displace the market leader and rise to the top.
Defensive strategies are only used by market leaders. The principle of this defensive strategy is
to make difficult for the competitors to acquire the market share and the new entrants to access
the market.

 Offensive strategy: It involves direct and indirect attacks by improving own position by taking
away the market share of the competitors. The primary focus of this strategy is to be a first
mover and a proactive market leader and to protect itself by standing one step ahead of the
competitors and allowing them to follow.

 Low Cost Strategy: Low cost strategy is a type of pricing strategy in which the firm offers the
products at low price. This strategy helps to stimulate the demand & gain higher market share.
The firm can gain cost advantages by increasing their efficiency, taking advantage of economies
of scale, or by getting the raw material at low cost. The low cost strategy also comes up with the
risk that other firms may also reduce their prices & a price may start.

 Differentiation Strategy¨ Differentiation strategy, as the name suggests, is the strategy that aims
to distinguish a product or service, from other similar products, offered by the competitors in
the market. It entails development of a product or service, that is unique for the customers, in
terms of product design, features, brand image, quality, or customer service. If successful, it
allows the business the opportunity to charge a premium for the good or service.

ii. Focusing a Strategy: it includes:

Competitive Analysis: A systematic attempt to identify and understand key elements of a

competitor’s strategy in terms of objectives, strategies, resource allocation and implementation
through the marketing mix
  Who are the competitors?
 How can the competitors be grouped meaningfully?
 What are the competitors’ strengths and weaknesses?
 What are the competitors’ objectives and strategies?
 How are the competitors likely to react to changes in the marketing environment?
iii. SWOT Analysis

3. Accounting analysis: Accounting Analysis seeks to evaluate the extent to which the firm’s
accounting reports capture its business reality.

1. Accounting System

2. Financial Statements

3. Accounting concepts, conventions, principles and standards

4. Audit

Technical Analysis

Technical analysis is a trading discipline employed to evaluate investments and identify trading
opportunities by analyzing statistical trends gathered from trading activity, such as price
movement and volume. Unlike fundamental analysts, who attempt to evaluate a security's
intrinsic value, technical analysts focus on patterns of price movements, trading signals and
various other analytical charting tools to evaluate a security's strength or weakness.

Assumptions of technical analysis

1. The market discounts everything: Technical analysts believe that everything from a
company’s fundamentals to broad market factors to market psychology are already priced into
the stock.
2. Price moves in trends: Technical analysts believe that prices move in short-, medium-, and
long-term trend. In other words, a stock price is more likely to continue a past trend than move
erratically. Most technical trading strategies are based on this assumption.

3. History tends to repeat itself

Technical analysts believe that history tends to repeat itself. The repetitive nature of price
movements is often attributed to market psychology, which tends to be very predictable based on
emotions like fear or excitement. Technical analysis uses chart patterns to analyze these
emotions and subsequent market movements to understand trends.
 What is Dow Theory?
The theory explains how the stock market can be used by investors to understand the health of
the business environment. It was the first theory to explain that the market moves in trends.

Six tenets of Dow Theory

 The market discounts all news

This principle explains that any information available in the market is already reflected in the
price of stocks and indices. This includes all data such as earnings announcements by
companies, rise (or fall) in inflation or even sentiments of investors.

As a result, it is better to analyse price movements instead of studying earnings reports

or balance sheets of companies.

 The market has three trends

This theory was the first to propound that the market moves in trends. The trends are:

 Primary trend is the major trend for the market. It indicates how the market moves in
the long-term. A primary trend could span many years.

 Secondary trends are considered to be corrections to a primary trend. This is like an

opposite movement to the primary trend. For example, if the primary trend is upward
(bullish), the secondary trend(s) is downward. These trends could last anywhere
between a few weeks to a few months.

 Minor trends are fluctuations to the market movement on a daily basis. These trends
last for less than three weeks and go against the movement of the secondary trend.
Some analysts consider minor trends to mirror market chatter.

