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Portfolio Analysis Some Important Concepts & Questions

d. CML vs SML
CML stands for Capital Market Line, and SML stands for Security Market Line.
The CML is a line that is used to show the rates of return, which depends on risk-free rates of
return and levels of risk for a specific portfolio. SML, which is also called a Characteristic Line,
is a graphical representation of the markets risk and return at a given time.
One of the differences between CML and SML, is how the risk factors are measured. While
standard deviation is the measure of risk for CML, Beta coefficient determines the risk factors of
The CML measures the risk through standard deviation, or through a total risk factor. On the
other hand, the SML measures the risk through beta, which helps to find the securitys risk
While the Capital Market Line graphs define efficient portfolios, the Security Market Line
graphs define both efficient and non-efficient portfolios.
While calculating the returns, the expected return of the portfolio for CML is shown along the Yaxis. On the contrary, for SML, the return of the securities is shown along the Y-axis. The
standard deviation of the portfolio is shown along the X-axis for CML, whereas, the Beta of
security is shown along the X-axis for SML.
Where the market portfolio and risk free assets are determined by the CML, all security factors
Unlike the Capital Market Line, the Security Market Line shows the expected returns of
individual assets. The CML determines the risk or return for efficient portfolios, and the SML
demonstrates the risk or return for individual stocks.
Well, the Capital Market Line is considered to be superior when measuring the risk factors.

e. Japanese Candlestick Chart

A candlestick chart is a style of financial chart used to describe price movements of a security,
derivative, or currency. Each "candlestick" typically shows one day; so for example a one-month
chart may show the 20 trading days as 20 "candlesticks".

It is like a combination of line-chart and a bar-chart: each bar represents all four important pieces
of information for that day: the open, the close, the high and the low.

Candlestick charts are most often used in technical analysis of equity and currency price patterns.
They appear superficially similar to box plots, but are unrelated.

G. Jacobs 4 Step Program for Developing a Model Portfolio:

1. Work with investors to develop Long Term Goals
2. Determine the Asset Allocation of the investment portfolio
3. Determine the Sector Distribution
4. Select Specific Fund Managers and their Schemes
H. Concept of MACD
Moving average convergence divergence (MACD) is a trend-following momentum indicator that
shows the relationship between two moving averages of prices. The MACD is calculated by
subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day
EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as
a trigger for buy and sell signals.

K. What is the 'Relative Strength Index - RSI'

The relative strength index (RSI) is a technical momentum indicator that compares the
magnitude of recent gains to recent losses in an attempt to determine overbought and oversold
conditions of an asset. It is calculated using the following formula:
RSI = 100 - 100/(1 + RS*)
*Where RS = Average of x days' up closes / Average of x days' down closes.