Bombay Stock Exchange is the oldest stock exchange in Asia What is now popularly known as

the BSE was established as "The Native Share & Stock Brokers' Association" in 1875.

Over the past 135 years, BSE has facilitated the growth of the Indian corporate sector by
providing it with an efficient capital raising platform.

Today, BSE is the world's number 1 exchange in the world in terms of the number of listed
companies (over 4900). It is the world's 5th most active in terms of number of transactions
handled through its electronic trading system

BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000
certification. It is also the first Exchange in the country and second in the world to receive
Information Security Management System Standard BS 7799-2-2002 certification for its BSE On-
Line trading System (BOLT). Presently, we are ISO 27001:2005 certified, which is a ISO version
of BS 7799 for Information Security.

Keywords:

BSE Sensex, Risk and Return, Average Annualized Returns, Risk Weighted Returns,
Standard Deviation, Coefficient of Variation, Portfolio Management, Security Analysis,
Beta, Annual WPI Inflation, Dispersion, Volatility of Stock, Market Capitalization, Value
at Risk, Confidence Level, Probability of Return, Range of Return, Bank Fixed Deposits,
Yield to Maturity, Risk Free Return, Annualized Yield.

Introduction:

For the financial year 2007-08, the Indian economy recorded a gross domestic product
(GDP) growth of 9 percent. This was the third year in a row when the Indian economy
grew at the rate of 9 percent and above. In the financial year 2005-06, the Indian
economy grew at 9.4 percent followed by 9.6 percent in 2006-07. The fast growing
Indian economy has not only opened up new opportunities for wealth creation; it has led
more and more people to invest in stocks and equity mutual funds.

According to a FICCI study, investments by households in shares and debentures as

percentage of total financial savings increased to 4.9 percent in 2006 compared to 2.4
percent in 2005. At the same time, the share of the household sector in bank deposits
came down from 64 percent in 2003 to 60 percent in 2004 and further down to 57 per
cent in 2005. Over the last few years, more and more Indian households are prefering
investments in stocks over fixed income instruments like fixed deposits in banks, public
provident fund, post office savings instruments etc. mainly due to higher returns.

The return on fixed income investments has decreased in real terms over the last fifteen
years due to increasing inflation (Refer Exhibit I for average annual WPI inflation rates in
India for the years between 1992 and 2008).
Returns from Stock Markets:

Let us have a look at the returns generated by the Indian stock market (BSE) over the last
fifteen years between March 31, 1992 and March 31, 2007. The Sensex increased from
4285 points on March 31, 1992 to 13072.10 points as on March 31, 2007 (Refer Exhibit
II for the BSE Sensex Chart).

The compounded annual growth rate (CAGR) recorded by the BSE Sensex during this
period is 7.72 percent (Refer Table I for the annual return and standard deviation
recorded by BSE Sensex between March 1992 and March 2007).

To calculate the return generated by Sensex and its standard deviation, we have taken the
closing figures of Sensex on March 31 each year. In case March 31 is a holiday, we have
taken the preceding day's figures.

From these figures, we have first calculated the year-on-year return on the index by using
the following formula:

Return generated by Sensex = ((I1 - I0)/ I0) × 100

Here I0 = Closing figure of previous year

I1 = Closing figure of just concluded year or present year

For calculating the average return, we have added all the annual returns obtained between
1992 and 2007 and divided the figure by the number of years. In other words, for the
period we are looking at i.e. 15 years, the figure obtained is the average return on Sensex
over 15-year period. Similarly, we have calculated returns for ten years, seven years, five
years, three years, two years and one-year period (Refer Exhibit III to Exhibit VIII).

Exhibit :

Exhibit I: Average Annual WPI Inflation (1992-2008)

Exhibit II: Movement of BSE Sensex (March 1992 - March 2007)
Exhibit III: Return and Standard Deviation of BSE Sensex (1997-2007)
Exhibit IV: Return and Standard Deviation of BSE Sensex (1999-2007)
Exhibit V: Return and Standard Deviation of BSE Sensex (2002-07)
Exhibit VI: Return and Standard Deviation of BSE Sensex (April 2004 - March 2007)
Exhibit VII: Return and Standard Deviation of BSE Sensex (April 2005 - March 2007)
Exhibit VIII: Return and Standard Deviation of BSE Sensex (April 2006 - March 2007)

