INTRO Diff b/w inv, spec, gamb; savings/inv; fin and inv planning

1. Meaning
i. Investment - An investment is an asset or property acquired to generate income or gain
appreciation. Investment means committing your money or assets to earn income or wealth in
future. It’s acquiring an asset with the expectation that it will appreciate or give returns over
time.
ii. Speculation - In the world of finance, speculation, or speculative trading, refers to the act of
conducting a financial transaction that has substantial risk of losing value but also holds the
expectation of a significant gain or other major value. Higher Risk Tolerance, Shorter Time
Horizons, Use of Leverage
iii. Gambling - Gambling is wagering money or valuables on an event with an uncertain outcome,
primarily driven by chance. It focuses on hoping for a win based on luck rather than analysis or
strategy. It relies primarily on chance or random outcomes.
iv. Hedge - Hedge refers to an investment strategy that protects traders against potential losses
due to unforeseen price fluctuations in an asset. It is an investment strategy used by traders
to protect their investments from risks of heavy price fluctuations in an asset. This investment
approach ensures that if one's holdings lose value, investing in another asset can make up for
that. Alternative investments like stocks, derivatives, swaps, options and futures contracts, and
ETFs can help offset losses caused by abrupt price changes.
v. Arbitrage – Simultaneous purchase and sale of the same asset in different markets in order to
make profits from tiny differences in the assets’ listed price. Arbitrage is a financial or
economic strategy that involves exploiting price differences for the same asset, security, or
commodity in different markets. The goal of arbitrage is to make a risk-free profit by taking
advantage of price disparities.

Point Investment Speculation

Meaning Buying an asset to earn stable returns over Taking high-risk positions aiming for
time, focusing on long-term wealth quick and substantial profits.
creation.
Basis for Based on fundamental analysis like Based on market rumours, short-term
Decision financial performance, industry trends, price patterns, and crowd psychology.
and company strength.
Time Horizon Long-term holding to allow assets to grow Short-term holding to profit from
in value. quick price changes.
Risk Involved Moderate risk due to analysis-backed High risk due to unpredictable market
decisions and stable assets. movements and reliance on uncertain
factors.
Expected Rate Modest and consistent returns in line with Very high returns in a short period,
of Return market averages. often from aggressive positions.
Funds Used Own capital is used, ensuring financial Borrowed funds are often used,
stability. increasing both risk and potential loss.

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 2. OBJECTIVES

a. Capital Appreciation
Capital appreciation refers to the growth in the value of an investment over time due to an
increase in its market price. This objective is pursued by investors seeking to build long-term
wealth, often by investing in assets like equities, real estate, or mutual funds. It does not
provide immediate income but focuses on future gains when the asset is sold at a higher
value.
b. Maximising Returns
Maximising returns means generating the highest possible profit from an investment relative
to the amount invested. Investors adopt strategies such as portfolio diversification, market
timing, and selection of high-performing assets to achieve this. The goal is to outperform
alternative investment options and enhance overall portfolio performance.
c. Minimising Risk
Minimising risk involves reducing the chances of financial loss while investing. Investors
achieve this through diversification across asset classes, careful asset selection, and risk
assessment tools. A lower level of risk ensures stability in returns, making it suitable for
conservative investors.
d. Hedge Against Inflation
Hedging against inflation means protecting the purchasing power of money from being
eroded by rising prices. Investors achieve this by investing in inflation-protected securities,
real assets like gold, or stocks of companies with pricing power. Such investments ensure that
returns keep pace with or exceed inflation rates.
e. Capital Protection
Capital protection aims to preserve the original amount invested, even if returns are low. This
is often prioritised by risk-averse investors who prefer safe investment avenues like
government bonds or fixed deposits. The strategy ensures that market volatility or adverse
conditions do not erode the principal amount.
f. Liquidity
Liquidity refers to the ease with which an investment can be converted into cash without
significant loss of value. Highly liquid investments, such as money market instruments or blue-
chip stocks, provide flexibility to meet short-term financial needs. Maintaining liquidity
ensures that investors can access funds quickly in emergencies.
g. Tax Savings
Tax savings involve using investments to legally reduce the amount of taxable income.
Instruments like tax-saving fixed deposits, Equity Linked Savings Schemes (ELSS), or retirement
funds provide both returns and deductions under applicable tax laws. This objective allows
investors to enhance their net returns while complying with tax regulations.

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 3. INVESTMENT PROCESS

1. Setting Financial Goals

The investment process begins with clearly defining specific, measurable, and realistic
financial objectives. These goals may include long-term targets such as retirement planning,
medium-term aims like purchasing a house, or short-term needs such as funding education. A
well-defined goal provides a clear direction for investment decisions and forms the foundation
for developing an effective strategy.

2. Assessing Risk Tolerance

Risk tolerance refers to an investor’s ability and willingness to endure fluctuations in
investment value. This involves evaluating factors such as financial stability, investment
horizon, and psychological comfort with market volatility. Accurately assessing risk tolerance
ensures that the investment portfolio is designed to match the investor’s capacity to absorb
losses while still pursuing desired returns.

3. Creating a Budget and Emergency Fund

Before allocating funds to investments, it is essential to prepare a structured budget that
covers all regular living expenses and savings commitments. Alongside this, establishing an
emergency fund—typically covering three to six months of expenses—provides financial
security in unforeseen situations. This safeguard prevents the need for premature liquidation
of investments, which could lead to losses or disrupt long-term plans.

4. Diversifying the Investment Portfolio

Diversification is the practice of spreading investments across various asset classes such as
equities, fixed income securities, commodities, and real estate. This approach reduces the
impact of poor performance in any single asset on the overall portfolio. A diversified portfolio
balances risk and return, helping to maintain stability during adverse market conditions.

5. Conducting Research and Analysis

Thorough research and analysis are vital for making informed investment decisions. This
includes studying market trends, reviewing the financial performance of companies, and
analysing relevant economic indicators. By basing decisions on reliable data and sound
analysis, investors can identify opportunities and avoid unsuitable or high-risk investments.

6. Making Informed Investment Decisions

After completing the research stage, investors select assets that align with their goals, time
horizon, and risk profile. This step requires careful evaluation of potential returns in relation
to the risks involved. Informed decision-making enhances the likelihood of achieving financial
objectives while maintaining a disciplined investment approach.

7. Regularly Reviewing and Rebalancing the Portfolio

Since market conditions and personal circumstances change over time, periodic portfolio
reviews are essential. Rebalancing involves adjusting asset allocations back to their original
targets to ensure alignment with the investor’s risk tolerance and objectives. This process
maintains the intended level of diversification and prevents the portfolio from becoming
overexposed to specific assets.