 Major Trends Have Three Phases.

Dow mainly paid attention to the primary (major) trends in which he distinguished three phases:
A primary trend will pass through three phases, according to the Dow theory. In a bull market,
these are the accumulation phase, the public participation (or big move) phase, and the excess
 phase. In a bear market, they are called the distribution phase, the public participation phase, and
the panic (or despair) phase.

 Indices confirm each other

A trend in the market cannot be verified by a single index. All indices should reflect the same
opinion. For example, in case of a bullish trend in India, the Nifty, Sensex, Nifty Midcap,
Nifty Smallcap and other indices should move in the upward direction. Similarly, for a bearish
trend, all indices should move in a downward direction.

 Trends are confirmed by volume

The trend in the market should be supported by trading volumes. For instance, in an upward
trend, the volume rises with increase in price and falls with decrease in price. And in a
downward trend, the volume increases with fall in price and decreases with price rise.

 Trends continues Until a Clear Reversal Occurs

The theory says that market trends exist despite any noise in the market. That is, during an
upward trend, a temporary trend reversal is possible but the market continues to move in the
upward direction. In addition, the status quo remains until a clear reversal happens in the
market.
Elliott Wave theory

The Elliott Wave Theory was developed by Ralph Nelson Elliott to describe price movements in
financial markets, in which he observed and identified recurring, fractal wave patterns. Waves
can be identified in stock price movements and in consumer behavior. Nelson found that
financial markets have movement characteristics that repeat over and over again. These
movements are called waves.
Waves 1, 2, 3, 4 and 5 form an impulse, and waves A, B and C form a correction.

Wave 1, 3 and 5 determine the direction of the market. Wave 2 and 4 are counter waves.

Rules of the theory:

 Wave 2 never moves below wave 1.

 Wave 3 is never the shortest
 Wave 4 never enters wave 1

Wave development takes place in two distinctive phases

1. The first is the 5 waves structure known as motive/impulse waves

2. The second is the 3 wave structure known as corrective waves.

Motive and corrective waves form the complete cycle of 8 waves.

Impulse waves consist of five sub-waves.

Impulsive waves: Impulses are featured in a set of five lower-degree waves. These lower-degree
waves also alternate between impulsive and corrective. Essentially, the first, third and fifth
waves are always impulses while the second and fourth are smaller retraces of the first and third
waves.

Corrective waves: Corrective waves are also divided – but into three smaller-degree waves.

Wave 1: The instrument begins to rise. Why? In some cases because a relatively small number
of investors feel – from various– that the instrument price is ‘cheap’, and decide to buy it.
 Wave 2
At this stage, some of the original buyers decide to ‘take profit’ and, when they sell, the
instrument’s price decreases. This time though, it won’t get to its earlier low before it’s viewed
as ‘cheap’ again.

Wave 3
Now more investors notice the instrument and decide to buy it, sending the price higher, usually
higher than the peak of Wave 1. According to the theory, this is often the strongest and longest of
the waves.

Wave 4
Again, some investors ‘take profits’ (although some are still buying). According to the theory,
this wave is commonly weaker.

Wave 5
Now the instrument has caught a lot of attention and investors buy - big time - sending the
instrument to ‘overpriced’ territory. Some investors will start ‘shorting’ the instrument, and the
corrective phase – the ABC pattern – will appear.

Section c

Portfolio Analysis and Selection

Difference between traditional and modern portfolio theories

 Traditional theory analyze securities on individual basis while modern theory analyze
securities on combined basis.

 Traditional theory analyze the risk and return of securities on individual basis by analyzing
of individual securities through evaluation of return and risk conditions in each security.

 The modern portfolio theory believes in the maximization of return through a combination of
securities. The modern portfolio theory discusses the relationship between different securities
and then draws inter-relationships of risks between them. The theory states that by combining a
security of low risk with another security of high risk, success can be achieved by an investor in
making a choice of investment outlets.