BSE Training Institute

A Division of Bombay Stock Exchange Ltd.
Launches a Two Days Practical Weekend Programme
On
Equity Portfolio Structuring and Stock Analysis
Integrating Intellect with Instinct

Dates: 26 and 27 November 2010 (Friday and Saturday)

Timing: 9.30 am to 5.30 pm
Mumbai Venue: BSE Training Institute, 19th Floor, Centre - 1, Bombay Stock
Exchange
Ltd., P. J. Towers, Dalal Street, Mumbai - 400 001
Programme Objective:
Peter Lynch
§ Compute Returns and Risk
§ Risk Profiling…Objectives & Constraints
§ Create a Strategic or Tactical or Integrated Portfolio on basis of Investor Risk
Profile
Key Highlights of the Programme:
Programme consists of Fundamental Modules
Module 1: Market Dynamics
Sensex Valuation…. FII Impact…. Liquidity, Sentiment, Momentum, Value….
Decoupling
Theory…. Corporate Earnings…. Global Cues…. Liberalization, Privatization and
Globalization…Leveraging the India Story…..Derivative Play…India Vision 2025

Benefits of Attending the Programme:

Participants will be able to
§ Appreciate that Wealth of Mind and Wealth of Money must move in tandem
§ Strengthen Micro and Macro Perspectives to help form Investment Strategies
§ Assess their Risk Profile and Construct an Equity Portfolio true to it
§ Understand Risk and Return and the Trade Off
§ Interpret Financial & Other Information to subjectively and objectively Analyse
&
Value Stocks
§ Think rationally and logically to avoid making Investment Mistakes
§ Interact actively with Faculty and a wide spectrum of participants
§ Apply Theory to Practice and Academics to Action
Who Should Attend?
All those who believe in the sustainable INDIA Story and want to leverage on it
through
Equity Investments in the Primary and Secondary Markets and manage the Risks
associated with such Investments
In short…all those who are
· Already Investing and Trading in Equity
· Advising others to Invest and Trade in Equity
· Managing Equity Funds for Clients
· Eager to Invest in Equity but are skeptical about the Integrity of Operations and
Integrity of Advice
These should include…..
Equity Investors: Small Retail, High Net Worth, NRIs, Corporates, FIIs, Banks
& Other
Financial Institutions
Capital Market Intermediaries:
Stock Brokers (Directors, Employees, Franchisees, Associates, Remisiers, Sub
brokers),
Independent Financial Advisors & Employees of Mutual Funds, Financial Planners,
Investment Strategists, Portfolio Managers, Business Journalists, Research
Analysts,
Equity Advisors and other financial intermediaries
Students: Those pursuing Business, Commerce, Insurance, Finance, Equity,
Management studies at all levels
Course Fees: Fees Rs. 9000 Per Participant Plus 10.30 % Service Tax, as
applicable.
Includes participant’s kit, refreshments & lunch and participation certificate.
YOU MUST REGISTER TODAY
Simple ways to register or to make an enquiry
Website: www.bseindia.com
E-mail: training@bseindia.com
Course Coordinator: Mr. Vispi Rusi Bhathena, Manager, BSE Training Institute
Phone: 022 - 6136 3155, 2272 8303
Fax: 022 - 2272 3250
By Post: BSE Training Institute, Bombay Stock Exchange Ltd., 18th & 19th Floor,
P. J.
Towers, Dalal Street, Mumbai – 400 001

A Paper on
"Risk - Return Relationship & the effect of
Diversification
on Unsystematic Risk using Market Index Model"

Introduction:

"Sometimes your best investments are the ones you don't make." This is a maxim
which best explains the complexity of making investments. There are many
investment avenues available for investors today. Different people have different
motives for investing. For most investors their interest in investment is an
expectation of some positive rate of return. But investors cannot overlook the fact
that risk is inherent in any investment. Risk varies with the nature of return
commitment. Generally, investment in equity is considered to be more risky than
investment in debentures & bonds. A closer look at risk reveals that some are
uncontrollable (systematic risk) and some are controllable (unsystematic risk). Risk
can be categorized into two types:
The risk that cannot be diversified away like interest rate risk and recession is known
as systematic risk. Unsystematic risk is stock specific and can be diversified away.
Scarcities in raw material supply, labour strike, and management inefficiency are all
problems specific to a company and are internal in nature. These negative factors
can make the share price fall sharply but can be avoided if well thought. An
investment in the shares of certain other companies with sound management can
help minimize this risk. Therefore diversification is the mantra for any prudent
investor. Diversification is done in many ways. Investors can diversify across one
type of asset classification - such as equities or among different asset classes such
as stocks, bonds, fixed income and bullion etc. But the question to be answered is:
How many stocks help diversify unsystematic risk? Theory suggests that 18-20
stocks in a portfolio helps to reduce unsystematic risk. But again, tracking 18-20
stocks becomes cumbersome for investor. Whatever be the number of stocks, it is an
undeniable fact that Diversification helps reduce unsystematic risk. This paper stands
to investigate the effect of diversification on unsystematic risk by applying Sharpe's
Single Index Model and also analyzes the relationship between return & risk.

Research Objective:

The broad objective of the paper is to examine whether unsystematic risk declines
with diversification. Also effort has been made to find out the extent of correlation
between portfolio return and risk i.e. the relationship between portfolio's beta &
expected return. The analysis also makes an attempt to find out whether stocks with
high beta values give high return to investors. For research purpose, 30 securities of
the companies comprised in BSE Sensex between the period April 2006 to March
2007 has been selected

Sharpe's Single Index Model

The major assumption of Sharpe's single-index model is that all the covariation of
security returns can be explained by a single factor. This factor is called the index,
hence the name "single-index model." One version of the model, called the market
model, uses a market index such as the BSE Sensex as the factor (any factor that
influences security returns can serve as the index).

Methodology used.
 The data consists of daily closing prices of BSE- Sensex for the period from April
2006 to March 2007. For study purpose, inorder to calculate Return on stock, Return
on market index (BSE Sensex), and Expected Return on securities and portfolios it is
assumed that market will give 15 percent annual return.

Portfolio Return and Risk

TABLE

Portfolio Stocks Var.st B1 Alpha Syst. rick Unsy-stam Cor.Co. (1-R2) Exp. Ret.
B1 2ox2 atic ei2 eff. R2 E(R)
P1 15 2.75 0.88 -.02 .02 2.72 0.47 0.53 0.13
P2 15 3.14 1.12 -0.05 0.04 3.10 0.56 0.44 0.14

The above table shows the statistical summary of two portfolios constructed on the
basis of beta value of thirty stocks. P1 is low market risk portfolio and high market
risk portfolio is P2. Total risk of P1 is low as compared to P2. The expected return is
consistent with its market risk. If invested in P1 can realize 13% annual return
whereas investment in P2 offers 14% annual return. Therefore it is evident that with
diversification as a tool unsystematic risk can be minimized. As per the investor's
risk appetite portfolio can be constructed. To conclude, several vaccinations are
needed to protect one's portfolio from vagaries of market. "DIVERSIFICATION" which
is much talked about but seldom practiced can be the right tool for any investor. So
all investors in order to counter unsystematic risk vaccinate your portfolios with
diversification.

REFERENCES

1. Srinivasans : "Testing of capital Asset pricing. Model in Indian

Environment," Decision.
2. Dhankar, R.S. : (i)'An Empirical Testing of Capital Asset pricing Model in the
Indian context'. Journal of financial management and
Analysis. July-Dec., 1996.
(ii)Dhankar, R.S. A New look at the criteria of performance
Measurement for Business Enterprises in India : A study of
public sector undertakings, Finance India, March 1988.
3. Dhankar, R.S. and Singh, R. : Arbitrage pricing Theory and the Capital Asset Pricing Model
Evidence from the Indian stock Market, Journal of Financial
Management and Analysis, Jan-June.2005.
4. Sehgal, S. : 'An Empirical Testing of Three Parameter Capital Asset Pricing
Model in India', Finance India.
5. Klemlosky, R.C. and Martin J.D. : 'The Effect of Market Risk on Portfolio Diversification', The
Journal of Finance.
6. R.S. Dhankar and Rakesh : 'Risk return relationship and Effect of Diversification Non
Kumar Market Risk Application of Market Index Model in Indian
Stock Market', The Journal of Finance, 2007
7. Kent Womack and Ying : 'Understanding Risk and Return, the CAPM, and the Fama-
Zhong French Three Factor Model, Tuck School of Business at
Dartmouth.
Acknowledgement

It's a matter of pleasure to have our article published in the management website
indianmba.com. We would like to express our gratitude to all those who gave us the
possibility to complete this article. We want to thank the Dean & Director of IBMR
Dr.R.K.Balyan for being a constant source of inspiration and Prof.Kavita Sharma for
stimulating us.