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Factors Influencing Investment –

 Return on Investment (ROI) – Profit earned, capital gains, dividends/interest, overall

performance, compares alternatives, measures efficiency.
 Inflation – Erodes purchasing power, real vs nominal return, affects long-term gains,
need for inflation-adjusted investments.
 Liquidity – Ease of converting to cash, quick access to funds, low transaction cost,
flexibility in emergencies.
 Tax Benefits – Deductions, exemptions, deferred tax, reduces effective cost, increases
post-tax returns.
 Frequency of Return – Regularity of dividends/interest, enables reinvestment,
compounds return, provides steady income.
 Risk in Investment – Market risk, credit risk, interest rate risk, volatility, probability of
capital loss, investor’s risk tolerance.
 Safety in Investment – Protection of principal, low default chance, stability,
government backing, insured options.
 Yield – Dividend, interest, capital appreciation, overall profitability, compares
investment options.
 Maturity of Investment – Lock-in period, investment horizon, short-term vs long-term,
liquidity vs returns trade-off.

IV.

Aspect Financial Investment Economic Investment

Definition Allocation of funds into financial assets Purchase or creation of real assets like
such as shares, bonds, or mutual funds to machinery, infrastructure, or factories
earn income or capital appreciation. that increase productive capacity. These
These are intangible assets that represent are tangible assets contributing directly
ownership or creditor relationships. to the production process.

Nature of Deals with paper-based or intangible Involves physical and tangible assets that
Assets assets that derive value from underlying can be used in production. These assets
entities or markets. They do not have a have intrinsic value due to their utility in
physical form but hold financial value. creating goods or services.

Impact on Indirectly impacts production by providing Directly impacts production by

Production capital to companies, which may use it for enhancing a company’s ability to
expansion. The investment itself does not produce more goods or services. This
produce goods or services. leads to increased productivity and
operational efficiency.

Risk Profile Highly influenced by market volatility, Less volatile compared to financial
interest rates, and investor sentiment, markets but carries business and
making returns uncertain. Prone to rapid operational risks. Performance depends
fluctuations in value due to external on productivity, demand, and
economic and market conditions. operational efficiency.

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 Examples Buying shares of a company to earn Purchasing manufacturing equipment,
dividends, purchasing bonds for interest constructing a warehouse, or investing in
income, or investing in mutual funds for new technology. These aim to reduce
capital gains. These generate returns costs or increase production capacity.
through financial market performance.

Market Conducted in the financial market where Takes place in the real market where
securities and financial assets are traded. goods, services, and tangible assets are
This includes stock exchanges, bond exchanged. Involves industries, factories,
markets, and other investment platforms. and infrastructure projects.

V. INVESTMENT AVENUES

A. Securities - are financial instruments that represent ownership in a company (equity), a creditor
relationship (debt), or a hybrid of both. They are traded in financial markets and are used by
investors to earn returns through capital appreciation, interest, or dividends. Securities are
regulated by market authorities to ensure transparency and investor protection.

 Equity Securities - Equity securities represent ownership in a company, giving investors a

claim on profits and assets. Shareholders may receive dividends and benefit from capital
appreciation, but they also face the risk of capital loss. Equity investments carry voting
rights, depending on the class of shares.

Type Meaning Example

Blue-Chip Shares of large, financially sound, and well-established Reliance Industries,
Shares companies with a history of stable earnings and reliable TCS.
dividend payments. These are considered low-risk in the
equity category.
Growth Shares of companies expected to grow faster than the market Infosys, Adani
Shares average, often reinvesting profits rather than paying Enterprises.
dividends. They offer high capital appreciation potential but
carry higher volatility.
Income Shares that provide regular and consistent dividend income, ITC Ltd., Hindustan
Shares often from mature companies with stable cash flows. Capital Unilever.
appreciation is usually moderate.
Cyclical Shares whose performance is closely linked to the business Tata Motors, Steel
Shares cycle, rising in economic booms and falling during recessions. Authority of India
They are sensitive to economic conditions. (SAIL).
Defensive Shares of companies whose demand remains stable even in Nestlé India, Dr.
Shares economic downturns, offering steady dividends and low Reddy’s
volatility. Laboratories.
Speculative Shares purchased mainly for high-risk, high-return Penny stocks or
Shares opportunities, often based on price speculation rather than newly listed small-
fundamentals. They carry significant volatility. cap firms.

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  Hybrid Securities - Hybrid securities combine features of both equity and debt
instruments, offering a balance between income and growth potential. They may
provide fixed returns like debt while also offering the possibility of capital appreciation
like equity. Examples include convertible debentures and preference shares.

 Preference Securities - Class of stock that provide shareholders with a fixed dividend
before dividends are paid to common shareholders. They generally do not carry voting
rights but offer priority in claims over profits and assets in case of liquidation. Preference
shares are suitable for investors seeking steady income with lower risk than common
equity.

 Bonds - Bonds are fixed-income securities with a maturity date, providing interest
payments for the period. The principal is repaid, making them a source of capital for
issuers. They are often issued by governments or banks to strengthen long-term funding
and are attractive to investors seeking stable, long-term income streams.
 Debentures - Debentures are long-term debt instruments issued by companies or
governments to raise capital from the public. Investors lend money to the issuer and
receive regular interest payments over the debenture's tenure, with the principal
amount repaid at maturity.

B. Derivatives
 Futures contracts are standardized agreements used to buy or sell an underlying asset at a
predetermined price on a future date, traded on regulated exchanges. Futures contracts
offer transparency through standardized terms and are traded on exchanges, ensuring a
high level of regulation and oversight.
 A forward contract is a customizable derivative contract between two parties to buy or sell
an asset at a specified price on a future date. Forward contracts can be tailored to a specific
commodity, amount, and delivery date. Forward contracts do not trade on a centralized
exchange and are considered over-the-counter (OTC) instruments.
 Options are versatile financial instruments that provide the right, but not the obligation, to
buy or sell an underlying asset at a set strike price, offering investors a way to leverage their
positions or hedge against risks. The two main types of options are call options, which
benefit from an increase in the underlying asset's price, and put options, which profit from
a decline in the asset's price. Options allow traders to leverage a position in an asset for less
cost than buying the shares directly.
 A swap is an agreement between two parties to exchange financial obligations for cash
flows for a set period of time. At the time the contract is initiated, the value of at least one
of the assets being swapped is determined by a fluctuating or uncertain variable, such as an
interest rate or a commodity price. Swaps are customized contracts traded privately in the
over-the-counter market, versus options and futures traded on a public exchange.

