Money Market

Meaning of Diversification:

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Meaning of Diversification:
The process of adding securities to a portfolio in order to reduce the portfolio’s unique risk and thereby the portfolios total risk.

Forms (Techniques) of Diversification:
a) Simple Diversification:
“Not putting all eggs in one basket”
In simple diversification, securities are selected added on random basis for making portfolio. Simple diversification reduces a portfolio’s total diversifiable risk to zero and only the undiversifiable risk remains. It is found that 10 – 15 securities are sufficient for a portfolio to minimize the portfolio’s total risk to the undiversifiable level.

b) Diversification across industries
In this diversification portfolio is constructed by selecting assets from different industries rather than from one industry. For eg if someone selects the securities from hotel banking, insurance co’s and other industries to make portfolio then it is called diversification across industries. But, empirical research has shown that diversifying across industries is not much better than simple selecting securities randomly.

c) Superfluous diversification
From research study, it is found that 10 – 15 assets in the portfolio are sufficient for risk diversification. But if more than 10 – 15 assets are added in the portfolio then such diversification is called superfluous diversification. It should be avoided; superfluous diversification will usually result in the following portfolio management problems:

1. Impossibility of good portfolio management
2. High search cost
3. High transaction cost

d) Simple diversification across quality rating
Some rating agencies rate different companies and their assets on the basis of the possibility of default risk (the risk of bank rupt) Under this categories we select assets randomly from the homogeneous quality ratings. The highest quality portfolio (of randomly diversified stocks) will be able to achieve lower levels of risk than the simple diversified portfolio of lower quality stocks.

e) Markowitz Diversification
Markowitz Diversification may be defined as combining assets which are less than perfectly positively correlated ( i.e. ≤ + 1 ) in order to reduce portfolio risk without sacrificing portfolio returns. Markowitz diversification is more analytical than simple diversification and considers assets correlations. The lower the correlation between assets, the more than Markowitz diversification will be able to reduce the portfolio’s risk. Therefore the Markowitz diversification focuses on the correlation between assets.

Overview of Investment Alternative

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Overview of Investment Alternative

1) Equity Security:
1. A. Common Stock: It represents ownership interest in issuing corporation.
a. Class A: Non voting common stock entitled to receive dividend.
b. Class B: Voting common stock not entitled to receive dividend.

1. B. Preferred Stock: Usually non voting but has priority over common stock in dividend and liquidation right.

2) Short Term Debt Securities: Obligations that matures in one year or less than one year.
2. A Negotiable CDs: Issue by federally insured commercial banks with minimum face value of Rs. 100,000.

2. B. Commercial Paper: Promissory negotiable notes issued by larger well known corporations.

2. C. Banker's Acceptance: Used by importers. The accepting bank guarantees payment by borrowers.

2. D. T-Bills

3) Intermediate and Long term Debt: Obligate that matures more then one year.
3. A. U. S. government Securities:
3. A.I. Treasury Notes: Maturity 1-10 years. Sold at face value with specified interest payment
3. A.II. Treasury Bonds: Maturity over 10 years.

3. A.III. Saving Bonds: Non negotiable saving instrument issued by government.

3. B. Municipal Securities:

3B.I Revenue Bonds: Issued to obtain financing for specific project such as hydropower, hospital. Revenue from these projects are earmarked to meet interest and principal payments.

3.B II. General Obligation Bonds: The general revenues (tax) of the issuer provides fund to meet interest and principal payments.

3. C Corporate Bonds

4. Hybrid Securities: Securities that have characteristic of both equity and debts.

4. A. Convertible preferred Stock: Convert preferred stock to common stock.

4. B Convertible Bonds: Convert bonds to common stock.

5 Derivative Securities: Securities whose value derives from the value of underlying securities.

5. A. Option: Provide the right to buy or sell shares of common stock of a specific corporation within a limited period of time at a designated price (Exercise price)

5. B Commodity Futures: Provides the contract holders the right to sell a specified amount of an agriculture or natural resources commodity a designated price with in a specified period to time.

5.C. Financial Futures: Provides the contract holders the right to sell a specified amount of common stock index; bonds or FCY at a designated price within a specified period of time.

5. D. Option on Futures: Provides the right to buy or sell a specified commodity or financial futures within a limited period of time at a designated price.

