1.

1 What is Portfolio Performance Evaluation? How does one measure the portfolio
performance

Portfolio evaluating refers to the evaluation of the performance of the portfolio. It is essentially the process of comparing the return earned on a portfolio with the return earned on one or more other portfolio or on a benchmark portfolio. Portfolio evaluation essentially comprises of two functions, performance measurement and performance evaluation. Performance measurement is an accounting function which measures the return earned on a portfolio during the holding period or investment period. Performance evaluation , on the other hand, address such issues as whether the performance was superior or inferior, whether the performance was due to skill or luck etc. The ability of the investor depends upon the absorption of latest developments which occurred in the market. The ability of expectations if any, we must able to cope up with the wind immediately. Investment analysts continuously monitor and evaluate the result of the portfolio performance. The expert portfolio constructer shall show superior performance over the market and other factors. The performance also depends upon the timing of investments and superior investment analysts capabilities for selection. The evolution of portfolio always followed by revision and reconstruction. The investor will have to assess the extent to which the objectives are achieved. For evaluation of portfolio, the investor shall keep in mind the secured average returns, average or below average as compared to the market situation. Selection of proper securities is the first requirement. The evaluation of a portfolio performance can be made based on the following methods: a) b) c) Sharpes Measure Treynors Measure Jensens Measure

(a) Sharpe Measure: The objective of modern portfolio theory is maximization of return or minimization of risk. In this context the research studies have tried to evolve a composite index to measure risk based return. The credit for evaluating the systematic, unsystematic and residual risk goes to sharpe, Treynor and Jensen. Sharpe measure total risk by calculating standard deviation. The method adopted by Sharpe is to rank all portfolios on the basis of evaluation measure. Reward is in the numerator as risk premium. Total risk is in the denominator as standard deviation of its return. We will get a measure of portfolios total risk and variability of return in relation to the risk premium. The measure of a portfolio can be done by the following formula: SI =(Rt Rf)/ f Where,

SI = Sharpes Index Rt = Average return on portfolio Rf = Risk free return f = Standard deviation of the portfolio return. (b) Treynors Measure: The Treynors measure related a portfolios excess return to non-diversifiable or systematic risk. The Treynors measure employs beta. The Treynor based his formula on the concept of characteristic line. It is the risk measure of standard deviation, namely the total risk of the portfolio is replaced by beta. The equation can be presented as follow: Tn =(Rn Rf)/
m

Where, Tn = Treynors measure of performance Rn = Return on the portfolio Rf = Risk free rate of return
m

= Beta of the portfolio ( A measure of systematic risk)

(c) Jensens Measure: Jensen attempts to construct a measure of absolute performance on a risk adjusted basis. This measure is based on CAPM model. It measures the portfolio managers predictive ability to achieve higher return than expected for the accepted riskiness. The ability to earn returns through successful prediction of security prices on a standard measurement. The Jensen measure of the performance of portfolio can be calculated by applying the following formula: Rp = Rf + (RMI Rf) x Where, Rp = Return on portfolio RMI = Return on market index Rf = Risk free rate of return

Treynor Portfolio Performance Measure

Treynor recognized two components of risk
Risk from general market fluctuations Risk from unique fluctuations in the securities in the portfolio

His measure of risk-adjusted performance focuses on the portfolio s undiversifiable risk: market or systematic risk

T!

 RFR Fi

The numerator is the risk premium The denominator is a measure of risk The expression is the risk premium return per unit of risk Risk averse investors prefer to maximize this value This assumes a completely diversified portfolio leaving systematic risk as the relevant risk

Comparing a portfolio s T value to a similar measure for the market portfolio indicates whether the portfolio would plot above the SML Calculate the T value for the aggregate market as follows:

Tm

R !

 RFR Fm

Treynor Portfolio Performance Measure

Comparison to see whether actual return of portfolio G was above or below expectations can be made using:

ER G ! RFR  F i R m  RFR

Sharpe Portfolio Performance Measure

Risk premium earned per unit of risk

R i  RFR Si ! Wi

Treynor versus Sharpe Measure

Sharpe uses standard deviation of returns as the measure of risk Treynor measure uses beta (systematic risk) Sharpe therefore evaluates the portfolio manager on the basis of both rate of return performance and diversification The methods agree on rankings of completely diversified portfolios Produce relative not absolute rankings of performance

PORTFOLIO MANAGEMENT
f i vest e ts el y a i stit ti r a i ivi al. T e A rtf li is a a r riate ix r c llecti assets i t e rtf li c l i cl e st cks, s, ti s, arra ts, g l certificates, real cti facilities, r a y t er ite t at is ex ecte t retai its val e. estate, f t res c tracts, r H l i g a rtf li is a art f a i vest e t a risk-li iti g strategy calle iversificati . By i g several assets, certai ty es f risk (i artic lar s ecific risk) ca e re ce .