 Traditional theory was based on the fact that risk could be measured on each individual
security through the process of finding out the standard deviation and that security should be
chosen where the deviation was the lowest. Greater variability and higher deviations showed
more risk than those securities which had lower variation.
 The modern theory is of the view that by diversification risk can be reduced. Diversification
can be made by the investor either by having a large number of shares of companies in different
regions, in different industries, or those producing different types of product lines.

 Traditional theory assume market as inefficient, while modern theory assume market as
efficient.

 Under traditional theory, the financial plan of an individual is evaluated based on individual’s
needs in terms of income and capital appreciation, while under modern theory the financial plan
of an investor is evaluated based on risk and return.

Merits of diversification

 Minimising risk of loss – if one investment performs poorly over a certain period, other
investments may perform better over that same period, reducing the potential losses of your
investment portfolio from concentrating all your capital under one type of investment.

 Preserving capital – not all investors are in the accumulation phase of life; some who are close
to retirement have goals oriented towards preservation of capital, and diversification can help
protect your savings.

 Generating returns – sometimes investments don’t always perform as expected, by

diversifying you’re not merely relying upon one source for income.

 As the economy changes, the spending patterns of the people change. Diversification into a
number of industries or product line can help create a balance for the entity during these ups and
downs.

 Certain industries may fall down for a specific time frame owing to economic factors.
Diversification provides movement away from activities which may be declining.
Markwitz model

This model was developed by Harry Markowitz which is also called modern portfolio
theory, shows how to choose a portfolio with the maximum possible expected return for the
given amount of risk. It also describes how to choose a portfolio with the minimum possible risk
for the given expected return. Therefore, Modern Portfolio Theory is viewed as a form of
diversification which explains the way of finding the best possible diversification strategy.

Assumptions:

 No transaction costs: For buying and selling of securities

 No tax
 Investors are generally rational and risk adverse.
 Investors have free access to fair and correct information on the returns and risk.
 Investors choose higher returns to lower returns for a given level of risk.

Steps in Markwitz model:

Step 1: investment media/channels

Step 2: Risk and return

Step 3: portfolio construction

Step 4: Efficient frontier: The efficient frontier is the set of optimal portfolios that offer the
highest expected return for a defined level of risk or the lowest risk for a given level of expected
return. Portfolios that lie below the efficient frontier are sub-optimal because they do not provide
enough return for the level of risk. Portfolios that cluster to the right of the efficient frontier are
sub-optimal because they have a higher level of risk for the defined rate of return. Different
combinations of securities produce different levels of return. The efficient frontier represents
the best of these securities combinations -- those that produce the maximum expected return for a
given level of risk. The efficient frontier is the basis for modern portfolio theory.

The efficient frontier rates portfolios (investments) on a scale of return (y-axis) versus risk (x-
axis). The efficient frontier graphically represents portfolios that maximize returns for the risk
assumed. Returns are dependent on the investment combinations that make up the portfolio. The
standard deviation of a security is synonymous with risk. Ideally, an investor seeks to populate
the portfolio with securities offering exceptional returns but whose combined standard deviation
is lower than the standard deviations of the individual securities. The less synchronized the
securities (lower covariance) then the lower the standard deviation.

Step 5: indifference curve

Step 6: selection of portfolio: Assume a risk-seeking investor uses the efficient frontier to select
investments. The investor would select securities that lie on the right end of the efficient frontier.
The right end of the efficient frontier includes securities that are expected to have a high degree
of risk coupled with high potential returns, which is suitable for highly risk-tolerant investors.
Conversely, securities that lie on the left end of the efficient frontier would be suitable for risk-
averse investors.