5. E Rights: Rights share.

5.F Warrants: Issued by corporations provide holder the right or option to purchase additional bonds or shares of common stock from the issuing corporation at a specified price within designated period of time.
6) Real Assets:

6. A. Precious Metals: includes gold, silver, platinum and other metals.

6. B. Real Estate: Single and multi family residence undeveloped Land, commercial property and farm land.

6.C: Collections: Diamonds, prints, fine arts, stamps.

7) International Investments: Investment by individuals in debt or equity securities issued by organization outside the country of residence of the investor.

7. A. Multinational Corporation

7. B. Foreign Stock Traded on a Local Exchange.

8) Other Investment Alternatives:

8. A. Pension Funds:
8. B. Mutual Funds

The Investment Process:

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The Investment Process:
Investment process describes how an investor should go about making decision with regard to what marketable securities to invest in, how extensive the investment should be and when the investment should be made. A five step procedure for making these decisions forms the basis of the investment process.

1. Set Investment Policy
2. Perform Security Analysis
3. Construct a portfolio
4. Revise the portfolio
5. Evaluate the performance of the portfolio.

The process always starts with the investor and understanding his or her needs and preferences. For a portfolio manager, the first and often most significant part of the investment process is understanding the client’s needs, the client’s tax status and most importantly, his or her risk preferences. For an individual investor constructing his or her own portfolio, this may seem simpler, but understanding one’s own needs and preferences is just as important a first step as it is for the portfolio manager.
The next part of the process is the actual construction of the portfolio, which we divide into three sub-parts. The first of these is the decision on how to allocate the portfolio across different asset classes defined broadly as equities, fixed income securities and real assets (such as real estate, commodities and other assets). This asset allocation decision can also be framed in terms of investments in domestic assets versus foreign assets, and the factors driving this decision. The second component is the asset selection decision, where individual assets are picked within each asset class to make up the portfolio. In practical terms, this is the step where the stocks that make up the equity component, the bonds that make up the fixed income component and the real assets that make up the real asset component are picked. The final component is execution, where the portfolio is actually put together, where investors have to trade off transactions cost against transactions speed. While the importance of execution will vary across investment strategies, there are many investors who have failed at this stage in the process.
The final part of the process, and often the most painful one for professional money managers, is the performance evaluation. Investing is after all focused on one objective and one objective alone, which is to make the most money you can, given the risk constraints you operate under. Investors are not forgiving of failure and unwilling to accept even the best of excuses, and loyalty to money managers is not a commonly found trait. By the same token, performance evaluation is just as important to the individual investor who constructs his or her own portfolio, since the feedback from it should largely determine how that investor approaches investing in the future.

The Investment Environment:

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1.2 The Investment Environment:

1.2.1 Securities:
A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities, such as banknotes, bonds and debentures, and equity securities, e.g. common stocks. The company or other entity issuing the security is called the issuer.
Securities may be represented by a certificate or, more typically, by an electronic book entry. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he or she appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible.
Normally securities are only a piece of paper that represents (a)the rights of the investors on certain property and (b) the conditions under which s/he may exercise those rights.
The security can be used to refer to a legal representation of the right to receive prospective future benefits under stated conditions. Securities can be easily and efficiently transferred from one owner to antoher.
The rate of return (simply return) for any security can be calculated by using following principle:
Return =
Most popular securities available in market:

>Treasury Bills
> Long Term Bonds
> Common Stock

1.1.2 Security Markets:
Market where buyers and sellers of security come together and make security transactions. It is common place created to facilitate the exchange of financial assets. Security market can be classified into primary markets and secondary markets. Again Primary market itself can be subdivided into seasoned and unseasoned new issues. A seasoned new issue refers to the offering of an additional amount of an already existing security where as unseasoned new issue- also called Initial Public Offering (IPO)- involves the initial offering of a security to the public. Besides this way of distinguishing security markets other classification can be:

Money Vs Capital Market
Open Vs Negotiated Market
Spot Vs Future Markets.

1.1.3. Financial Intermediaries:

A financial intermediary is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly. That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers). This may be in the form of loans or mortgages.