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 Basis Forward Contract Futures Contract
Nature of Tailor-made agreement between two parties. Standardized contract with fixed
Contract Example: A farmer and buyer agree privately terms. Example: Nifty Futures
to sell wheat in 3 months. traded on NSE.
Trading Traded over-the-counter (OTC). Example: Traded on organized stock
Platform Customized currency forward contracts exchanges. Example: Crude oil
between banks and corporates. futures on MCX.
Risk & Higher risk with greater chances of default due Lower risk with negligible default
Default to private nature. probability due to clearinghouse
guarantee.
Liquidity Low liquidity because contracts are private High liquidity due to standardized
and customized. contracts and active market
trading.
Collateral/ No collateral or margin required. Initial margin is required to trade
Margin futures contracts.

C. Postal Schemes

a. Sukanya Samriddhi Yojana (SSY) - A government savings scheme for the girl child, aimed at
securing her education and marriage expenses. It offers a high interest rate and tax benefits
under Section 80C of the Income Tax Act.

b. Senior Citizen Savings Scheme - A retirement-focused savings scheme for individuals above
60 years. It provides a safe investment with a fixed quarterly interest payout.

c. National Savings Certificate (NSC) - A fixed-income investment mainly for small savings. It has
a lock-in period and offers tax deductions under Section 80C.

d. Post Office Monthly Income Scheme - A scheme where you invest a lump sum and receive a
fixed monthly interest. It’s designed for those seeking steady income with low risk.

e. Kisan Vikas Patra - A certificate scheme that doubles the invested amount in a fixed time
frame. It is a safe option backed by the government for long-term savings.

f. Post Office Time Deposit Account - Similar to a bank fixed deposit, it allows you to invest for 1,
2, 3, or 5 years. It offers fixed returns and is considered low-risk.

g. Public Provident Fund (PPF) - A long-term savings scheme with a tenure of 15 years. It offers
tax-free returns and benefits under Section 80C.

D. Insurance

a) Term – Pure protection, fixed period, death benefit only.

b) Endowment – Protection + savings, lump sum at maturity or death.
c) ULIP – Market-linked, insurance + investment, flexible.
d) Money Back Plans – Periodic payouts, survival benefits, maturity bonus.
e) Pension – Retirement income, annuity, long-term.
f) Child – Education funding, child’s future security.
g) Group – Single policy for multiple members, cost-effective.

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E. Real Estate - Real estate is defined as the land and any permanent structures, like a home, or
improvements attached to the land, whether natural or artificial. Real estate is a form of real
property. There are five main categories of real estate, which include residential, commercial,
industrial, raw land, and special use.

F. Green Bonds - A green bond is a fixed-income debt instrument earmarked to raise money for
climate and environmental projects. These bonds are issued by public, private, or multilateral entities
to raise capital for initiatives that contribute to a more sustainable economy and generate identifiable
climate, environmental, or other benefits.

G. Gold

H. Digital Assets - A digital asset is generally anything created and stored digitally, is identifiable and
discoverable, and has or provides value. Nonfungible tokens, Cryptocurrency, Tokens, Crypto Assets.

I. Mutual Funds - A mutual fund gathers money from many investors to purchase a diversified
portfolio of stocks, bonds, or other securities. In a mutual fund, investors pool their money to buy
assets together, benefiting from shared costs and professional expertise. Essentially hiring
professional money managers to make investment decisions on your behalf.

VI. BENEFITS OF DIVERSIFICATION

1. Risk Reduction: Diversification lowers business risk by spreading investments across different
markets, industries, or products. This helps companies avoid heavy losses in one area, making
them more stable and able to handle market uncertainties. As a result, businesses become
more resilient to economic fluctuations and unexpected challenges.
2. Synergy Creation: By combining different operations, companies can share resources,
technology, and expertise. This improves efficiency, cuts costs, and increases overall
profitability and competitiveness. Such collaboration often leads to innovation and better use
of existing assets.
3. Revenue Stability: Diversification stabilizes income by generating revenue from multiple
sources. If one sector suffers a downturn, others may still perform well, balancing overall
profits. This steady flow of income helps companies plan and invest confidently for the future.
4. Increased Growth Potential: Expanding into new markets or products opens fresh growth
opportunities. It helps companies overcome saturation in existing markets and tap into
emerging trends for future profits. Diversification allows businesses to stay relevant and
competitive in changing markets.
5. Long-Term Sustainability: Diversification supports lasting success by balancing financial goals
with social and environmental responsibility, reducing risks and building trust. It also
encourages companies to adopt sustainable practices that benefit society and the
environment over time.

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 RISK ANALYSIS

Risk refers to the possibility of an adverse outcome or loss arising from uncertainty in future events.

a. Unsystematic Risk: Unsystematic risk, also known as company-specific risk or diversifiable risk, is
associated with the performance of an individual company. This type of risk can be reduced or
eliminated through diversification of a securities portfolio. By holding a variety of investments, the
negative impact of poor performance by one company can be offset by better performance from
others.
o Liquidity Risk - is the chance that an investor or business will not be able to quickly convert
assets into cash without a significant loss in value. This usually happens when market demand is
low or there are not enough buyers for the asset. It can force a company to sell assets at
unfavourable prices to meet urgent payment needs.
o Financial Risk - refers to the possibility of losing money due to poor financial management,
high levels of debt, or changes in interest rates. It affects a company’s ability to meet financial
obligations and can lead to reduced profits or bankruptcy. This type of risk can often be
managed by monitoring cash flow and maintaining healthy capital structures.
o Operational Risk - arises from failures in a company’s internal processes, systems, or from
human errors. It can also be caused by unexpected events such as fraud, system breakdowns, or
accidents. Effective internal controls and risk management practices can reduce the impact of
such risks on daily operations.

b. Systematic Risk: Systematic risk, also known as non-diversifiable risk, is associated with
macroeconomic factors or market conditions affecting all companies in the market. This risk cannot
be eliminated through diversification of a securities portfolio. Examples include government policies,
inflation, GDP fluctuations, per capita income, and interest rates. Systematic risk is assessed in terms
of the beta coefficient (β), which measures the sensitivity of a security's returns to the overall
market's returns. It is calculated using regression analysis between the return of a security and the
return of a market
o Interest Rate Risk - This is the risk of losing money due to changes in interest rates. When
interest rates go up, the value of existing fixed-income securities like bonds may drop, as
investors prefer new bonds with higher returns. This can especially affect long-term
investments, making them less attractive compared to newer options.
o Market Risk - This is the risk of a loss caused by overall market movements such as price
changes in stocks, bonds, or commodities. It is influenced by factors like economic downturns,
political instability, or global events that affect the entire market. Investors cannot avoid this risk
entirely, but they can manage it by diversifying their portfolios.
o Purchasing Power (Inflationary) Risk - This is the risk that inflation will reduce the value of an
investment’s returns. As the cost of goods and services rises, the money earned from
investments may not have the same buying power. This risk is more significant for fixed-income
investments, as their returns do not increase with inflation.

