Beginners guide to Security Analysis and Portfolio Management

1. SYNOPSIS
Risk – Meaning – Classification
Measurement of risk
Fundamental and Technical Analysis
Dow’s Theory
Charts

2. Definition of 'Risk'
 Risk is the chance that an investment’s
actual return will be different than expected
 It is expressed in terms of volatility of return
 Risk includes the possibility of losing some
or all of the original investment
Generally the greater the risk associated
with an investment the greater the rate of
return investors will expect

4. Systematic Risk

5. Unsystematic Risk

6. Measurement of Risk
• Risk is measured by the variability of return
• The statistical tool often used to measure the unsystematic risk is
standard deviation
• Beta is used to measure the systematic risk
• Beta describes the relationship between the stock’s return and
index return
β =
Correlation Coefficient
Between Market and Stock
×
Standard Deviation of Stock Returns
Standard Deviation of Market Returns
β = 1 – indicates that the security's price will move with the market
β < 1 – indicates that the security will be less volatile than the market.
β > 1 - indicates that the security's price will be more volatile than the market

7. Fundamental analysis
• Fundamental analysis is a method of evaluating securities by attempting
to measure the intrinsic value of a stock.
• Fundamental analysis of a business involves analyzing its financial
statements and health, its management and competitive advantages, and
its competitors and markets.
• Fundamental analysis maintains that markets may misprice a security in
the short run but that the "correct" price will eventually be reached.
• Profits can be made by purchasing the mispriced security and then waiting
for the market to recognize its "mistake" and re-price the security.

8. Fundamental
Analysis
Economic Analysis
Industry
Analysis

9. Technical analysis
• Technical analysis is the evaluation of securities by means of
studying statistics generated by market activity, such as past
prices and volume.
• technical analysis really just studies supply and demand in a
market in an attempt to determine what direction, or trend, will
continue in the future.
• Start of Bull Phase = higher Low + break above previous High.
• End of Bull Phase = lower High + break below previous Low.

10. Movement of NIFTY ( JUL 11 – MAR 12)
Range
Bound

11. Difference between Fundamental & Technical Analysis

12. Dow’s theory
Dow theory remains as the foundation of technical analysis. It was
formulated from a series of Wall Street Journal editorials authored
by Charles H. Dow.
Six basic tenets of Dow theory
 The market has three movements
 Market trends have three phases
 The stock market discounts all news
 Stock market indices must confirm each other
 Trends are confirmed by volume
 Trends exist until definitive signals prove that they have ended

13. Support and Resistance Level

14. Charts
• Charts are the valuable and easiest tools in the technical analysis.
• The graphical presentation of the data helps the investor to find out
the trend of the price without any difficulty.
Charts are also used to
• Spot the current trend for buying and selling
• Indicate the probable future action of the market by projection
• Show the past historic movement
• Indicate the important areas of support and resistance

15. Types of Charts
Point and Figure Chart
2000
2500
3000
3500
4000
4500
5000
5500
6000
NIFTY
Line Chart

16. Candle- Stick Chart Bar Chart
http://www.investopedia.com/university/technical/techanalysis7.asp

17. Flags and Pennants Head & Shoulders
Chart Patterns
http://www.investopedia.com/university/technical/techanalysis8.asp

18. Cup & Handle Rounding Bottom