An institution that acts as the middleman between investors and firms raising funds. Often referred to as financial institutions. This can include chartered banks, insurance companies, investment dealers, mutual funds, and pension funds.Commercial banks are the financial intermediary we meet most often in macroeconomics, but mutual funds, pension funds, credit unions, savings and loan associations, and to some extent insurance companies are also important financial intermediaries.
Financial intermediaries provide two important advantages to savers. First, lending through an intermediary is usually less risky than lending directly. The major reason for reduced risk is that a financial intermediary can diversify. It makes a great many loans, and even though some of those loans will be mistakes, the losses will be largely offset by loans that are sound. In contrast, an average saver could directly make only a few loans, and any bad loans would substantially affect his wealth. Because an intermediary can put its "eggs" in many "baskets," it insures its depositors from substantial losses.
A second advantage financial intermediaries give savers is liquidity. Liquidity is the ability to convert assets into a spendable form--money--quickly. A house is an illiquid asset; selling one can take a great deal of time. If an individual saver has lent money directly to another person, the loan can also be an illiquid asset. If the lender suddenly needs cash, he must either persuade the borrower to repay quickly, which may not be possible, or he must find someone else who will buy the loan from him, which may be very difficult. Although the intermediary may use its funds to make illiquid loans, its size allows it to hold some funds idle as cash to provide liquidity to individual depositors. Only when a great many depositors want to withdraw deposits at the same time, which happens when there is a "run" on the institution, will the financial intermediary be unable to provide liquidity. Unless it can obtain help from the government or other institutions, it will be forced to suspend payments to depositors.
Economists are concerned that financial intermediaries can be a source of shocks to the economy, bumps that can disrupt the normal flow of economic life. This concern arises for at least two reasons. First, bank debt serves as money, so disruptions to banks can affect the amount of money in circulation. Second, financial intermediaries are tied together through chains of debts and assets. Because of these linkages, the failure of one financial intermediary can weaken others, increasing their chances of failure. As a result, there is the possibility that if a key financial intermediary fails, that failure can create a domino effect that could cause other financial institutions to fail, ultimately causing the financial sector to "seize up" and stop functioning. Serious disruption of the financial markets will disrupt the rest of the economy.

What is investment?

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In finance, investment refers to purchasing securities or any other financial assets from the capital market or money market or purchasing real properties with high market liquidity for example, gold, silver, real properties, and precious items. Financial investments are investment in stocks, bonds, and many other types of security investments. Indirect financial investments can also be done with the help of mediators or third parties, such as pension funds, mutual funds, commercial banks, and insurance companies.
In finance, investment=cost of capital, like buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price. Returns on investments will follow the risk-return spectrum.
Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses.
Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments.
Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.

Market index

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Market Index

Securities market index are construct to get the answer of following questions; “What is the market doing?”, “What did the market do yesterday?” Index number is devoid of dollar values or other units of measure. Stock market index are “pure number” use for marketing composition between different index numbers in the same series of other index number. Market index are also know as the indicator of the movement of the overall securities prices in the secondary market.
E.g.
Nepal Stock Exchange (NEPSE)
Dow Jones Industrial Average (DJIA)
Standard & Poor 500 Index

Market index furnish a handy summary of historical price levels in their specific markets, especially when they are presented in graphical form. By the use of index, investors who own several securities in a give market or industry can quickly get an indication of how mkt movements have affected the value of their portfolio. Similarly, indexes are useful for historical analysis. By analyzing mkt indexes and other economic indicators, an analyst may detect some consistent relationship between different indexes and the fortunes of sectors of the economy.

Methods of Calculating Index:

There are four most popular methods to compute market index. They are:

1) Price Weighting:

The Dow Jones Industrial Average is calculated by using this method. In this method index is calculated by summing the prices of the stocks that are included in the index and ends by dividing this sum by a constant (called Divisor). Mathematically, the formula is:

Capital Assets Pricing Model (CAPM)

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Capital Assets Pricing Model (CAPM)
Markowitz portfolio theory suggests that the investment decision should be based on the total risk and price of assets should be also determined on the basis of total risk. But the CAPM suggests that, any investor can create a portfolio of assets that will eliminate all diversifiable risk (as undiversifiable risk can’t be diversify away .) Therefore the only relevant risk is non-diversifiable risk. Thus the investment decision and the pricing of capital assets should be based on the undiversifiable risk, The relationship between an asset’s return and its systematic risk can be expressed by the CAPM. The CAOM tries to quantify the required rate of return at a given level of systematic risk. In other word CAPM gives idea about, how much return (required rate of return - RRR) should be necessary for given level of systematic risk beta. For this we us following equation.