Optimal Portfolio

One assumption in investing is that a higher degree of risk means a higher potential return.
Conversely, investors who take on a low degree of risk have a low potential return. According to
Markowitz's theory, there is an optimal portfolio that could be designed with a perfect balance
between risk and return. The optimal portfolio does not simply include securities with the highest
potential returns or low-risk securities. The optimal portfolio aims to balance securities with the
greatest potential returns with an acceptable degree of risk or securities with the lowest degree of
risk for a given level of potential return. The points on the plot of risk versus expected returns
where optimal portfolios lie are known as the efficient frontier.

Sharpe single index model

William Sharpe tried to simplify the Markowitz method of diversification of portfolios. Sharpe’s
Index Model simplifies the process of Markowitz model by reducing the data in a substantive
manner. He assumed that the securities not only have individual relationship but they are related
to each other through some indexes represented by business activity. According to Markowitz, a
portfolio of 100 securities would require the following bits of information.

Markowitz covariance shows that 100 securities would require (N2 – N)/2 = (1002 – 100)/2 =
9900/2 or 4950 covariance. Sharpe first made a single index model.

According to Sharpe’s index, the formula is:

Ri = αi + βiRm+ ei
Where, R = expected return on security ‘i’.

αi = constant return/intercept of a straight line or coefficient.

βi = slope of straight line or Beta Coefficient.

Rm = return on the market index,
ei= error.
Optimal Portfolio of Sharpe Model:
This optimal portfolio of Sharpe is called the Single Index Model. The optimal portfolio is
directly related to the Beta. If Ri is expected return on stock i and Rf is Risk free Rate, then the
excess return = Ri – Rf This has to be adjusted to Bi, namely,

Ri – Rf/βi which is the equation for ranking Stocks in the order of their return adjusted for risk.
The method involves selecting a cut-off rate for inclusion of securities in a portfolio. For this
purpose, excess return to Beta ratio given above has to be calculated for each stock and rank
them from highest to lowest. Then only those securities which have Ri – Rf/βi, greater than cut-
off point, fixed in advance can be selected.
The basis for finding the cut-off Rate Ci is as follows:
Basis for Cut-off Rate:
For a portfolio of i stocks, Ci is given by cut-off rate-

σm2 = variance in the market Index

σei2 = variance in the Stock movement in unsystematic Risk.
Ri, Rf, Bi have the same meanings as referred to above.

What Is Beta?

A beta coefficient is a measure of the volatility, or systematic risk, of an individual stock in

comparison to the unsystematic risk of the entire market. In statistical terms, beta represents the
slope of the line through a regression of data points from an individual stock's returns against
those of the market.

For example, if a stock's beta value is 1.3, it means, theoretically this stock is 30% more volatile
than the market. Beta calculation is done by regression analysis which shows security's response
with that of the market.

By multiplying the beta value of a stock with the expected movement of an index, the expected
change in the value of the stock can be determined. For example, if beta is 1.3 and the market is
expected to move up by 10%, then the stock should move up by 13% (1.3 x 10).
The concept of beta is actually very simple – it’s a measure of individual stock risk relative to the
overall stock market risk. the beta analysis allows an investor to understand if the price of that
security has been more or less volatile than the market itself. Taking decision based on a sound
beta analysis will definitely enhance the portfolio performance.

 A beta of 1 indicates that the security's price will move with the market
 A beta of less than 1 means that the security will be less volatile than the market
 A beta of greater than 1 indicates that the security will be more volatile than the market

A company with a higher beta has greater risk and also greater expected returns.

Choosing company which has beta more than 1 means we are selecting more volatile stock. For
example, an early-stage technology company’s stock will have a beta greater than 1. This
company’s stock price will bounce up and down more than the market. Definitely these kinds of
companies will be riskier than, say; utility industry stocks which have low beta or beta close to 1.
Of course, here risk also implies return. Stocks with a high beta usually give a higher return than
the market. A risk-averse investor may like to look for companies which have beta 1 or very
close to 1.

Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk
and expected return for assets, particularly stocks. CAPM is widely used throughout finance for
pricing risky securities and generating expected returns for assets given the risk of those assets
and cost of capital.