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Beta is an indicator of the price volatility of a stock or other asset in comparison with the broader
market. It suggests the level of risk that an investor takes on in buying the stock. The higher the beta
number, the higher the risk.

MINIMISE RISK EXPOSURE:

a. Market Risk Protection

To reduce market risk, investors should study the price behaviour of stocks, as past trends may
indicate future performance. It is advisable to avoid cyclical stocks or sectors expected to
underperform, such as textiles in certain conditions, while focusing on sectors showing growth, like IT.
Volatility can be assessed using standard deviation and beta, which are available for stocks in indices.
These metrics help investors evaluate the risk factor and make decisions according to their risk
tolerance.

b. Protection Against Interest Rate Risk

One way to manage interest rate risk is to hold investments to maturity, avoiding losses from early
sales during falling rates. Investors can also choose short-term treasury bills and bonds, allowing
reinvestment according to prevailing rates. This approach minimizes the impact of rate fluctuations
on capital. Proper portfolio planning ensures that the returns remain stable despite changing interest
rates.

c. Protection Against Inflation

To guard against inflation risk, investors may opt for high-yield bonds (13–15%) with low risk. Short-
term securities are preferred over long-term investments to reduce exposure to falling purchasing
power. Diversification across assets like real estate, precious metals, and art can also partially hedge
inflation. While no strategy offers a perfect protection, combining these methods minimizes potential
losses.

d. Protection Against Business and Financial Risk

Investors should analyse the industry strength and weaknesses before investing to avoid sectors with
high regulatory interference or instability. Examining a company’s profitability trends and return
variability (standard deviation) helps identify consistent performers. Stocks with stable earnings and
a strong track record reduce exposure to business and financial risk. Selecting companies with
predictable performance ensures safer investment outcomes.

IMPORTANCE OF MEASURING RISK:

 Measuring Risk: Variance and standard deviation are used to quantify how much data points
deviate from the mean. Higher values indicate greater fluctuations, which typically reflect
higher risk. In finance, assessing the level of risk for an investment is essential for making
informed decisions. These metrics provide a numerical foundation for evaluating uncertainty
and potential financial loss.
 Risk Comparison: These metrics allow investors to compare different investments or
portfolios to determine which carries more risk. Understanding relative risk helps investors
choose options that match their risk tolerance and financial objectives. It also aids in ranking
investment options based on their volatility and stability.

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  Portfolio Diversification: Calculating the variance and standard deviation of a portfolio’s
returns assists in optimizing diversification. Investments with low correlations can lower
overall portfolio risk by reducing the effect of extreme outcomes. This analysis helps in
constructing a portfolio that balances risk and return effectively.
 Risk-Return Trade-off: Variance and standard deviation are key to evaluating the trade-off
between risk and return. Higher potential returns are usually linked with higher risk, and these
measures help investors determine if the expected rewards justify the risks. Investors can use
these metrics to select investments that align with their financial goals and acceptable risk
levels.
 Decision Making: Investors rely on these metrics to assess potential downsides before
committing funds. Analysing risk helps in making decisions that balance expected returns with
acceptable levels of uncertainty. This ensures that investment choices are consistent with
long-term financial planning.
 Performance Evaluation: These measures are also used to review the historical performance
of investments or portfolios. Comparing actual outcomes with expected risk helps investors
evaluate the effectiveness of their investment strategies over time. It allows investors to refine
strategies and improve future portfolio management decisions.

FACTORS INFLUENCING VALUATION OF SECURITIES

1. Company Performance

The financial health and operational efficiency of a company are major determinants of its valuation.
Strong revenue growth, stable profit margins, and consistent earnings create investor confidence and
drive higher stock prices. Companies with sound balance sheets, effective management, and
competitive products are typically valued more favourably in the market.

2. Economic Conditions

The overall economic environment plays a crucial role in determining security valuations. Favourable
conditions such as high GDP growth, stable inflation, and strong consumer demand boost investor
confidence and increase company valuations. During periods of economic expansion, industries like
retail and manufacturing often benefit from higher spending and investment activity, which positively
impacts their stock prices. Conversely, economic slowdowns can lead to reduced valuations due to
lower demand and profitability.

3. Interest Rates

Interest rate movements have a direct impact on security valuations. Lower interest rates make
borrowing cheaper and increase liquidity, encouraging investors to shift from fixed-income
instruments to equities, thereby driving up stock valuations. On the other hand, rising interest rates
increase the cost of capital and reduce future cash flow valuations, leading to lower stock prices.

4. Industry Trends

The outlook and growth potential of an industry strongly influence the valuation of companies within
it. Positive industry trends attract investors and lead to higher valuations as future earnings potential
increases. For instance, the growing demand for renewable energy has significantly improved the
valuations of companies operating in that sector. A favourable industry environment provides firms
with expansion opportunities and enhances their long-term profitability prospects.

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5. Market Sentiment

Investor perception and overall market mood play a critical role in valuation levels. Positive sentiment
driven by optimistic expectations, favourable news, or strong earnings reports can lead to a surge in
stock valuations. In contrast, negative sentiment arising from uncertainty, poor performance, or
external shocks can depress prices.

6. Regulatory Changes

Government policies and regulatory developments can significantly affect security valuations.
Supportive regulatory frameworks, tax incentives, or favourable laws often create new opportunities
and enhance valuations, while restrictive regulations can have the opposite effect. For example,
government subsidies and incentives for electric vehicles have increased the valuations of EV
manufacturers by improving their market prospects and profitability outlook.

7. Competitive Landscape

The level of competition and a company’s position within its industry also impact valuations. Firms
with a strong market share, brand reputation, and competitive advantages are typically valued higher,
as they are expected to sustain profitability and growth. For instance, a leading e-commerce platform
with extensive customer reach and efficient operations often commands a premium valuation
compared to smaller competitors lacking similar strengths.