Risk Management
Nature of Risks

Reduction and Control of Risks

• Know Your Client Scheme

• Database of lost , Stolen , Misplaced Securities
• Client Caution Database
• Verification of shares at members office
• Inspection

Integrated Comprehensive Insurance Policy for Members

Property Insurance Policies

Nature of Risks:

The Exchange has been exposed to a large number of risks, which have been inherently borne
by the member brokers for all times. Since the introduction of the screen based trading the nature
of risks to which the members of the Exchange are exposed to has undergone radical
transformation. At the same time the inherent risk involved with the trading of paper based
securities still remains. Though the process of dematerialisation has already begun, till such that
it is made compulsory in all scrips, the risk of trading in fake/forged shares and instances of loss
of shares etc. will continue to exist. The safe custody of these shares in physical form in the
Exchange as well as in the member brokers offices is of prime importance.

The Risks can be classified as under:

1. Risks associated with Paper Based Trading

o Lost/misplaced securities
o damage to securities
o loss of securities in transit
2. Client Risk
o Client default
o Client absconding
 o Fake/ forged/stolen securities introduced by the clients

Reduction and Control of Risks:

As a measure of the pro-active risk control several measures have been initiated by the
Exchange to reduce the risks to which the Exchange and the member brokers are exposed. In
this regard the Exchange has initiated the following measures:

1. Know Your Client Scheme :

Under the procedure the member brokers of the Exchange are compulsory required to obtain
detailed information of clients prior to commencement of any transactions for new clients. A
similar procedure is also to be followed for existing clients. This information is to be made
available to the Exchange authorities whenever called for. In case the member brokers fails to
furnish the same it is viewed seriously

2. Database of lost , Stolen , Misplaced Securities :

The Exchange maintains a database on all the shares that have been reported as lost, stolen,
duplicate etc. by the Companies / registrars. The information available through the database is
time relevant thus the database is modified on a regular basis and is downloaded by the
members through BOLT on a weekly basis. This database is also provided to the Clearing House.
The member brokers can thus reduce the instances of delivery of shares that have been reported
by the Company as bad delivery by checking all the deliveries in their office with the database
provided. The Exchange has designed and developed a software module for the above for the
benefit of the members.

The Clearing House also uses the database. At the time of pay-in the members of the Exchange
are required to submit the details of the shares being deposited in the pay-in in a softcopy in a
prescribed format.. These details are checked against the database and a report is generated in
case a match is found. Such shares are then reported as bad delivery in the Exchange. Further
follow-up is done with the delivering broker and they are directed to lodge a police complaint
against the client introducing the stolen shares.

3. Client Caution Database :

The Risk Management department in conjunction with the Bad Delivery Cell of the Exchange, the
Exchange has designed and developed a client database. All member brokers whose clients /
sub-brokers have introduced fake / forged shares are required to lodge a FIR / Police complaint
against their clients and also report the same to the Exchange. The information of such clients is
called for in a prescribed format. As per the scheme the members have to collect detailed
information about the clients. These details are incorporated in the database, which is
downloaded to the members, as a precautionary measure. The member brokers at the time of
admitting new clients can refer to the client caution database for further verification.

4. Verification of shares at members office :

The Risk Management Committee has outlined a process for minimizing the risks arising out of
Fake/ forged /stolen shares introduced by the clients of the member brokers.
As per the procedure outlined issued by the Exchange, in case the transaction in a script with one
particular client in a settlement exceeds Rs. 10 lakhs then the member brokers are required to
send the photocopies of the transfer - deeds and the share certificates to the Company /
Registrar for verification of the material particulars. The members can select a random sample for
the same from the lot. A similar procedure should also be followed in case the shares worth more
than Rs. 10 lakhs are received from the Clearing House during pay-out in one scrip.

The basic idea behind the introduction of this procedure is to prevent Fake/ forged/stolen shares
from being introduced in the market. The Exchange issued a notice outlining the procedure to be
followed. The above procedure is an important Risk Management Tool especially where there
exists a large volume of deliveries. The Risk Management Department acts as a facilitator in this
regard and has written to all "A" group and B1 group companies in this regard seeking their co-
operation.