Investors expect to be compensated for risk and the time value of money. The risk-free rate in the
CAPM formula accounts for the time value of money. The other components of the CAPM
formula account for the investor taking on additional risk. The beta of a potential investment is a
measure of how much risk the investment will add to a portfolio that looks like the market. If a
stock is riskier than the market, it will have a beta greater than one. If a stock has a beta of less
than one, the formula assumes it will reduce the risk of a portfolio.

A stock’s beta is then multiplied by the market risk premium, which is the return expected from
the market above the risk-free rate. The risk-free rate is then added to the product of the stock’s
beta and the market risk premium. The result should give an investor the required
return or discount rate they can use to find the value of an asset. The goal of the CAPM formula
is to evaluate whether a stock is fairly valued when its risk and the time value of money are
compared to its expected return.

For example, imagine an investor is contemplating a stock worth $100 per share today that pays
a 3% annual dividend. The stock has a beta compared to the market of 1.3, which means it is
riskier than a market portfolio. Also, assume that the risk-free rate is 3% and this investor
expects the market to rise in value by 8% per year.
 The expected return of the stock based on the CAPM formula is 9.5%:

9.5%=3%+1.3×(8%−3%)
Assumption:

 Investors are rational/ risk averse (X)

 Information are available (X)
 Investors are evaluating portfolio by expected return (√)
 Securities are infinitely divisible (X)
 There is a risk free rate of return on which investors can both borrow and lend.
 The risk-free rate will remain constant over the discounting period.
 The market is perfect: There are no taxes, no transaction costs, securities are completely
divisible, and the market is competitive.

The CAPM and the Efficient Frontier

Using the CAPM to build a portfolio is supposed to help an investor manage their risk. If an
investor were able to use the CAPM to perfectly optimize a portfolio’s return relative to risk, it
would exist on a curve called the efficient frontier, as shown on the following graph.

The graph shows how greater expected returns (y-axis) require greater expected risk (x-
axis). Modern Portfolio Theory suggests that starting with the risk-free rate, the expected return
of a portfolio increases as the risk increases. Any portfolio that fits on the Capital Market
Line (CML) is better than any possible portfolio to the right of that line, but at some point, a
theoretical portfolio can be constructed on the CML with the best return for the amount of risk
being taken.
Capital market line

The Capital Market Line is a graphical representation of all the portfolios that optimally combine
risk and return. When we combine a risky asset portfolio with a risk-free asset, we form a capital
allocation line. CML is a theoretical concept that gives optimal combinations of a risk-free asset
and the market portfolio of risky assets. Under CAPM, all investors will choose a position on the
capital market line, in equilibrium, by borrowing or lending at the risk-free rate, since this
maximizes return for a given level of risk.

Capital Market Line Formula

Ri = Rf + (Rm – Rf) σi/ σm

where:

Ri=Expected return of investment

Rf=Risk-free rate

σi = standard deviation of investment return

σm = standard deviation of market return

(Rm−Rf)=Market risk premium

Security market line/ characteristic line: The security market line (SML) is a graphical
representation of the different levels of systematic, or market risk of various marketable
securities plotted against the expected return of the entire market at a given point in time. Also
known as the "characteristic line," the SML is a visual of the capital asset pricing model
(CAPM), where the x-axis of the chart represents risk in terms of beta, and the y-axis of the chart
represents expected return. The concept of beta is central to the capital asset pricing model and
the security market line. The beta of a security is a measure of its systematic risk that cannot be
eliminated by diversification. A beta value of one is considered as the overall market average. A
beta value higher than one represents a risk level greater than the market average, while a beta
value lower than one represents a level of risk below the market average.