8. Global Events

International developments and geopolitical events influence market sentiment and security
valuations. Trade agreements, conflicts, pandemics, or major policy shifts can impact investor
confidence and economic activity across borders. For example, favourable trade deals often enhance
the valuations of companies with significant global exposure, while geopolitical tensions may lead to
uncertainty and declining valuations in sensitive sectors such as energy or defence.

CHAP 4

Portfolio

It is a collection of a wide range of assets that are owned by investors. The said collection of financial
assets may also be valuables ranging from gold, stocks, funds, derivatives, property, cash equivalents,
bonds, etc. Individuals put their money in such assets to generate revenue while ensuring that the
original equity of the asset or capital does not erode. A portfolio must be constructed in such a way
that it meets the investor`s needs and objectives with the aim to deliver maximum returns with
minimum risk. To develop a profitable portfolio, it is essential to become familiar with its
fundamentals and the factors that influence it.

Traditional Approach Steps:

1. Specification of Investment Objective and Constraints:

This step involves defining the investor’s goals, such as income generation, capital appreciation, or
wealth preservation. It also includes identifying constraints like risk tolerance, liquidity needs,
investment horizon, tax considerations, and legal restrictions. A clear objective helps align portfolio
decisions with the investor’s financial profile. Constraints ensure the portfolio remains realistic,

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practical, and suitable for the investor’s unique situation, laying the foundation for all further
portfolio decisions.

2. Quantification of Capital Market Expectations:

Here, investors or portfolio managers assess future market conditions, including interest rates,
inflation, stock prices, and economic growth. They analyse historical data, trends, and expert
forecasts to form realistic expectations of returns and risks. This step helps estimate how different
asset classes may perform in the future. Accurate market expectations are vital for constructing a
portfolio that balances risk and return effectively in changing market conditions.

3. Choice of Asset Mix:

This step involves deciding how to allocate investments across various asset classes such as equities,
bonds, and cash. The goal is to achieve diversification and optimize returns for a given level of risk.
The chosen asset mix depends on the investor’s risk appetite, financial goals, and market outlook. A
balanced asset allocation reduces exposure to market volatility and ensures steady performance over
time.

4. Formulation of Portfolio Strategy:

In this step, the investor or manager determines how to achieve the desired asset mix and return
objectives. Portfolio strategies can be active, where securities are frequently traded to outperform
the market, or passive, which aims to mirror market performance. The strategy also defines the rules
for timing, selection, and rebalancing. A well-defined strategy ensures consistency and discipline in
portfolio management.

5. Selection of Securities:
This stage involves identifying and choosing specific securities—such as stocks, bonds, or mutual
funds—to include in the portfolio. Selection is based on detailed financial analysis, performance
evaluation, and risk-return trade-offs. The investor considers factors like company fundamentals,
credit quality, and market trends. Proper security selection helps maximize returns while managing
risk effectively.

6. Portfolio Execution:
Execution is the process of implementing the investment plan by purchasing or selling the chosen
securities. It requires efficiency, accuracy, and timing to minimize transaction costs and market
impact. Portfolio managers often use brokers, trading systems, and market analysis tools to execute
trades strategically. Effective execution ensures that the designed portfolio is accurately and cost-
efficiently established.

7. Portfolio Revision and Evaluation:

This step focuses on continuously reviewing and updating the portfolio to reflect changing market
conditions and investor goals. Periodic evaluation helps assess the portfolio’s performance against
benchmarks and objectives. If deviations or risks arise, rebalancing ensures the asset allocation
remains aligned with the original strategy. Regular revision and performance tracking maintain
portfolio efficiency and long-term stability.

(Objectives and Selection)

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Modern Approach – Markowitz Model

Markowitz Model

The modern portfolio theory (MPT) is a practical method for selecting investments in order to
maximize their overall returns within an acceptable level of risk. This mathematical framework is used
to build a portfolio of investments that maximize the amount of expected return for the collective
given level of risk.

A broader concept that encompasses Markowitz's work, Modern Portfolio Theory emphasises
constructing portfolios that maximise returns for a given level of risk or minimise risk for a given level
of returns. The core premise of MPT lies in the belief that designing an optimal portfolio, balancing
maximum returns and an optimal level of risk, is attainable. A key principle of MPT is diversification,
emphasising the importance of spreading investments across various securities and asset classes.

The theory unfolds by highlighting that the risk associated with a well-diversified portfolio is less than
that of holding any individual stock.

Assumptions:

 The model assumes that investors are rational and will always behave in a certain manner.
 More returns are preferred and low risk

The efficient frontier is a set of portfolios that offer the greatest anticipated return for their level of
risk or the least risk for an expected return. Portfolios that lie below the efficient frontier are sub-
optimal because they do not provide enough return for the level of risk.

(take rest from notebook)

CAPM/CAPT/Capital Market Theory

A financial model that establishes the relationship between expected return and systematic risk in
investments, providing insights into the cost of equity. This model posits that the expected return on
an investment is the sum of the risk-free rate and a risk premium linked to the asset's beta, a measure
of its volatility in comparison to the market.

It links an asset’s expected return to its market risk, showing how investors are compensated for
taking systematic risk. It is widely used to estimate the required return on equity, calculate the cost
of capital for projects, price risky securities, and evaluate portfolio performance. CAPM provides a
simple benchmark for comparing investments and guiding allocation decisions, helping investors
judge whether an asset’s expected return fairly compensates for its market risk.

Assumptions:

 Efficient Market – All available information is already reflected in asset prices, so investors
can’t consistently earn extra returns.
 Rational and Risk-Averse Investors – All investors make logical decisions and prefer less risk
for the same return.
 There is a stable risk-free rate that investors can borrow or lend at.
 Single period Investment horizon.
 No transaction cost or taxes.

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SML & CML (graph)

The Security Market Line (SML) serves as a critical framework for comprehending the intricate
relationship between expected returns and systematic risk associated with individual securities. The
beta captures an asset’s sensitivity to market movements and serves as a gauge for its systematic risk.
Visualising the SML through a graph, we encounter an upward-sloping curve that signifies a linear
relationship between expected return and systematic risk. Securities above the SML are considered
undervalued, offering higher returns for a given risk level, while those below the SML may be deemed
overvalued, implying lower returns despite higher associated risk. SML hones in on individual assets
such as stocks.

The CML emerges as a tangent line drawn from the risk-free asset to the feasible region for risky
assets. CML portrays the set of portfolios offering the highest expected return for a given level of risk
by combining a proportion of the market portfolio of risky assets with the risk-free rate of return.
CML incorporates the concept of diversification by combining a risk-free asset with a portfolio of risky
assets. The combination of the market portfolio and the risk-free asset give the CML, offering superior
risk-return profiles compared to other portfolios on the efficient frontier. CML directs attention to
portfolios blending risky and risk-free assets.