PO TFOLIO ANAGEMENT: a age e t i v lves eci i g at assets t i cl e i t e rtf li , give t e g als f t e P rtf li rtf li er a c a gi g ec ic c iti s. Selecti i v lves eci i g at assets t rc ase, a yt rc ase, e t rc ase t e , a at assets t ivest. T ese ecisi s al ays st ty ically ex ecte ret r t e rtf li , a i v lve s e s rt f erf r a ce eas re e t, t e risk ass ciate it t is ret r (i.e. t e sta ar eviati f t e ret r ). Ty ically t e ex ecte rtf li s f iffere t asset les is c are . ret r fr NEED FO PO TFOLIO MANAGEMENT: eca se: P rtf li ee s eri ic ai te a ce a revisi y T e ee s f t e e eficiary ill c a ge y T e relative erits f t e rtf li c e ts ill c a ge y T kee t e rtf li i acc r a ce it t e i vest e t licy state e t a strategy.

i vest e t

& )

& '& & )

#$ & ) & % % ( & ' # & # # #$ % $ # !  " ! !                  

TE HNIQUE: An active anage ent licy can e f ll e in ic t e c siti n f t e rtf li is yna ic. T e rtf li anager eri ically c anges t e rtf li c nents r t e c nents r rti n it in t e rtf li . A assive anage ent strategy is ne in ic t e rtf li is largely left al ne. PO TFOLIO EBALAN ING: e alancing a rtf li is t e r cess f eri ically a j sting it t aintain t e riginal c nditi ns. F ll ing strategies can e e l yed: 1. C nstant ix strategy Is ne t ic t e anager akes adj st ents t aintain t e relative eig ting f t e asset classes it in t e rtf li as t eir rices c ange eq ires t e rc ase f sec rities t at ave erf r ed rly and t e sale f sec rities t at ave erf r ed t e est A c nstant ix strategy sells st ck as it rises Exa le: A rtf li as a arket val e f $2 illi n. T e invest ent licy state ent req ires a target asset all cati n f 60 ercent st ck and 30 ercent nds. Date P rtf li Val e Act al All cati n St ck B nds 1 Jan $2,000,000 60%/40% $1,200,000 $800,000

2. 3.

1 Apr $2,500,000 56%/44% $1,400,000 $1,100,000 W at dollar a ount of stock s ould t e portfolio anager uy to re alance t is portfolio? W at dollar a ount of onds s ould e sell? Solution: a 60%/40% asset allocation for a $2.5 illion portfolio eans t e portfolio s ould contain $1.5 illion in stock and $1 illion in onds. T us, t e anager s ould uy $100,000 ort of stock and sell $100,000 ort of onds. Constant proportion portfolio insurance strategy

elative perfor ance of constant ix and CPPI strategies a. A CPPI strategy uys stock as it rises EBALANCING WITHIN THE EQUITY PO TFOLIO: T e elow entioned odels can e e ployed for re alancing of portfolio wit in t e equity portfolio. 1. Constant proportion: A constant proportion strategy wit in an equity portfolio requires aintaining t e sa e percentage invest ent in eac stock y May e itigated y avoidance of odd lot transactions y Constant proportion re alancing requires selling winners and uying losers 2. Constant eta: A constant eta portfolio requires aintaining t e sa e portfolio eta. To increase or reduce t e portfolio eta, t e portfolio anager can: y Reduce or increase t e a ount of cas in t e portfolio y Purc ase stocks wit ig er or lower etas t an t e target figure y Sell ig - or low- eta stocks y Buy ig - or low- eta stocks 3. C ange t e portfolio components: C anging t e portfolio components is anot er portfolio revision alternative. Events sometimes deviate from what the manager expects: y The manager might sell an investment turned sour y The manager might purchase a potentially undervalued replacement security