The formula for plotting the security market line is as follows:

Required Return = Risk Free Rate of Return + Beta (Market Return - Risk Free Rate of Return)

Ri = Rf + (Rm – Rf) βi

Using the Security Market Line

The security market line is commonly used by investors in evaluating a security for inclusion in
an investment portfolio in terms of whether the security offers a favorable expected
return against its level of risk. When the security is plotted on the SML chart, if it appears above
the SML, it is considered undervalued because the position on the chart indicates that the
security offers a greater return against its inherent risk. Conversely, if the security plots below
the SML, it is considered overvalued in price because the expected return does not overcome the
inherent risk. The SML is frequently used in comparing two similar securities offering
approximately the same return, in order to determine which of the two securities involves the
least amount of inherent market risk in relation to the expected return. The SML can also be used
to compare securities of equal risk to see which one offers the highest expected return against
that level of risk.
Difference between capital market line and security market line

Capital market line Security market line

CML is the graphical representation of CAPM SML is the graphical representation of CAPM
which shows the relationship between the which shows the relationship between the
expected return on efficient portfolio and theirrequired return on individual security as a
total risk function of systematic non diversifiable risk
and their total risk
Measure the risk through standard deviation or Measure the risk through beta
total risk factor
The graph of CML defines efficient portfolios The graph of SML defines both efficient and
non efficient portfolios
The y axis represents the expected return and x The y axis represents the level of required
axis represents the standard deviation or level return on individual assets and the x axis shows
of risk the level of risk represented by beta
CML shows the rates of return for a specific SML represents the market’s risk and return at
portfolio a given time, and shows the expected returns of
individual assets.

Zero-Beta Portfolio

A zero-beta portfolio is a portfolio constructed to have zero systematic risk or, in other words, a
beta of zero. A zero-beta portfolio would have the same expected return as the risk-free rate.
Such a portfolio would have zero correlation with market movements, given that its expected
return equals the risk-free rate or a relatively low rate of return compared to higher-beta
portfolios.

Arbitrage Pricing Theory

APT is a multi-factor technical model based on the relationship between a financial asset's
expected return and its risk. The model is designed to capture the sensitivity of the asset's returns
to changes in certain macroeconomic variables. Investors and financial analysts can use these
results to help price securities. Arbitrage pricing theory (APT) is an alternative to the capital
asset pricing model (CAPM) for explaining returns of assets or portfolios. It was developed by
economist Stephen Ross in the 1970s. It has fewer assumptions in comparison to CAPM.

Assumptions of APT

Unlike the capital asset pricing model, arbitrage pricing theory does not assume that investors
hold efficient portfolios.

The theory does, however, follow underlying assumptions:

  Asset returns are explained by systematic factors.

 There is perfect competition in the market.

 There are no transaction costs in the market.

 Investors can build a portfolio of assets where specific risk is eliminated through
diversification.
 No arbitrage opportunity exists among well-diversified portfolios. If any arbitrage
opportunities do exist, they will be exploited away by investors. (This how the theory got
its name.)

Mathematical Model for the APT

While APT is more flexible than the CAPM, it is more complex. The CAPM only takes into
account one factor—market risk—while the APT formula has multiple factors. And it takes a
considerable amount of research to determine how sensitive a security is to various
macroeconomic risks.

The factors as well as how many of them are used are subjective choices, which means investors
will have varying results depending on their choice. However, four or five factors will usually
explain most of a security's return.

APT factors are the systematic risk that cannot be reduced by the diversification of an investment
portfolio such as GDP, GNP, market indices, exchange rates etc.

Formula:

E(Rp)= Rf +β1f1+β2f2+…+βnfn

where:

E(Rp)=the asset’s expected rate of return

Rf = Risk-free return

fn= the risk premium associated with the particular factor

βn = the sensitivity of the asset's return to the particular factor

 The real challenge for the investor is to identify three items:

 Each of the factors affecting a particular stock

 The expected returns for each of these factors
 The sensitivity of the stock to each of these factors

Section – D

Portfolio revision

Meaning: The art of changing the mix of securities in a portfolio is called as portfolio revision.
The process of addition of more assets in an existing portfolio or changing the ratio of funds
invested is called as portfolio revision. The sale and purchase of assets in an existing portfolio
over a certain period of time to maximize returns and minimize risk is called as Portfolio
revision.