5. Inspection :

The department is carrying out inspection of the member brokers records as regards compliance
of the risk management procedures.

About ICCL
Indian Clearing Corporation Limited ("ICCL") has been promoted by Bombay Stock Exchange Ltd ("BSE")
as its 100% owned subsidiary company, inter alia, to function as a Clearing Corporation. At present, ICCL
undertakes clearing and settlement services for the Mutual Funds Segment and Corporate Debt Segment of
BSE. ICCL also undertakes clearing & settlement functions of the Currency Derivatives Segment of United
Stock Exchange of India Limited ("USE")

Risk Management in ICCL

ICCL has a well designed and robust Comprehensive Risk-Management Framework which, inter alia,
includes computation and collection of various types of margins, Collateral Management etc. for the
Currency Derivatives Segment of USE.

Collateral requirements for ICCL-USE Clearing Members

• Minimum Liquid Networth

The Clearing Member’s liquid net worth after adjusting for the initial margin and extreme loss
margin requirements must be at least Rs. 50 Lakhs at all points in time. Accordingly, every Clearing
Member is required to maintain a minimum liquid networth of Rs. 50 lakhs in the prescribed
proportion (i.e. Rs. 25 lakhs in cash and balance Rs.25 lakhs in form of cash, cash equivalent or
non-cash equivalent) with ICCL.
• Liquid assets
The liquid assets for trading in currency futures are to be maintained separately in the Currency
Derivatives Segment.
• Composition of liquid assets
Clearing Members of the Currency Derivatives Segment may deposit liquid assets in the form of
 cash and cash equivalent i.e. Fixed Deposit Receipts, Bank Guarantees of the Schedule
Commercial Banks, approved Government Securities and Treasury Bills and non-cash equivalent
i.e. approved securities and in any other form of collateral as may be prescribed by ICCL from time
to time. List of approved securities is available on the website (www.bseindia.com).
The cash/cash equivalent component should be at least 50% of the total liquid assets. In other
words, non-cash component in excess of the total cash component is not considered as part of
Total Liquid Assets for trading/exposure purpose.
The norms in respect of liquid assets i.e. composition of liquid assets, types of liquid assets,
applicable haircuts, single bank and single issuer exposure limits, etc. are mutatis mutandis
applicable from the Equity Derivatives Segment.

Best Stocks to Buy - Stock Market Investment of 2011 and 2012

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Technical Analysis of Indian stock market BSE Sensex

Index :
The BSE SENSEX is not only scientifically designed but also based on globally accepted construction
and review methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks
representing a sample of large, liquid and representative companies. The base year of SENSEX is
1978-79 and the base value is 100. The index is widely reported in both domestic and international
markets through print as well as electronic media.

Technical Analysis of Indian stock market BSE Sensex Index

The Index was initially calculated based on the "Full Market Capitalization" methodology but was
shifted to the free-float methodology with effect from September 1, 2003. The "Free-float Market
Capitalization" methodology of index construction is regarded as an industry best practice globally.
All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float
methodology.
Due to is wide acceptance amongst the Indian investors; SENSEX is regarded to be the pulse of the
Indian stock market. As the oldest index in the country, it provides the time series data over a fairly
long period of time (From 1979 onwards). Small wonder, the SENSEX has over the years become
one of the most prominent brands in the country

1 Day Technical Analysis Chart of Indian stock market BSE Sensex Index

5 Day Technical Analysis Chart of Indian stock market BSE Sensex Index

1 Year Technical Analysis Chart of Indian stock market BSE Sensex Index

FAQ's
Q.1 What is SENSEX?
The SENSEX, short form of the BSE-Sensitive Index, is a "Market Capitalization-Weighted" index of
30 stocks representing a sample of large, well-established and financially sound companies. It is the
oldest index in India and has acquired a unique place in the collective consciousness of investors.
The index is widely used to measure the performance of the Indian stock markets. SENSEX is
considered to be the pulse of the Indian stock markets as it represents the underlying universe of
listed stocks at The Stock Exchange, Mumbai. Further, as the oldest index of the Indian Stock
market, it provides time series data over a fairly long period of time (since 1978-79).

Q.2 What are the objectives of SENSEX?