7 3

3 3 32 7 7 75 3 1 1 3213 7 3 3213 3 3 32 7 7 3 3 32 7 3 3 3213 7 7 75 6 53 3 4 9 9 3 7 7 3 B 1 3 3 1 5 4 Q 7 7 4 7 7 3 7 32 C 7 4 1 7 1 D 1 B 13 4 13 7 7 1 2 7 7 7 2 1 9 C 1 G 1 C 7 96 Q 4 4 7 G E 4 63 H E Q 7 1 D

3 3 3 9 9 3 3 3 34 2 3 2 3 3 3 1 7 3 1 3 9 1 7 3 3 32 21 3 1 3 4 7 13 2 7 7 332 1 3 9 3 7 92 7 9 8 7 3 3 32 7 7 5 1 1 7 7 75 3 3 1 3

7 5 1

2 3

7 7

63 32

B B

3 2 3 3 32 7 7 5 3 323 2 2 1 3 3 32 7 1 6 1 1 0 4 G GG F E 7 3 21 4 32 7 7 B 7 @ 4 R P D 1 1 3 3 32 0 8 1 1 B Q A @ 7 1 Q Q I I G 7 Q 7 5 53 3 4 8 8 8 1 4 8

4. Indexing: Indexing is a form of portfolio management that attempts to mirror the performance of a market index. Index funds eliminate concerns a out outperforming the market. The tracking error refers to the extent to which a portfolio deviates from its intended ehavior COSTS INVOLVED IN PORTFOLIO REVISION: Costs of revising a portfolio can: y Be direct dollar costs y Result from the consumption of management time y Stem from tax lia ilities y Result from unnecessary trading activity y Trading fees: Commissions and Transfer taxes y Market impact: The market impact of placing the trade is the change in market price purely ecause of executing the trade. Market impact is a real cost of trading. Market impact is especially pronounced for shares with modest daily trading volume y Management time: Most portfolio managers handle more than one account. Re alancing several dozen portfolios is time consuming. y Tax implications: Individual investors and corporate clients must pay taxes on the realized capital gains associated with the sale of a security. Tax implications are usually not a concern for tax-exempt organizations SYNTHETIC REBALANCING USING DERIVATIVES Portfolio allocations drift away from the desired (i.e., target) allocations as asset classes experience differing returns. This drift creates undesira le tracking error. Re alancing moves the asset-class holdings ack close to their desired allocations ut incurs transaction costs. Portfolio re alancing trades off tracking error against the transaction costs associated with avoiding tracking error. We need to achieve optimal re alancing strategies that minimize the expected transaction costs required to achieve a given level of tracking error. Reductions in expected transaction costs can e obtained by using derivatives to synthetically rebalance a portfolio. The shape of the optimal no-trade region depends on trading costs, asset volatility, and the correlations between asset-class returns. We desire to achieve lower expected transaction costs to obtain the same level of tracking error. Strategies for efficient cash-market rebalancing require rebalancing the portfolio back to a no-trade region and setting the no-trade region to induce efficient rebalancing trades. Once the derivative position limit has been met, any further drift of the asset class that is over weighted (underweighted) relative to the target allocation is rebalanced in the cash market. REBALANCING TO THE TARGET VS. REBALANCING TO THE BOUNDARY: The estimates of tracking error and expected transaction cost depend on the input assumptions. The proportional savings in expected transaction costs; however, from strategies that trade to the boundaries versus rebalancing to the targets does not vary much with the return assumptions. SYNTHETIC REBALANCING: Synthetic rebalancing trades reduce exposure to asset classes that are over weighted relative to their target allocations by using short positions in derivatives and add exposure to underweighted asset classes by using long positions in derivatives. Synthetic rebalancing is attractive because derivatives are generally traded at considerably lower cost than cash-market positions. An effective synthetic rebalancing strategy must be carefully designed, however, because the transaction-cost and trackingerror implications of a synthetic rebalancing trade depend on the cost of trading the derivatives and how long the derivative positions are maintained. For example, when futures are shorted to reduce