Need of portfolio revision:

 change in economic cycle

 change in market movements
 diversification of risk
 maximizing return
 The need for portfolio revision also rises when an individual has some additional money
to invest.
 Change in investment goal also gives rise to revision in portfolio. Depending on the
cash flow, an individual can modify his financial goal, eventually giving rise to changes
in the portfolio i.e. portfolio revision.

Portfolio revision strategies/techniques

There are two types of Portfolio Revision Strategies.

 Active Revision Strategy: Active Revision Strategy involves frequent changes in an existing
portfolio over a certain period of time for maximum returns and minimum risks. Active
Revision Strategy helps a portfolio manager to sell and purchase securities on a regular basis for
portfolio revision.

 Passive Revision Strategy: Passive Revision Strategy involves rare changes in portfolio only
under certain predetermined rules. These predefined rules are known as formula plans.
 According to passive revision strategy a portfolio manager can bring changes in the portfolio as
per the formula plans only.

Formula plans

Formula Plans are certain predefined rules and regulations deciding when and how much assets
an individual can purchase or sell for portfolio revision. Securities can be purchased and sold
only when there are changes or fluctuations in the financial market.

Why Formula Plans ?

 Formula plans help an investor to make the best possible use of fluctuations in the financial
market. One can purchase shares when the prices are less and sell off when market prices are
higher.
 With the help of Formula plans an investor can divide his funds into aggressive and defensive
portfolio and easily transfer funds from one portfolio to other.

 Aggressive Portfolio: Aggressive Portfolio consists of funds that appreciate quickly and
guarantee maximum returns to the investor such as equity oriented securities.

 Defensive Portfolio: Defensive portfolio consists of securities that do not fluctuate much and
remain constant over a period of time such as government securities and bonds oriented
securities.
Formula plans facilitate an investor to transfer funds from aggressive to defensive portfolio and
vice a versa.

Rules for Formula Plans

1. The formula plans are useful for making a decision on the timing of investments. These plans,
however, do not help in the selection of securities. Selection can be made according to the
economic industry company framework which is the methodology adopted by the fundamental
school of thought.

2. The formula plans are strict, rigid and straightforward but they are not flexible. The investor
has to bear in mind that by adopting these for in mind plans he will have some problems of
adjustment with the changing environmental conditions.

3. The formula plans cannot be used or found useful for short periods of time. They have to be
adopted for a fairly long period to see their results. The longer the period of holding the
investments, the easier for formula plans to work.

4. The formula plans do not eliminate the need for making forecast. Although the investor will
have to forecast, the kind of forecasting technique will be different.

5. The formula plans work according to a methodology which is related for the working of each
plan.
The formulations of these plans are discussed below:

(a) There should be a pool of funds which the investor has with him and would like to invest. If
there are no funds, the formula plans or techniques are useless.

(b) The investment fund of an investor should be divided through the technique of formula plans
to achieve the highest possible return and to meet the investors’ expectations. The usefulness of
the formula requires the application of the formula plans artfully and scientifically.

(c) The formula plan will be able to work when an investor has two portfolios.

Types of Formula Plans

1. Constant-Rupee-Value Plan: The constant rupee value plan specifies that the rupee value of
the stock portion of the portfolio will remain constant. Thus, as the value of the stock rises, the
investor must automatically sell some of the shares in order to keep the value of his aggressive
portfolio constant.
If the price of the stock falls, the investor must buy additional stock to keep the value of
aggressive portfolio constant. The constant-rupee-value plan’s major advantage is its simplicity.
The investor can clearly see the amount that he needed to have invested.
The investor invests a part of his funds in the aggressive portfolio and a portion of his total funds
should be invested in a conservative portfolio. This plan provides action points which are also
known as revaluation points. The action points enable the investor to maintain the constant rupee
value by effecting transfers from aggressive to conservative portfolio and vice versa. The action
points work by giving some specifications to the investor. The action points specify a certain
range of fluctuations of stock prices, say, for example 25%.
If the fluctuations are within 25% range, the investor should not make any transfer from
conservative portfolio to the aggressive portfolio. Only when fluctuations in prices cross this
range, the investor will have to plan transfer between his portfolios.