RRR = Rf + ( Rm – Rf ) . ąβ

Where, RRR = Required rate of return or expected rate of return
Rf = Risk free rate of return
Rm = Market return
B= Beta coefficient
( Rm – Rf ) = Slope of CAPM

CAPM is also known as security Market Line (SML) . SML is the line showing the relationship between the systematic risk index (beta) and the required rate of return.

Arbitrage Pricing Theory (APT)
Chapter 11
APT (Based on ‘ Law of one price’)

Arbitrage opportunity refers to buying of the same securities in the less costlier market and selling it in the expensive market with zero initial cash outlay and zero incremental risk (often known as risk free investment)

Arbitrage is the process of earning risk less profits by taking advantage of differential pricing for the same physical asset or security. As a widely applied investment tactic, arbitrage typically entails the sale of a security at a relatively high price and the simultaneous purchase of the same security at a relatively low price. Fundamentally there wouldn’t be different price of same underlying stock in the different market while market being perfect but if there are two prices for the same security one can have the arbitrage opportunity.
Arbitrage opportunity can also be used to compare the required rate of return & expected return, therefore one short sale the overpriced security or portfolio and also purchase the under price portfolio from the same proceed which was realize from short selling.

Three conditions should be needed in order to grab the arbitrage opportunity
1. In-order to invest, the security or portfolio should be undervalued (Under priced)
2. There should be zero initial cash outlay.
3. There should be zero incremental risk.

Regression Line or equation for arbitrage opportunity
Arbitrage pricing model is similar with the CAPM model. CAPM assume only one risk factor (systematic risk factor or beta) for pricing the assets but APT assumes multiple factors which affects security’s return while pricing the assets. Therefore in APT while pricing the security or determining the required rate of return all those factors need to be consider. These various risk factor are called the macro economic systematic risk factors. The general equation for arbitrage opportunity can be categorized into two parts.

Meaning of Diversification:

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Market Index

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Market Index

Securities market index are construct to get the answer of following questions; “What is the market doing?”, “What did the market do yesterday?” Index number is devoid of dollar values or other units of measure. Stock market index are “pure number” use for marketing composition between different index numbers in the same series of other index number. Market index are also know as the indicator of the movement of the overall securities prices in the secondary market.

E.g.

Nepal Stock Exchange (NEPSE)

Dow Jones Industrial Average (DJIA)

Standard & Poor 500 Index

Market index furnish a handy summary of historical price levels in their specific markets, especially when they are presented in graphical form. By the use of index, investors who own several securities in a give market or industry can quickly get an indication of how mkt movements have affected the value of their portfolio. Similarly, indexes are useful for historical analysis. By analyzing mkt indexes and other economic indicators, an analyst may detect some consistent relationship between different indexes and the fortunes of sectors of the economy.

Methods of Calculating Index:

There are four most popular methods to compute market index. They are:

1) Price Weighting:

The Dow Jones Industrial Average is calculated by using this method. In this method index is calculated by summing the prices of the stocks that are included in the index and ends by dividing this sum by a constant (called Divisor). Mathematically, the formula is:

Specifically, the equation for calculating index by price weighting method is

2) Value Weighting:

In this method, index is computed daily by multiplying price of the stock index and their respective number of shares outstanding and then added up in order to arrive at a figure equal to the aggregate market value for that day. This figure is then divided by the corresponding figure for the day zero (the index was started) with the resulting value being multiplied by an arbitrarily determined beginning index value i.e.

3) Equal Weighting:

This is index is computed by multiplying the level of the index on the previous day by the arithmetic mean of the daily Price Relatives (Today’s Price/Yesterday’s Price) of the relevant stocks in the index i.e.

Fixed Income Securities

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Fixed income securities are those, which promise either a fixed stream of income or a stream of income that is determined according to a specified formula. Debt or bond is most popular fixed income securities. Fixed income securities include saving deposit (commercial Banks, credit union), money market instruments. Like certificate of Deposit, commercial paper Banker’s acceptance and so on.

