Relative Strength Index It is an oscillator used to discover the inherent strength or weakness of particular scrip.

An oscillator is an excellent indicator of over bought / over sold conditions. The relative strength index emphasizes market moves before they occur. The relative strength index tells us -Whether the net difference between the closing prices is increasing or decreasing. It is calculated for scrip for any number of days such as for 5 or 10 etc. It indicates the strength of price trend. The relative strength index can be calculated by using the following formula: RSI=100-[100/1+RS] RS=Average of 14 weeks up closing prices / Average of 14 weeks down closing prices This is a powerful indicator and pin points buying and selling opportunities ahead of the market. It ranges in Value from 0 to 100. Values above 70 are considered to denote over bought conditions and values below 30 are considered to denote over sold conditions. Markowitz Theory of Portfolio Management According to Markowitz, the portfolio theory establishes a relationship between a portfolio's expected return and its level of risk as the criterion for selecting the optimum portfolio. Thus two measures were suggested for evaluating the merits of a portfolio, i.e. 1. The expected return from the portfolio and 2. The level of risk exposure associated with the portfolio. The risk is the statistical notion of variation or standard deviation of return. The Markowitz theory is also based on diversification. It believes in asset correlation and in combining assets the risk can be lowered. Assumptions of Markowitz Theory The Markowitz theory of portfolio management is based on the following assumptions: 1. Market is efficient: The market information is freely available to all the players in the market and all the investors have access to the market information. No single investor can make superior profits. All investors in equal category. 2. The investors have common goal: All investors will avoid risk. They are risk average. 3. Investors will expect maximum return. 4. Investors will take the decisions based on the expected rate of return of an investment. 5. The diversification of portfolio will maximise the return and minimise the risk. 6. Investors assume high return for high risk and low return for low risk. 7. Risk can be reduced by diversification of portfolios.

8. An investor can get higher return for each level of risk "by determining the efficient set of securities". So as to find the efficient set of portfolios and select the most efficient one the portfolio manager will need to know the expected return and the risk of these returns for the various individual securities. Additionally, the covariance between the stocks and all other combination of the remaining stocks will be required. From this, he can compute the expected return and risk of the possible portfolios. Markowitz approach determines for the investor the efficient set of portfolio through three important variables i.e., return, standard deviation and coefficient of variation. It is also called the "Full co-variance Model". Through this model the investor can find out the efficient set of portfolios by finding out the trade off between risk and return, between the limits of zero and infinity. According to the theory the effect of one security purchase over the effect of the other security purchase is taken into consideration and results are evaluated. Capital Asset Pricing Model The Capital Asset Pricing Model (CAPM} attempts to measure the risk of a security in the portfolio. It considers the required rate of return of a security on the basis of its contribution to total portfolio risk. It provides that in a well-functioning efficient market, the risk premium varies in direct proportion to risk. It also provides a measure of risk premium and a method of estimating market risk-return line. The risk of a well-diversified portfolio depends on the market risk of the securities included in the portfolio. The market risk of a security is measured in terms of its sensitivity to market movements. The core idea of the CAPM is that only nondiversifiable risk is relevant to the determination of expected return on any asset. Since the diversification risk can be eliminated, there is no reward for it. In fact, the CAPM can be used to examine the risk and return of any type of capital asset such as individual security, an investment project or a portfolio of assets/ investment. However, for the time being, the CAPM is being discussed here with reference to risk and return of a security only. The CAPM is based on the following assumptions: 1. The investors are basically risk averse and diversification is needed to reduce the risk. 2. All investors have identical estimates of risk and return of all securities. 3. All investors can borrow or lend an unlimited amount of funds at risk free rate of interest. 4. All investors want to maximise the wealth and the portfolio selection is on the basis of risk and return assessment. 5. All investments are efficiently diversified and have eliminated the unsystematic risk.

6. All the securities are perfectly divisible and liquid and there is no transaction cost or tax. 7. The security market is efficient and purchases and sales by a single investors cannot affect the prices. According to CAPM, systematic risk can be measured by (a) the beta factor. The a can be viewed as an index of the degree of the responsiveness of the security's returns with the market return. The beta coefficient is the relative measure of sensitivity of an asset's return to change in the return on the market portfolio. The beta coefficient (a) is calculated by relating the returns of a security with the returns for the market. Security Analysis Security analysis refers to the analysis of trading securities. It analyses the share price returns and the risk involved in the investment. Every investment involves the risk and the expected return is related to the risk. The security analysis will help in understanding the behaviour of security prices and the market.

Security analysis refers to the analysis of securities from the point of view of their prices, returns and risks. The analysis of risk and return related to the securities will help in understanding the behaviour of security prices, market and decision making for investment. If the analysis includes scrip it is called microanalysis of a company. If it is an analysis of a market with various securities it is known as macro picture of the behaviour of the market. The entire process of estimating return and risk of a security is known as security analysis. The process of estimating return and risk for individual securities is known as "Security Analysis. Security analysis is the essence of the valuation of financial instruments. The value of financial asset depends upon their return and risk. The universal fact is that everyone must recognise the risk component in investment decision. Objectives of Security Analysis The following are the objectives of Security Analysis: To estimate the risk and return related to a security. To find out the intrinsic value of the security with a view to make a buy/sell decision. To identify the under valued securities to buy or over value securities to sell. To analyse the stock market trends to understand the market pattern and behaviour . To forecast the future earnings and dividends along with the price of the securities. To find out the key determinants of intrinsic value. To analyse and point out the position of economy industry and the company with a view to select the best possible company for investment.

Need for Securities Analysis The primary motive for buying a stock is to sell it subsequently at a higher price. The dividends and price changes are the principal ingredients for the expected return of an investor. If the investors are able to know well in advance the information and the about dividends and stock prices over subsequent periods he will gain by selling his securities. However, the world of investing is influenced by political, economic, social and other forces that the investor cannot predict and understand. Therefore security analysis helps the investor to determine Dividends to be paid on a stock in the future and what the stock price will be in the future. Concept of Fundamental Analysis A fundamental analysis is a time honoured, value based approach depending upon a careful assessment of the fundamentals of an economy, industry and company The fundamental analysis studies the general economic situation, makes an evaluation of an industry and finally does an in depth analysis, both financial and non-financial of the company. In the fundamental analysis an attempt is made to analyse various fundamentals or basic factors that affect the risk-return oi the securities. In the fundamental analysis the security analyst or prospective investor is primarily interested in analysing factors such as economic influences industry factors and pertinent company information such as product demand, earnings, dividends and management in order to calculate an intrinsic value for the firm's securities. The investor makes an investment by comparing the intrinsic value with the current market price of a security. The intrinsic value is the present value of future dividends and capital appreciation computed at an appropriate discount rate to reflect the riskiness of the share. The intrinsic value is also known as the fundamental value. Based on the fundamental value the investor will make a decision to buy or sell a share, by comparing the market price of the shares.