2. Constant Ratio Plan: The constant ratio plan is based on the idea that the aggressive and
conservative portions of the portfolio are set according to a ratio. For instance, a ratio of 1:1
between the two segments means that half of the portfolio will be invested in stocks while the
other half would be invested in defensive securities like bonds. The constant ratio plan goes one
step beyond the constant rupee plan by establishing a fixed percentage relationship between the
aggressive and defensive components. Under both plans the portfolio is forced to sell stocks as
their prices rise and to buy stocks as their prices fall. The constant ratio plan holder can adjust
portfolio balance either at fixed) intervals or when the portfolio moves away from the desired
ratio by a fixed percentage. To maintain the target asset weights—typically, between that of
stocks and bonds—the portfolio is periodically rebalanced by selling outperforming assets and
buying underperforming ones. Thus, stocks are sold if they rise faster than other investments and
bought if they fall in value more than the other investments in the portfolio.
 In simple words If a portfolio's strategic asset allocation is set to be 60% stocks and 40% bonds,
a constant ratio plan will ensure that, as markets move, that 60/40 ratio is preserved over time.

How do constant ratio plan work?

Constant ratio plan works as follows:

 When the value of stock rises, it must be sold to make it constant with the value of the
conservative portfolio. When the value of stock falls, the investor should transfer funds to
common stock.
 The investor should keep the aggressive value constant of the portfolio’s total value. When
the prices of stock fall, the investor should transfer from conservative to aggressive value.
 When there is a continuous and sustained rise or fall in share prices, the investor will make
enormous profit.

3. Variable Ratio Plan: Instead of maintaining a constant rupee amount in stocks or a constant
ratio of stocks to bonds, the variable ratio plan user steadily lowers the aggressive portion of the
total portfolio as stock prices rise, and steadily increase the aggressive portion as stock prices
fall. For instance, a variable ratio plan can allow for a higher ratio of the aggressive portion vis-
à-vis the conservative portion when equities are doing well in order to benefit from the bull-run.
The plan can also allow for a higher ratio in favor of the defensive portion as an investor grows
old and his life cycle demands a more conservative approach to investments.

The variable ratio plans can be understood by studying the following points.

1. When stock prices rise, the investor should sell stock and purchase. bonds. Similarly, when the
stock prices fall, stock should be bought and bonds should be sold.

2. There should be different proportions of stock prices.

3. Forecasting is the most important technique of variable ratio plan.

4. This plan is found to be profitable when there are large number of fluctuations in prices.

5. The variable ratio plan works with indicators like market index, the economic activity index, etc.
So, the ratios are to be varied whenever economic index or market index changes.

Rupee Cost Averaging

Rupee cost averaging is an approach in which you invest a fixed amount of money at regular
intervals. With rupee-cost averaging, an investor invests a specific amount at regular intervals
irrespective of the investment’s share (unit) price. By investing regularly, the investor takes
advantage of market dips without worrying about when they’ll happen. Their money buys more
units when the price is low and fewer when the price is high.
In a Rupee cost averaging strategy, an investor divides his total planned investment amount (say
Rs 60,000) into equal amounts (for example Rs 5,000), and invests the amount periodically over
a certain period (12 months). For example When the market is high you do not stop investments,
you continue to invest in the market, but you are going to get lesser units, but since you do not
know how high or how low the market will go you continue to invest a standard amount of
money on a monthly basis, maybe Rs 5,000, Rs 10,000 so that over a period of time your cost of
acquisition of the unit comes down to be much lower than what you would have otherwise paid.
This is called rupee cost averaging.