A) Saving Deposits:

Saving deposits in general refers to the personal savings account at a bank or saving & loan company or credit union. Such an account provides substantial safely of principal & interest, high liquidity and a relatively low return.

B) Commercial Bank

Commercial banks are the main institutions where people maintain saving deposits in different form & different conditions. There are 3 most popular saving deposits in real practice.

a. Demand deposit

b. Time deposits

c. Certificate of deposit (CDs)

Ø Demand Deposit

Many people maintain a checking account at a commercial bank. Formallu these accounts are termed demand deposits, because money can be withdrawn on demand by the depositors.

An alternative to a checking account is a standard saving accounts. In this a/c request for withdrawals are almost honored immediately. Almost any amount may be invested in a saving account.

Ø Time Deposit

The standard saving account is time deposits where deposits are made for some fix periods. These deposits can’t be withdrawn before the maturity period.

Ø Certificate of deposits (CDs)

Some types of deposits may be made in almost any amount when other may be made only in units of say $ 1000 each. The later may be represented by certificates of deposit (CDs), which clearly qualify to be called securities large-denomination CDs (generally $100000) or more & known as “Jumbas”) may be negotiable; that is original depositors may sell the certificate to someone else before maturity.

v Other types of personal saving accounts

In US, ano of institutions similar to commercial banks are authorized to accept federally insured deposits and to use the proceeds to make consumer loans. These institutions include Saving & Loan companies; mutual saving banks & credit unions. They act similar to commercial banks & venders the service to customers.

v Money Market Instruments

The money market usually applied to the buying & selling of debt instruments maturing in one year or less. These instruments sometimes are called cash equivalents or just cash for short. Money market instruments include short-term marketable, liquid, low-risk debt securities. Short-term here refers for one year & less.

Some money market instruments are negotiable and are traded on active market & other are not. Investors buy money market securities at discount from their face values and get benefits from the pri9ce appreciation that typically occurs at maturity date of the securities. The maturity date of the securities. The most common money market securities are described below.

a) Commercial Paper

Large well-known companies often issue their own short-term unsecured debt notes rather than borrow directly from banks. These notes are called commercial paper. Commercial paper maturities ranges up to 270 days & longer maturities would require registration only those companies with high reputation as well as government sponsored financial & non financial companies issue commercial paper.

b) Certificate of deposit (see above)

c) Bankers’ Acceptance

A bankers’ acceptance is a time draft drawn on a bank by an exporter or an importer to pay for merchandise. If the bank honors the draft, it will stamp “Accepted “ on its face and endorse the instrument. By doing so the issuing bank has unconditionally guarantee to pay the face value of the acceptance at maturity shielding exporters and investors in international markets from default risk. Acceptances Cary maturities ranging from 30 days to 270 days (90days market common) and are considered prime-quality money market instruments. They are actively traded among financial institutions, industrial corporations & security dealers as a high quality investment & source of ready cash.

d) Eurodollars

Eurodollars are the deposits of U.S dollars in banks located outside the United States or in US-based banking facilities free of U.S deposit regulation. The banks record the deposits on their books (a/c) in U.S dollars, not in their home currency. Most Eurodollars deposits are for large sums and most are time deposits of less than six months maturity. Eurodollars deposits are non-negotiable, meaning that they can not be traded.

e) Repurchase agreement

Dealers in government securities use repurchase agreements, also called “repos” or “RPs” as a form of short-term, usually overnight, and borrowing. The dealer sells government securities to an investor on an overnight basis, with an agreement to buy back those securities the next day at a slightly higher price. The increase in the price is the overnight

interest. The dealer thus takes out a one-day loan from the investor and the securities serve as collateral. Repos are considered very safe in terms of credit risk because the loans are backed by the government securities.

f) Government securities

Government of the country collects revenue mainly from tax, service charges & fees. Such revenues are used for social & development purpose. The revenues collected so far do not cover all the expenses. Therefore difference (deficit) so creates has to be financed primarily by issuing debt securities. The proceeds of these debts are used for development purpose as well as to repay the old debt. The government may issue long, medium or short term debt according to the requirement. Some common securities are;

T-bills, T-notes, T-Bonds, Saving bonds, Development bonds.

g) Treasury Bills

T-bills are the most marketable of all money market instruments. T-bills represent the simplest form of borrowing. The government raises money by selling bills to public. Investors buy the bills at a discount from the stated maturity value. At the bill’s maturity, the holder receives from the government a payment equal to the face value of the bill. The difference between the purchase price and ultimate maturity value constitutes the investor’s earnings.