exposure, transaction costs are incurred in assembling the futures positions and each time the futures positions are rolled as the contracts approach expiration. The length of time derivative positions are held also affects the tracking error associated with a rebalancing strategy because of the derivativescash market benchmark basis. Synthetic rebalancing trades occur when the allocations to the asset classes deviate from their target allocations by 1 percent. The derivatives exposure limit is the difference between the cash and derivatives boundaries. The notional value of a derivative position cannot exceed 4 percent of the portfolio value in this case. The mechanics of a synthetic rebalancing program are shown by starting with allocations at the portfolio target allocations and then showing the trades that are made as the portfolio allocations drift from their target allocations. The effective allocation is the sum of the cash allocation and futures positions. Thus, the portfolio is synthetically rebalanced back to the rebalancing boundaries. The derivative positions taken to synthetically rebalance the portfolio are taken off when the performances reverse. When equity outperforms fixed income, the effective allocations are maintained by taking off the long fixed-income and short equity derivative positions. Thus, the expected length of time the derivative position is held increases with the derivative position limit. When more than two asset classes are involved, the derivative position limits are smaller for asset classes in which the appropriate derivative contract has either high roll costs or high derivatives-cash market basis volatility. Three parameters are required to characterize each derivative contract and to simulate synthetic rebalancing strategies: (1) The costs of trading derivatives, (2) The costs of maintaining derivative positions, and (3) The basis volatility associated with the synthetic trade. These three parameters also fully characterize all potential derivative alternatives. For futures contracts, the cost of trading is the bid-ask spread, including any market impact and commissions. The cost of maintaining a futures contract, the roll cost, is the bid-ask spread, market impact, and commissions for calendar rolls, which are usually considered lower than the costs of initiating a position. Roll costs for futures are lower because they are generally transacted at a time when the market is more liquid than it is at initiation. The quote convention is frequently "bid to bid" on the roll (which reduces bid-ask spread costs by half), and the manager has discretion over when to roll the positions, which presumably mitigates market impact costs. The expected transaction-cost savings from using synthetic rebalancing are substantial. The expected transaction cost of synthetic rebalancing is less than 50 percent of the cost of cash-market rebalancing for low-tracking-error targets and 90 percent of the cost of cash-market rebalancing for high-trackingerror targets.The chosen tracking-error target depends on the investor's tracking-error tolerance and the expected transaction costs associated with obtaining that tracking error. The availability of synthetic rebalancing programs tends to shift investors toward tight tracking-error tolerances. CASH FLOWS AND REBALANCING When a portfolio experiences cash inflows or outflows, efficient synthetic rebalancing strategies have an additional dimension: a maximum allocation to cash. Thus, rebalancing policies are characterized by (1) The maximum allowable allocation to cash, (2) Upper and lower synthetic boundaries, and

(3) Upper and lower cash boundaries. The optimization procedure searches over boundaries to determine the set of boundaries that results in the lowest expected transaction costs for a given level of tracking error. The efficient approach is to rebalance by holding at least some of the cash inflows and overlaying the cash position with derivatives. Also note that for most asset classes, the lower boundary is wider than the upper boundary. The purpose is to allow the portfolio to hold cash. The upper derivatives boundary on cash caps the amount of cash that is allowed to remain without a derivative overlay at 0.55 percent of the portfolio. The lower derivatives boundary on cash is constrained to be zero to preclude leverage. CONCLUSION 1. Synthetic rebalancing programs can minimize the expected transaction costs associated with portfolio rebalancing. 2. With synthetic rebalancing, the expected transaction costs for a given tracking-error target are considerably lower than can be attained by even the most well-conceived strategies that rebalance by using only cash-market assets. 3. When the desired tracking-error target is small, synthetic rebalancing can achieve the same level of tracking error for less than half the cost of cash-market-only rebalancing. As the tracking-error target increases, the expected transaction-cost savings from synthetic rebalancing decline. 4. Synthetic rebalancing is particularly attractive when the desired tracking error is small, because derivative positions are expected to be maintained for longer periods of time when the tracking-error tolerance is large. 5. A synthetic rebalancing strategy must incorporate features that limit the length of time the derivative positions are held. 6. When a portfolio receives cash inflows or is required to make periodic cash payments, the efficient rebalancing strategy allows the portfolio to hold some cash. When cash flows arrive, gaining the desired exposure by overlaying at least some of the cash with derivative positions is more efficient than investing the entire cash flow directly into the underweighted asset classes. Investing the cash flow into cash assets generally moves the asset allocations inside the no-trade region. The overlay strategy avoids trading cash-market asset classes inside the no-trade region, which is inefficient. The numerical optimization procedure determines the most efficient allowable cash position and notrade

ASSET MIX The classification of all assets within a fund or portfolio. Assets are assigned to one of the core asset classes: stocks (equities), bonds (fixed income), cash and real estate. Other categories that are sometimes considered asset classes are commodities, international investments, hedge funds and limited partnership interests. The asset mix is usually shown as the set of percentages every asset class contributes to the total market value of the portfolio. It is a key determinant of the risk/reward profile of the fund, which in turn is

largely determinant of long-term performance results.

