Security and port folio management
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This document discusses technical analysis and fundamental analysis approaches to security analysis and portfolio management. It defines technical analysis as attempting to forecast price changes based on historical price and volume trends. Two common technical analysis strategies discussed are momentum/contrarian strategies and moving average/trading range breakout strategies. Fundamental analysis involves economic, industry and company analysis to estimate a company's valuation, which is then compared to market prices for investment decisions. Key aspects of fundamental analysis covered include financial statement analysis and steps like economic, industry and company analysis.
Security and port folio management
- 1. Security Analysis and Portfolio Management DEEPAK SINGH MBA 3RD SEM. RAI BUSINESS SCHOOL, NEW DELHI 1
- 2. TECHNICAL ANAYSIS • DEFINITION: a form of security analysis that attempts to forecast price changes based on historical price and volume trends 2
- 3. TECHNICAL ANAYSIS • Two Groups of Strategies Used: 1. Momentum and Contrarian Strategies 2. Moving Average and Trading Range Breakout Strategies 3
- 4. TECHNICAL ANAYSIS 1. Momentum and Contrarian Strategies – METHDOLOGY: • examine the returns over a time period just ended to identify – momentum investors who seek out stocks recently rising in price for purchase; falling for sale – contrarians who follow the opposite strategy of most investors » contrarians base their strategy on the overreation theory 4
- 5. TECHNICAL ANAYSIS 2. Moving Average and Trading Range Breakout Strategies – MOVING AVERAGE STRATEGY: • calculate a moving average over the last 200 days of closing prices • divdied today’s closing price into the moving average (SHORT-TO-LONG RATIO) • if short-to-long ratio is greater than 1, buy • if ratio is less than 1, sell 5
- 6. Advantages of Technical Analysis • Not heavily dependent on financial accounting statements – Problems with accounting statements: 3.Lack information needed by security analyst 2. GAAP allows firms to select reporting procedures, resulting in difficulty comparing statements from two firms 6
- 7. Challenges to Technical Analysis • Assumptions of Technical Analysis – Empirical tests of Efficient Market Hypothesis (EMH) show that prices do not move in trends • Technical Trading rules – The past may not be repeated – Patterns may become self-fulfilling prophecies – A successful rule will gain followers and become less successful – Rules require a great deal of subjective judgement 7
- 8. Underlying Assumptions of Technical Analysis • Trading via technical analysis involve a number of assumptions about markets – The market value of any good or service is determined solely by the interaction of supply and demand – Supply and demand are governed by numerous factors, both rational and irrational 8
- 9. Technical Analysis vs. Fundamental Analysis • Technical analysis involves the development of trading rules based on past price and volume data for individual stocks and the overall stock market. • Fundamental analysis involves economic, industry, and company analysis that lead to valuation estimates for companies, which can then be compared to market prices to aid in investment decisions. 9
- 10. FUNDAMENTAL ANALYSIS • FINANCIAL STATMENT ANALYSIS – INTEGRAL PART OF FUNDAMENTAL ANALYSIS • it helps the analyst understand a firm’s current condition • where it is headed • what factors affect it • how the factors affect it 10
- 11. FUNDAMENTAL ANALYSIS • FINANCIAL STATMENT ANALYSIS – Review of Accounting Statements • includes a study of the three major statements prepared monthly by most accountants: – the balance sheet – the income statement – the statement of cash flows 11
- 12. • Steps of Fundamental Analysis: Economic Analysis:: • GDP Growth rate • Changes in natural resources • Performance of agriculture Economic and political stability • Inflation • Corruption 12
- 13. Industry Analysis: • Industry Analysis • Product line • Raw material • Nature of demand • Labor • Government Policies related to that industry 13
- 14. Company Analysis: Company Analysis • Marketing policies • Accounting policies • Profitability • Dividend policy • Capital structure • Management Financial statement analysis 14
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