Describe briefly the Dow Theory for technical analysis and how it classifies the market movements. Or Explain briefly the concept of the Efficient…

(a) Either The Dow Theory's purpose is to determine where the market is and where is it going, although not how far or high. The theory, in practice, states that if the cyclical swings of the stock market averages are successively higher and the successive lows are higher, then the market trend is up and a bullish market exists. Contrarily, if the successive highs and successive lows are lower, then the direction of the market is down and a bearish market exists. The Dow Theory is based upon the movements of two indices, constructed by Charles Dow, Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJTA). The movements of the market are divided into three classifications, all going at the same time:- (i) the primary movement, (ii) the secondary movement, and (iii) the daily fluctuations. The primary movement is the main trend of the market, which lasts from one year to 36 months or longer. This trend is commonly called bear or bull market. The secondary movement of the market is shorter in duration than the primary movement and is opposite in direction. It lasts from two weeks to a month or more. The daily fluctuations are the narrow movements from day-to-day. OR Markowitz has formalized the risk return relationship and developed the concept of efficient frontier using the Mean-Variance Dominance Principle. For selection of a portfolio, comparison between combinations of portfolios is essential. As a rule, a portfolio is dominating another portfolio in terms of mean and variance if there is another portfolio with: (a) A lower expected value of return and same or higher standard deviation (risk). (b) The same or higher standard deviation (risk) but a lower expected return. Markowitz has defined the diversification as the process of combining assets that are less than perfectly positively correlated in order to reduce portfolio risk without sacrificing any portfolio returns. If an investors' portfolio is not efficient he may: (i) Increase the expected value of return without increasing the risk. (ii) Decrease the risk without decreasing the expected value of return, or (iii) Obtain some combination of increase of expected return and decrease risk.