Arbitrage Pricing Theory

The APT aims to pinpoint the fair market price of a security that may be temporarily incorrectly
priced. It assumes that market action is less than always perfectly efficient, and therefore
occasionally results in assets being mispriced – either overvalued or undervalued – for a brief
period of time. APT introduces a novel perspective by estimating an asset's expected returns based
on a multitude of macroeconomic factors. This flexibility positions APT as a more adaptable model,
unburdened by assumptions like a risk-free rate or a single market portfolio. APT's adaptability to
diverse risk sources gives it a broader perspective in understanding the dynamics of asset pricing.

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CHAP 5

Portfolio management may be defined as the process of construction, maintenance, revision and
evaluation of a portfolio. The objective of portfolio management is to build a portfolio which gives a
return commensurate with the risk preference of the investor.

Objectives of Portfolio Management - a) Capital appreciation b) Maximising returns on investment c)

To improve the overall proficiency of the portfolio d) Risk optimisation e) Allocating resources
optimally f) Ensuring flexibility of portfolio g) Protecting earnings against market risks.

Active portfolio management - In this type of management, the portfolio manager is mostly
concerned with generating maximum returns. Resultantly, they put a significant share of resources in
the trading of securities. Typically, they purchase stocks when they are undervalued and sell them off
when their value increases. A strategy where the objective of investing is to outperform the market
return compared to a specific benchmark by either buying securities that are undervalued or by short
selling securities that are overvalued. In this strategy, risk and return both are high. This strategy is a
proactive strategy it requires close attention by the investor or the fund manager

Passive portfolio management - This particular type of portfolio management is concerned with a
fixed profile that aligns perfectly with the current market trends. The managers are more likely to
invest in index funds with low but steady returns which may seem profitable in the long run. It is a
reactive strategy as the fund manager or the investor reacts after the market has responded.

Constraints:

a. Liquidity Constraints: Liquidity constraints identify an investor’s need for liquidity, or cash. For
example, within the next year, an investor needs $50,000 for the purchase of a new home. The
$50,000 would be considered a liquidity constraint because it needs to be set aside (be liquid) for
the investor.
b. Time Horizon: A time horizon constraint develops a timeline of an investor’s various financial
needs. The time horizon also affects an investor’s ability to accept risk. If an investor has a long-
time horizon, the investor may have a greater ability to accept risk because he would have a
longer time period to recoup any losses. This is unlike an investor with a shorter time horizon
whose ability to accept risk may be lower because he would not have the ability to recoup any
losses.
c. Tax Concerns: After tax returns are the returns, investors are focused on when creating an
investment portfolio. If an investor is currently in a high tax bracket as a result of his income, it
may be important to focus on investments that would not make the investor’s situation worse,
like investing more heavily in tax-deferred investments.
d. Legal and Regulatory: Legal and regulatory factors can act as an investment constraint and must
be considered. An example of this would occur in a trust. A trust could require that no more than
10% of the trust be distributed each year. Legal and regulatory constraints such as this one often
can’t be changed and must not be overlooked.
e. Unique Circumstances: Any special needs or constraints not recognized in any of the constraints
listed above would fall in this category. An example of a unique circumstance would be the
constraint an investor might place on investing in any company that is not socially responsible,
such as a tobacco company.

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Stages in the selection process:

 Determination of assets, which are eligible for constructing of a portfolio.

 Computation of the expected return for the eligible assets over a holding period.
 Arriving at an acceptable balance between risk and return for constructing optimum a
portfolio, i.e., selecting such a portfolio for which there is highest return for each level of risk.

Need for Revision

• Availability of additional funds for investment

• Availability of new investment avenues
• Change in the risk tolerance
• Change in the time horizon
• Change in the investment goals
• Change in the liquidity needs
• Change in the taxes
• Diversification

Measurement:

 Sharpe Ratio (Reward to Variability Ratio) : The Sharpe Index measures the risk premium of
the portfolio relative to the total amount of risk in the portfolio. The larger the index value,
the better the portfolio has performed.
 Treynor Ratio (Reward to Volatility Ratio): The Treynor Index measures the risk premium of
the portfolio related to the amount of systematic risk present in the portfolio.
 Jensen Ratio: This measure is based on differential returns. The Jensen’s Ratio is based on the
difference between the actual return of a portfolio and required return of a portfolio in view
of the risk of the portfolio.

CHAP 3

Fundamental Analysis

Fundamental analysis is the study of economic factors; industrial environment and the factors related
to the company. The earnings of the company, the growth rate and the risk exposure of the company
have a direct bearing on the price of the share. The objective of fundamental analysis is to raise the
intrinsic value of a security. The intrinsic value of a security is that value such as assets, earnings,
dividends and prospects of the company. It is also measured as the present value of all future cash
inflows on the security.

a. Economic
It is very important to assess the state of the economy of making investment. This status of an
economic activity has a major impact on overall stock market. The state of the economy
determines the growth of gross domestic product and investment opportunities. An economy
with favourable savings, investments, stable prices, balance of payments, and infrastructure
facilities provides a best environment for common stock investment.
 Gross domestic product (GDP): GDP represents the aggregate value of goods and
services produced in the economy. It consists of personal consumption expenditure,
gross private domestic investment and government expenditure on goods & services
and net export of goods & services. It indicates rate of growth of economy. The
estimate on GDP available on annual basis.

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  Inflation: The inflation is rise in price, where its rate increases, than the real rate of
growth would be very little. The demand is the consumer product industry is
significantly affected. The industry which comes under the government price control
policy may lose the market. If the mild level of inflation, it is good to the stock market
but high rate of inflation is harmful to the stock market.
 Interest rates: The interest rate affects the cost of financing to the firms. Higher
interest rates increase the cost of funds and lower interest rates reduce the cost of
funds resulting in higher profit. There are several reasons for change in interest rates
such as monetary policy, fiscal policy, inflation rate
 Tax structure: Every year in March, the business community eagerly awaits the
government’s announcement regarding the tax policy. Concessions and incentives
given to the certain industry encourage investment in particular industry. Tax relief
given to savings encourages savings.
 Political Stability: Plays a key role in shaping investor confidence and market
performance. A stable political environment ensures consistent economic policies,
reduces uncertainty, and encourages both domestic and foreign investment. For
fundamental analysis, stable governance supports predictable business conditions,
making future earnings easier to estimate. In contrast, political instability increases
risk, leading to market volatility and lower valuations.
 Government Expenditure and Deficit: It directly influences economic growth and
market sentiment. High government expenditure can boost demand and corporate
earnings, positively impacting security valuations. However, large fiscal deficits may
lead to inflation, higher interest rates, or reduced investor confidence. In fundamental
analysis, examining these factors helps assess future growth prospects and potential
risks to company performance.
 Savings & Investment:
 Employment:
 Trade Barriers:

b. Industry
An industry is a group of firms that have similar technological structure of production and
produce similar products. E.g.: food products, textiles, beverages. The investor should know
the industry classification used in the economy. An investor should select few industries that
are in expansion stage. Investments should not be made in the industries which are in the
pioneering stage. Similarly, industries that are in the stagnation stage or declining in economic
importance should be avoided. It is difficult to identify a good industry for investment