The classification of all assets within a fund or portfolio. Assets are assigned to one of the core asset classes: stocks (equities), bonds (fixed income), cash and real estate. Other categories that are sometimes considered asset classes are commodities, international investments, hedge funds and limited partnership interests. The asset mix is usually shown as the set of percentages every asset class contributes to the total market value of the portfolio. It is a key determinant of the risk/reward profile of the fund, which in turn is largely determinant of long-term performance results.

Based on your objectives and constraints, you have to specify your Asset allocation, that is, you decide how much of your portfolio has to be invested in each of the following asset categories: 1. Cash 2. Bonds 3. Stocks 4. Real estate 5. Precious metals 6. Other The thrust of this article will be on determining the appropriate mix of bonds and stocks in the portfolio. Before we examine this issue, note the following: The first important investment decision for most individuals is concerned with their education meant to build their human capital. The most significant asset that people generally have during their early working years is their earning power that stems from their human capital. Purchase of life and disability insurance becomes a pressing need to hedge against loss of income on account of death or disability. The first major economic asset that individuals plan to invest in is their own house. Before they are ready to buy the house, their savings are likely to be in the form of bank deposits and money market mutual fund schemes. Referred to broadly as cash these instruments have appeal because they are safe and liquid.

Once the investment in house is made and reasonable liquidity in the form of cash is maintained to meet expected and unexpected expenses in the short run, the focus shifts to planning for the education of children, providing financial security to the family, saving for retirement, bequeathing, wealth to Heirs, and contributing to charitable activities. In this context stocks and bonds become important. Very broadly, we define them as follows: Stocks include equity shares (which in turn may be classified in to income shares, growth shares, blue chip shares, cyclical shares, speculative shares, and so on) and units / shares of equity schemes of mutual funds (like Master shares, Birla Advantage, and so on). Bonds defined very broadly, consist of non-convertible debentures of private sector companies, public sector bonds, gilt edged securities, RBI Savings Bonds, units/shares of debt oriented schemes of mutual funds, National Savings Certificates, Kisan Vikas Patras, bank deposits, post office savings deposits fixed deposits with companies, deposits in provident fund and public provident fund schemes, deposits in the Senior Citizen s Savings Scheme, and so on. The basic feature of these investments is that they earn a fixed or near fixed return. Should the long term stock bond mix be 50:50 or 75:75 or 25:75 or any other? Referred to as the strategic asset mix decision (or policy asset mix decision), this is by far the most important decision made by the investor. Empirical studies have shown that nearly 90 percent of the variance of the portfolio return is explained by its asset mix. Put differently, only about 10 percent of the variance of the portfolio return is explained by other elements like sector rotation and security selection . Given the significance of the asset mix decision, you should hammer it out carefully.

Conventional Wisdom on Asset Mix: The conventional wisdom on the asset mix is embodied in two propositions: Other things being equal, an investor with greater tolerance for risk should tilt the portfolio in favor of stocks, whereas an investor with lesser tolerance for risk should tilt the portfolio in favor of bonds. This is because in general stocks are riskier than bonds and hence earn higher returns than bonds. Exhibit portrays the risk return relationship for various types of stock and bond investments. James H Lorie summed up the long view well when he stated: The most enduring relations in all finance perhaps is the relationship between returns on equities (or stocks) and returns on bonds. In all periods of American history, British history, French history, and German history, equities (stocks) have provided higher returns than bonds. A similar observation can be made when we look at the returns on stocks and bonds in India for the last few decades.

NEED FOR PORTFOLIO REVISION

Availability of additional funds for investments. Change in risk tolerance. Change in investment goals. Need to liquidate a part of the portfolio to provide funds for some alternative use.

Portfolio revision involves changing existing mix of securities. This can be done by changing the securities currently included in portfolio or by altering the proportion of funds invested in securities. ` Portfolio revision leads to purchases & sales of securities ` Objective of portfolio revision is to maximizing the return for a given level of risk or minimization the risk for the given level of return

CONSTRAINTS ON PORTFOLIO REVISION

y y y y

Transaction Cost Taxes Statutory Stipulation Intrinsic Difficulty

PORTFOLIO REVISION STRATEGIES 1. Active Revision Strategy: This involves frequent and substantial adjustments to the portfolio. They hope to use their bet estimates to excess returns. The frequency of trading is likely to be much higher resulting in higher transaction cost. 2. Passive Revision Theory It involves only minor and in frequent adjustments to the portfolio over time. Under this, adjustment to portfolio is carried out according to predetermined rules and procedures designated as formula plans.