The SENSEX is the benchmark index of the Indian Capital Markets with wide acceptance among
individual investors, institutional investors, foreign investors and fund managers. The objectives of
the index are:
a)To measure market movements
Given its long history and its wide acceptance, no other index matches the SENSEX in reflecting
market movements and sentiments. SENSEX is widely used to describe the mood in the Indian
Stock markets.

b)Benchmark for funds performance

The inclusion of blue chip companies and the wide and balanced industry representation in the
SENSEX makes it the ideal benchmark for fund managers to compare the performance of their
funds.

c) For index based derivative products

Institutional investors, money managers and small investors all refer to the SENSEX for their
specific purposes The SENSEX is in effect the proxy for the Indian stock markets. The country's first
derivative product i.e. Index-Futures was launched on SENSEX

Q.3 What are the criteria for selection and review of scrips for the
SENSEX?
A. Quantitative Criteria:

1) Market Capitalization:
The scrip should figure in the top 100 companies listed by market capitalization. Also market
capitalization of each scrip should be more than 0.5 % of the total market capitalization of the Index
i.e. the minimum weight should be 0.5 %. Since the SENSEX is a market capitalization weighted
index, this is one of the primary criteria for scrip selection. (Market Capitalization would be
averaged for last six months)

2) Liquidity:
(i) Trading Frequency: The scrip should have been traded on each and every trading day for the last
one year. Exceptions can be made for extreme reasons like scrip suspension etc. (ii) Number of
Trades: Number of Trades: The scrip should be among the top 150 companies listed by average
number of trades per day for the last one year. (iii) Value of Shares Traded: Value of Shares
Traded: The scrip should be among the top 150 companies listed by average value of shares traded
per day for the last one year.

3) Continuity:
Whenever the composition of the index is changed, the continuity of historical series of index values
is re-established by correlating the value of the revised index to the old index (index before
revision). The back calculation over the last one-year period is carried out and correlation of the
revised index to the old index should not be less than 0.98. This ensures that the historical
continuity of the index is maintained.

4) Industry Representation:
Scrip selection would take into account a balanced representation of the listed companies in the
universe of BSE. The index companies should be leaders in their industry group.

5) Listed History:
The scrip should have a listing history of at least one year on BSE.

B. Qualitative Criteria:

Track Record:
In the opinion of the Index Committee, the company should have an acceptable track record.
Q.4 What is the beta of SENSEX scrips?

Beta measures the sensitivity of a scrip movement relative to movement in the benchmark index
i.e. SENSEX. A Beta of one means that for every change of 1% in index, the scrip moves by 1%.
Statistically Beta is defined as: Covariance (SENSEX, Stock )/ Variance(SENSEX)
Note: Covariance and variance are calculated from the Daily Returns data of the SENSEX and
SENSEX scrips

Q.5 How is SENSEX calculated?

SENSEX is calculated using a "Market Capitalization-Weighted" methodology. As per this
methodology, the level of index at any point of time reflects the total market value of 30 component
stocks relative to a base period. (The market capitalization of a company is determined by
multiplying the price of its stock by the number of shares issued by the company). An index of a set
of a combined variables (such as price and number of shares) is commonly referred as a 'Composite
Index' by statisticians. A single indexed number is used to represent the results of this calculation in
order to make the value easier to work with and track over time. It is much easier to graph a chart
based on indexed values than one based on actual values.

The base period of SENSEX is 1978-79. The actual total market value of the stocks in the Index
during the base period has been set equal to an indexed value of 100. This is often indicated by the
notation 1978-79=100. The formula used to calculate the Index is fairly straightforward. However,
the calculation of the adjustments to the Index (commonly called Index maintenance) is more
complex.

The calculation of SENSEX involves dividing the total market capitalization of 30 companies in the
Index by a number called the Index Divisor. The Divisor is the only link to the original base period
value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all
Index maintenance adjustments. During market hours, prices of the index scrips, at which latest
trades are executed, are used by the trading system to calculate SENSEX every 15 seconds and
disseminated in real time.

Q.6 How is the closing Index calculated?

The closing SENSEX is computed taking the weighted average of all the trades on SENSEX
constituents in the last 15 minutes of trading session. If a SENSEX constituent has not traded in the
last 15 minutes, the last traded price is taken for computation of the Index closure. If a SENSEX
constituent has not traded at all in a day, then its last day's closing price is taken for computation of
Index closure. The use of Index Closure Algorithm prevents any intentional manipulation of the
closing index value.

