Ratio between two investments (relative strength)

[Djobydjoba]

Hi Mark,

One thing I would like to have in FM is the ability to build calculated investments from other investments. In particular, the ability to create an investment from the ratio between one investment and an other. Or, at least, to see graphically this ratio (without the step to create a new investment, you're the master for the implementation here).

This is very useful in technical analysis to analyze the behavior of a stock, a sector, an index.. relatively to an (broader) index. It's generally called "relative strength", although the relative strength indicator refers also to something else as far as I know.

Here's two graphs from a technical rapport to illustrate the interest of ratio between investments :

relative strength.png (165.17 KiB) Viewed 2951 times

Thanks.

[Mark]

Hi Djobydjoba,

If you're using the Professional or Advisor versions you can make use of the command (new to 12.x): "File / File Operations / Create Investment from Portfolio...". This command takes the value of a sub-portfolio you select, and creates a new (or updates an existing) investment, where the daily price of that investment was the daily portfolio value of the sub-portfolio. Using this allows you to create weighted benchmarks, by weighting the investments in the sub-portfolio by value.

[Djobydjoba]

Hi Mark,

Thanks for your answer. The function Create Investments from Portfolio doesn't match the need however, because the aim here is not to create a composite index from a sub-portfolio, but to divide the prices of a investment by the prices of an other, and plot the resultant graph.

Consider a index investment : the MSCI ASIA, which is an global index for the asian area. The investment is created in FM, and the prices of this index are downloaded from Bloomberg.
Consider several index investments for the asian countries : Nifty (India), Hang Seng (Hong-Kong), Kospi (Korea), Jakata Composite (Indonesia), etc.. Here too, they are created in FM and the prices are downloaded.

Admit we want to invest in Asia, because the MSCI ASIA is in an upside trend. We have now to determine the countries that are in a good relative move in this area. This is the purpose of the relative strength, which is a ratio. For example, the relative strength of the Nifty versus MSCI Asian is :

Daily prices of Nifty / Daily prices of MSCI Asia

The graphical result of this ratio is very interesting. If the MSCI Asia is increasing and the Nifty is increasing too, but the relative strength is decreasing, this means the relative contribution of the Nifty to the MSCI trend is fading. On the contrary, if the relative strength is growing, this means that the contribution of the Nifty to the MSCI upside trend is growing, and that the country is in a good momentum (for example in a catch-up phase).

So to choose the asian countries to invest, the ratio "Daily prices of the index of the country" / "Daily prices of MSCI Asia" is an effective, straightforward, and intuitive indicator.

It can be used in many situations, when we want to compare an investment to a broader index :
Relative strength of the US utilities sector : Daily prices of S&P Utilities Index / Daily prices of S&P500 (graph in the first post)
Relative strength of Apple versus Nasdaq : Daily prices of Apple / Daily prices of Nasdaq
Etc...

I'm not a specialist of relative strength, I couldn't go further in the explanations. What I would is simply a ratio between an investment and another investment (its broader index), as the graphical evolution of this ratio is a very useful indicator. As you can see in the graphs above, it is possible to do graphical analysis (supports and resistances) with this ratio.

I think it would be a very good addition to FM : implement the ability to create an investment from the ratio of two others investments. Perhaps the function Create Investments from Portfolio could be extended in this way ?

Here some links I found about relative strength (which is not the RSI : Relative Strength Index) :

http://www.investopedia.com/ask/answers ... rength.asp
http://www.investopedia.com/terms/r/rel ... rength.asp
http://www.chartmill.com/documentation. ... 20Strength

[Mark]

Hi Djobydjoba,

Thanks for the clarification and information. I understand what you're looking for now. This would be a nice enhancement.