 Pioneering stage: The prospective demand for the product is promising in this stage
and the technology of the product is low. The demand for the product attracts many
producers to produce the particular product. There would be severe competition and
only fittest companies this stage. The producers try to develop brand name,
differentiate the product and create a product image. The severe competition often
leads to the change of position of the firms in terms of market shares and profit. In this
situation, it is difficult to select companies for investment because the survival rate is
unknown.
 Expansion stage: This stage starts with the appearance of surviving firms from the
pioneering stage. The companies that have withstood the competition grow strongly in
market share and financial performance. The technology of the production would have
improved resulting in low cost of productions and good quality products. The
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 companies have stable growth rate in this stage and they declare dividend to the
share-holders. It is advisable to invest in the shares of these companies.
 Maturity and Stagnation stage : In the stabilization stage, the growth rate tends to
moderate and the rate of growth would be more or less equal to the industrial growth
rate or the gross domestic product growth rate. Symptoms of obsolescence may
appear in the technology. The investors have to closely monitor the events that take
place in the maturity stage of the industry.
 Declining stage: In this stage, Demand for the particular product and the earnings of
the companies in the industry decline. The specific feature of the declining stage is that
even in the boom period; the growth of the industry would be low and decline at a
higher rate during the recession. It is better to avoid investing in the shares of the low
growth industry even in the boom period. Investment in the shares of these types of
companies leads to erosion of capital.

c. Company
A company analysis is a study of the variables which influence the future price of a company’s
shares. It is an assessment of company’s competitive position, earning capacity and
profitability. It is a method of finding out the intrinsic value of a company’s share. This requires
internal as well as external information of the company. Internal investment consists of data
and events of the company. External information consists of demand, supply, pricing, etc. The
basic financial statements which are used as tools of company analysis are the income
statement, the balance sheet and the statement of changes in financial position. The most
frequently used tools for company analysis are as follows: 1. Trend analysis 2. Ratio analysis 3.
Fund flow analysis 4. Common size statement analysis.

Technical Analysis

Technical analysis is a study of market data in terms of factors affecting supply and demand
schedules, such as prices, volume of trading, etc. It is a simple and quick method of forecasting
behaviour of share prices. It is a process of identifying trend reversal at earlier stages to formulate the
buying and selling strategy. The financial data and past behaviour of share price of a company are
presented on charts and graphs in order to find out the history of price movements. It helps to
explain and forecast changes in share prices.

1. Dow Theory
This theory was developed by Charles H Dow. He
did research and published in journal in 1984 mainly
for trend analysis. It asserts that stock prices
demonstrate patterns over four to five years and
these patterns are mirrored by indices of stock
prices. According to his theory, the price patterns
do not move just like that and it follows some trend.
There are 3 types of trend:
• Primary trend – It is broad upward or downward
movement which last for a year or two.
• Secondary trend or Correction trend – It last for 3 weeks to some months.
• Minor trend. – It refers to the day-to-day price. It’s also known as fluctuations or random
wiggles

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 In Dow Theory, trend lines are used to identify and confirm the direction of market movements.
A trend line is a straight line drawn on a price chart to connect significant highs or lows,
showing the general direction of price movement.
There are three types of trends:
 Uptrend: Formed when each successive peak and trough is higher than the previous one. It
indicates a bullish market.
 Downtrend: Formed when each peak and trough is lower than the previous one, showing a
bearish market.
 Sideways or Horizontal Trend: Occurs when prices move within a narrow range, indicating
market indecision.

i. Primary Trend -
Bull: When market exhibits increasing trend, it’s called bull
market. The graph shows three clear cut peaks. Each peak is
higher than the previous peak. The revival period encourages
more and more investors to buy scripts, their expectation
about the future is high. In the next phase, increased profits or
corporate would result in further price rise. In the final phase,
the price advance due to inflation and speculation.
 Phase I –Market confidence
 Phase II – Good Corporate Earnings
 Phase III – Price increase due to Inflation and Speculation

Bear: The contrary of bull market happens here .In the first
phase, the prices are coming down,this would result in
lowering of profit in second [Link] final phase is
characrterised by distress sale of share.
 Phase I – Loss of hope
 Phase II – Recession in business, Low dividends, Low
profits
 Phase III – Distress selling

ii. Secondary Trend –

In the bull market the secondary trend results in fall of about
33-66% of earlier rise. In bear market, it carries the price
upward and corrects the main trend. It provides breathing
space to market.

2. Elliot Wave Theory

Elliott wave principle was established by R.M. Elliott in 1930. It states that major moves take
place in five successive steps resembling tidal waves. In a major bull market, the first move is
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 upward, the second downward, the third upward the fourth downward and the fifth and final
phase upward. The waves have a reverse flow in a bear market. In starting wave, only few people
invest and the waves keep moving high. It indicates the prices of shares are moving high and
hence they sell it. As they get more profit they will again invest in the same company and there
will be few more investors. This makes the wave to move higher. Same process keeps going every
day. In the 5th wave investors will be more interested in investing and to gain profit. Since people
buy lot of shares here, it is called as buying wave. After these five waves get over A,B,C waves or
correction waves will occur. It these 8 waves get over and if the same trend occurs, again we may
face bully’s wave or else we have beary’s wave.

The graph depicts bullish wave, 1,2,3,4,5 – impulsive waves ; A,B,C - correction waves.

Charting

1. Line - A line chart is the figure that, perhaps,

automatically comes to mind when you think of a chart.
The line chart has the stock price or trading volume
information on the vertical or y-axis and the
corresponding time period on the horizontal or x-axis).
Trading volumes refer to the number of stocks of a
company that were bought and sold in the market on a
particular day. The closing stock price is commonly used for the construction of a line chart.