FORMULA PLANS Formula plans consists of predetermined rules regarding when to buy or sell & how much to buy or sell. These predetermined rules call for specified actions when there are changes in the securities market. ` In this, the investor divide his investmentfunds into 2 portfolios i.e. one aggressive(portfolio consists of equity shares)& other conservative or defensive ( bonds & debentures). ` The formula plans specify predetermined rules for the transfer of funds from aggressive portfolio to the defensiveportfolio & vice versa. These rules enable the investors toautomatically sell shares when their prices are rising & buyshares when their prices are falling.

DIFFERENT FORMULA PLANS 1. Constant Rupee Value Plan 2. Constant RatioPlan

3. Dollar Cost Averaging

BASIC RULES FOR FORMULA PLANS 1) Formula plans require the investor to divide his investment funds in two portfolios i.e.aggressive & Conservative (defensive), 2) The volatility of aggressive portfolio must be greater than that of conservative portfolio, the larger the difference between the two, the greater the profits the formula plan can yield. 3) The conservative (defensive) portfolio must include high- grade bonds having a high degree of safety and stability of the returns. 4) The conservative portfolio tends to decline during periods of prosperity, owing to falling interest rates. While the stock prices are rising, therefore, the aggressive portfolio also rises 5) The basic premise of formula plans is that stock and bond prices of the portfolios move in opposite direction. If they move in same direction then this phenomenon certainly impairs profitability of the formula plans. 6) The formula plans do not deal with the selection of stocks or bonds

PORTFOLIO EXECUTION By the time this phase of portfolio management is reached, several key issues have been sorted out. Investment objectives and constraints have been specified, asset mix has been chosen, portfolio strategy has been developed, and specific securities to be included in the portfolio have been identified. The next step is to implement the portfolio plan by buying and/or selling specified securities in given amounts. This is the phase of portfolio execution which is often glossed over in portfolio management literature. However, it is an important practical step that has a significant bewaring on investment results. Further, it is neither simple nor costless as is sometimes naively felt.

For effectively handling the portfolio execution phase, you should understand what the trading game is like, what is the nature of key players (transactors) in this game, who are the likely winners and lowers in this game, and what guidelines should be borne in mind while trading. Trading Game: Security transactions tend to differ from normal business transactions in two fundamental ways: 1. A businessman entering into a transaction does so with a reasonable understanding of the motives of the party on the other side of the transaction. For example, when you are buying a piece of used machinery, you are well aware of the motives of the seller. In contrast, in a typical securities transaction, the motive and even the identity of the other party is not known. 2. While both parties generally gain from a business transaction, a security transaction tends to be a zero sum game. A security offers the same future cash flow stream to the buyer as well as the seller. So, apart from considerations of taxes and differential risk bearing abilities, the value of security is the same to the buyer as well as the seller. Hence, constructive motives which guide business transactions are not present in most security transactions. This means that if a security benefits one party, it hurts the other. Put differently, if one wins the other loses. Motives for trade: Why do people trade? One motivation is cognitive. People trade because they think they have superior information or better methods of analyzing information. However, most traders tend to confuse noise or randomness for information. Traders see patterns in stock prices that are random, and they rely on intuitive judgment even when systematic analysis would have demonstrated that their judgment is incorrect. Another motivation is emotional. Trading can be a source of pride. Specifically people trade because trading brings with it the joy of pride. When someone decides to buy a stock he assumes responsibility for the decision. A stock that goes up brings not only profits, but also pride. Of course, if the trading decision turns out to be wrong it can inflict losses and cause embarrassment. Key players: Securities market appears to be thronged by four types of players or transactors: value based transactors (VBT), liquidity based transactors (LBT), and pseudo information based transactors (PIBT). Generally the dealer or the market maker intermediates between these transactors.

Who Wins, Who losses: Who wins and who loses in the trading game which is essentially a zero sum game. It appears that Information based transactor (IBT) s odds of wining are the highest, assuming that his information is substantiated by the market. He is followed by the VBT, LBT, and PIBT in that order. Put differently, the above question may be answered as follows: 1. The IBT seems to have a distinct edge over others. 2. The VBT tends to lose against the IBT but gains against the LBT and PIBT. 3. The LBT may have some advantage over the PIBT.