Q.7 How is the routine maintenance of SENSEX carried out?

One of the important aspects of maintaining continuity with the past is to update the base year
average. The base year value adjustment ensures that additional issue of capital and other
corporate announcements like bonus etc. do not destroy the value of the index. The beauty of
maintenance lies in the fact that adjustments for corporate actions in the Index should not per se
affect the index values.

The Index Cell of the Exchange does the day-to-day maintenance of the index within the broad
index policy framework set by the Index Committee. The Index Cell takes special care to ensure
that SENSEX and all the other BSE indices maintain their benchmark properties by striking a
delicate balance between high turnover in Index scrips and its representative character. The Index
Committee of the Exchange has experts from different field of finance related to the capital
markets. They include Academicians, Fund-managers from leading Mutual Funds, Finance -
Journalists, Market Participants, Independent Governing Board members, and Exchange
administration.
Q.8 How are adjustments for Bonus, Rights and newly issued Capital
carried out in SENSEX?
The arithmetic calculation involved in calculating SENSEX is simple, but problem arises when one of
the component stocks pays a bonus or issues rights shares. If no adjustments were made, a
discontinuity would arise between the current value of the index and its previous value. The Index
Cell of the Exchange periodically adjusts the base value to take care of such corporate
announcements.
Adjustments for Rights Issues:
When a company, included in the compilation of the index, issues right shares, the market
capitalisation of that company is increased by the number of additional shares issued based on the
theoretical (ex-right) price. An offsetting or proportionate adjustment is then made to the Base
Market Capitalisation (see ' Base Market Capitalisation Adjustment' below).
Adjustments for Bonus Issue:
When a company, included in the compilation of the index, issues bonus shares, the market
capitalisation of that company does not undergo any change. Therefore, there is no change in the
Base Market Capitalisation, only the 'number of shares' in the formula is updated.
Other Issues: Base Market Capitalisation Adjustment is required when new shares are issued by
way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-
back of shares, corporate restructuring etc.
Base Market Capitalisation Adjustment: The formula for adjusting the Base Market
Capitalisation is as follows:

New Base Market Capitalisation = Old Base Market Capitalisation X (New Market Capitalisation/Old
Market Capitalisation)

To illustrate, suppose a company issues right shares which increases the market capitalisation of
the shares of that company by say, Rs.100 crores. The existing Base Market Capitalisation (Old
Base Market Capitalisation), say, is Rs.2450 crores and the aggregate market capitalisation of all
the shares included in the index before the right issue is made is, say Rs.4781 crores. The "New
Base Market Capitalisation " will then be: Rs.2501.24 crores = 2450 X (4781+100)/4781

This figure of 2501.24 will be used as the Base Market Capitalisation for calculating the index
number from then onwards till the next base change becomes necessary.

Q.9 With what frequency is SENSEX calculation done?

During market hours, prices of the index scrips, at which trades are executed, are automatically
used by the trading computer to calculate the SENSEX every 15 seconds and continuously updated
on all trading workstations connected to the BSE trading computer in real time.

Technical Analysis, Trend Analysis, Support and Resistant levels of the Indian
Stock Market BSE Sensex Index

Stock charts gained popularity in the late 19th Century from the writings of Charles H.
Dow in the Wall Street Journal. His comments, later known as "Dow Theory", alleged that
markets move in all kinds of measurable trends and that these trends could be deciphered and
predicted in the price movement seen on all charts.
FUNDAMENTAL ANALYSIS seeks to determine future stock price by understanding and
measuring the objective "value" of an equity. The study of stock charts, known as TECHNICAL
ANALYSIS, believes that the past action of the market itself will determine the future course of
prices.

A stock chart is a simple two-axis (x-y) plotted graph of price and time. Each individual
equity, market and index listed on a public exchange has a chart that illustrates this movement of
price over time. Individual data plots for charts can be made using the CLOSING price for each day.
The plots are connected together in a single line, creating the graph. Also, a combination of the
OPENING, CLOSING, HIGH and/or LOW prices for that market session can be used for the data
plots. This second type of data is called a PRICE BAR. Individual price bars are then overlaid onto
the graph, creating a dense visual display of stock movement.