2. Bar - The vertical dimensions of lines represent

the price of stock and the horizontal
dimensions indicated the time involved by the
chart as a whole. bar chart is similar to a line
chart. However, it is much more informative.
Instead of a dot, each marking on a bar chart is
in the shape of a vertical line with two
horizontal lines protruding out of it, on either
side. The top end of each vertical line signifies
the highest price the stock traded at during a
day while the bottom point signifies the lowest price at which it traded at during a day. The
horizontal line to the left signifies the price at which the stock opened the trading day. The
one on the right signifies the price at which it closed the trading day. As such, each mark on a
bar chart tells you four things.
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 3. Candlestick - A candlestick chart is made up of rectangular blocks with lines coming out of it
on both sides. The line at the upper end signifies the day’s highest trading price. The line at
the lower end signifies the day’s lowest trading price. The candlestick chart is a modified
version of a bar chart. These charts show the stock open, close, high and low for each time-
period in a modified three-dimensional format.

 White - A white candlestick depicts a period where the security's price has closed at a
higher level than where it had opened. It is a point on a security's candlestick chart
representing a bullish period. Several recurring white candlesticks will typically signal
an uptrend.
 Black - A black candle in a candlestick chart is one where the closing price is lower
than the opening price. They indicate selling pressure and potential bearish market
sentiment.
 Doji - A doji names a trading session in which a security has an open and close that
are virtually equal, which resembles a candlestick on a chart. It is a one-candle neutral
pattern that reflects uncertainty or indecision about where the price is headed. It is
neither bullish nor bearish on its own.

Charting Patterns – (notebook for diagrams)

1. Support & Resistance - Identification of support and resistance levels is one of the most
important aspects of charts analysis. A support level is a barrier or price decline while a
resistance level is a barrier to price advancement. Though the barrier is an obstruction, it is by
no means impassable. Stock prices may break support and resistance levels under abnormal
circumstances. A stock breaking its support level is called technically weak and a stock
breaking its resistance level is called technically strong.

2. Continuation Patterns – They provide breathing space to the earlier sharp rise/fall. After the
completion of these patterns, the price tends to move along the original trend. They are
formed during sideways movement of prices. They indicate a continuation of the trend
prevailing before the formation of the pattern.
a. Triangle - Triangles are among the most popular chart patterns used in technical analysis
since they occur frequently compared to other patterns. These chart patterns can last
anywhere from a couple weeks to several months. They can be symmetrical, ascending or
descending. Triangles are formed when two or more consecutive descending
tops/ascending bottoms are in the graph.
b. Flag & Pennants - Are short-term continuation patterns that represent a consolidation
following a sharp price movement before a continuation of the prevailing trend. Flag
patterns are characterized by a small rectangular/parallelogram pattern that slopes against
the prevailing trend. Pennants are small symmetrical triangles that look very similar. These
patterns typically last no longer than a few weeks.

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 3. Reversal Patterns – A price pattern that signals a change in the prevailing trend is known as a
reversal pattern. The established trend will pause and then head in a new direction as new
energy emerges from the other side (bull or bear).
a. Head & Shoulders - A Head and Shoulder Top is characterized by three peaks with the
middle peak being the highest peak (head) and the two others being lower and roughly
equal (shoulders). The lows between these peaks are connected with a trend line
(neckline) that represents the key support level to watch for a breakdown and trend
reversal.
b. Inverse H & S - A Head and Shoulder Bottom – or Inverse Head and Shoulders – is simply
the inverse of the Head and Shoulders Top with the neckline being a resistance level to
watch for a breakout higher.

Technical Indicators

These are pattern-based signals produced by the price, volume, and interest of a security. E.g.
Relative Strength Index, Moving Avg, Convergence, Divergence, Money Flow Index. Market indicators
are a subset of technical indicators used to predict the direction of major financial indexes or groups
of securities. A moving average of underlying historical data about the stock prices. Each data point is
the arithmetic average of a portion of the previous data. The changes in the slope of line of moving
average are important.

 A simple moving average (SMA) is an arithmetic moving average calculated by adding recent
prices and then dividing that figure by the number of time periods in the calculation average.
For example, add the closing prices over several periods and divide the sum by the number of
periods. Short-term averages react quickly to price changes, whereas long-term averages
respond more slowly.
 An Exponential Moving Average (EMA) is a moving average that places greater emphasis on
recent data points, making it more sensitive to recent price changes. The formula for
calculating an EMA includes a multiplier that gives more weight to recent observations, which
allows traders to better capture current trends.

Random Walk Theory

(Efficient Market Hypothesis)

According to the Random Walk Theory, the changes in prices of stock show independent behaviour
and are dependent on the new pieces of information that are received but within themselves are
independent of each other. Whenever a new price of information is received in the stock market, the
market independently receives this information and it is independent and separate from all other
pieces of information. The basic essential fact of the Random Walk Theory is that the information on
stock prices is immediately and fully spread over that other investors have full knowledge of the
information. The theory further states that the financial markets are so competitive that there is
immediate price adjustment. This theory is based on the Efficient Market Hypothesis (EMH), which
assumes that investors act rationally and markets quickly adjust to new information, leaving no room
for consistent abnormal returns.

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  Weak Form - The weak form of EMH states that past stock prices or trading patterns cannot
predict future prices. It argues that historical data and chart analysis are useless for gaining
excess returns, as all past information is already included in the current market price.
Therefore, technical analysis is ineffective in this form, and price changes occur randomly as
new information enters the market.
 Semi-Strong Form - The semi-strong form of EMH suggests that all publicly available
information, such as financial reports or news announcements, is already reflected in stock
prices. This means investors cannot earn higher-than-average returns by analysing public data,
as prices adjust almost instantly to new information. It challenges traditional financial analysis
and highlights the market’s quick response to public announcements.
 Strong Form - The strong form of EMH claims that all information, both public and private
(insider information), is already included in stock prices. Hence, no investor, regardless of
access to insider details, can consistently earn abnormal profits. However, in reality, this form
is rarely valid, as corporate insiders and specialists with exclusive information often gain an
advantage, making markets only partially efficient.

Tests

 Weak Form Efficiency Tests:

o Serial Correlation Tests
o Run Tests
o Distribution Pattern Analysis
o Filter
 Semi-Strong Form Efficiency Tests:
o Public Information Analysis
o Event Studies
o Residual Analysis
o Back-Testing Trading Strategies
 Strong Form Efficiency Tests:
o Insider Trading Studies
o Regulatory Interventions
o Market Microstructure Studies

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