Calculation the Yields on Bills

Bill yields are determined by the bank discount method, which ignores the compounding of interest rates & uses a 360-day year for simplicity. The bank discount rate (DR) on bills is given by the following formula:

DR =

Where,

Maturity period = no. of days to maturity

Because the rate of return on T-bills is figured in different way than the rate of return on most other debt instrument the investor must convert bill yield to an investment yield (coupon-equivalent yield) to make realistic comparison with other securities. The formula for investment yield/rate (IR) is

IR =

Treasury Notes & Bond

The government borrows funds in large part by selling Treasury notes & Treasury bonds. T-notes maturities range up to 10 yrs. whereas bonds are issued with maturities ranging from 10 to 30 years. Both are issued in denominations of $ 1000 or more both make semi-annual interest pmt called coupon pmt.

Saving bond: main motive to induce for saving pay at last target: Student

Zero coupon bond: issue at discount ( no coupon)

Development bond: issue to raise fund for development project.

State & Local government securities

The most popular state & local gov’t securities is municipal bond. They are similar to T-bond & corporate bond except that there interest income exempt from state & local taxation in the issuing state. It means that dividend/interest income is tax exempted income where as capital gain is taxable income. When the bonds mature or if they are sold for more than the investor’s purchase price. There are basically two types) of municipal bonds. These are general obligation bond by the “full faith & credit” (i.e. the taxing power of the issuer and revenue bonds which are issued to finance particular projects & are backed either by the revenues from that project or by the particular municipal agency operating the project.

Behavior of Stock Market Price

Security price fluctuates around their intrinsic value. Any information that affect the intrinsic value has an

Effect on the stock market price movements. More efficient the market, more quickly it adjust the price of security to the new information. E.F. Famma opined that financial information arrived randomly and if the market response to the information is efficient, then the price should fluctuate randomly. Famma suggested three levels of market efficiencies.

I ) Weakly efficient market hypothesis

It states that security prices reflect all historic information. It follows that historic price and volume data of securities contains no information which can be used to earn larger return over what could be earn on passive buy and hold. Strategy by trading on short term price movement. In other words technical analysis is worthless.

Weakly efficient market hypothesis suggest for the following tools to evaluate the market behavior & have decision:

A ) c % Filter rule ( E.F Famma & M.E. Blume)

If the price of a security rises at least c %, buy and hold the securities until its price drops at least c % from a subsequent high. Then liquidate the long position and assume a short position on the same stock until the price rises c %.

B) Sweeney’s c % Filter rule:

If the price of the security rises at least c % buy and hold security until its price drops at c % from a subsequent high. Then liquidate the long position and invest the proceeds in the risk free short-term bond until the price reaches its next through and then rises c %.

C) Run test:

Run test is simply group of positive or negative price trend which provide insight for overall trend of particular security within some specified time so that one can either purchase the stock and sale or short sell. It is computed to test whether the security prices fluctuate randomly or they follow some trend, which sometimes is not detected by filter rules. There are 3 types of run.

i. Positive run: Total positive price changes in the subsequent time

ii. Negative run: Total negative price changes in the subsequent time

iii. Zero run: Total indifferent between the price of two type of time.

Note:

Difference between Famma & Blume and Sweeny

Famma & Blume assumes that decreasing trend of price can have best opportunity for short selling but at the some time sweeny think that it is quite riskier than that of investing in risk free bond. So sweeny emphasis to invest the proceed of sale on risk-free short-term bond rather than risky bond.

II ) Sem-Strong Efficient Market Hypothesis

It assumes that security price reflects all public information. It follows that only those investors who have access to valuable insight information could earn a return larger that what could be earn by using a passive buy and hold strategy by trading on short-term price movement.

II ) Strongly Efficient Market Hypothesis

It states that security prices reflect all the information. It follows that no investor can earn a return larger than what could be earn passive buy and hold strategy by trading on short term price movement.