Advance Financial Management : Report
Added on 2020-07-23
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ADVANCE FINANCIALMANAGEMENT
TABLE OF CONTENTSIntroduction......................................................................................................................................1Literature review..............................................................................................................................1Rational and methodology...............................................................................................................1Results and analysis.........................................................................................................................2Figure 1Comparison chart of portfolios and index......................................................................2Conclusion.......................................................................................................................................3References........................................................................................................................................5APPENDIX......................................................................................................................................6
IntroductionInvestment is one of practice that is followed by each and every individual and corporate entity. Varied strategies that are developed in different time period by intellectual people are used by investors to makegain on investment (Van Deventer, Imai and Mesler, 2013). In current report different approaches that are considered for preparing portfolio will be discussed and on basis of same portfolio is developed. On analysis ofperformance of groups of stocks relative to index, underperformnace of portfolio is observed. However, in week 4, 9 and 11 portfolio that was developed by considering PE ratio and PB ratio beat market. In this regardspecific strategy was adopted which was very risky. Coresus PE ratio was 1.60 which was higher then average PE ratio of firms which is 1.24. Stock was overpriced and it was estimate that share price may furtherplunged in nearby weeks. Thus, in order to take advantage of fast growth and positive sentiments of investors heavy invesment was made on Centurion. This, hunch prove correct and good amount of gain made oninvestment in week 4 in fundamental analysis portfolio. In Week 7 we follow same strategy that we follow in earlier weeks. Moderate profit and less amount of loss was beared in shares of firm Boustead. Thus,consistently confidence maintained on it, as fundamentals like technical analysis does not changed. This strategy deliever exceptional result in week 9 and profit of 5052 earned. Thus, it can be said that strategy offocusing on specific shares by considering their profit generation potential lead to earning of good profit in these weeks.Literature reviewAccording to Borges, (2010) efficient market hypothesis is one of theory which state that it is impossible to beat market for portolio managers. Market is efficient and it accurately adjust accoriding to any newsthat comes in market. Means that no one can make additional gains by taking advantage of positive news. Mentioned theory state that stocks always trade at theie fair price and never overvalued or undervalued. Thoeryis one of controvercial topic and in its support and opposition there are number of scholars. In many nations of the world it is observed that share price erode at fast rate when index decline. In such kind of situation it isnot possible that all firms that constitute index give poor performance in their business and due to this reason share price decline suddenly. From this point of view EMH seems failed. Opposite to this Lee, Lee and Lee, (2010) practical application of EMH can be verified from the fact that whether index or market observed in bullish or bearish mode 98% stocks performance remain belowmarket. Thus, it is verified that investors can not additional gain on shares and can not beat market in terms of return gain on portfolio. It can be said that EMH apply but sometime conditions arise where its applicationis questionable.According to Camerer, Loewenstein and Rabin, (2011) behavioural finance is the new term which assume that emotions and thinking of individuals play vital role in formation of decisions. Behavioural financecover cognitive and behavioural theory. This theory believed that investors decisions are biased by overconfidence, conservatism and mental accounting etc. Just by viewing data and trends investors make decisions areconfident that they can beat market. By earning short term gain investor think that they beat market. Thus, consistently investor follow this strategy. It can be said that in this way investors challenge EMH theory andprove it incorrect.Contrary to this Baker, Singleton and Veit, (2011) state that by only viewing trends good amount of profit can not be gained on investment. This is because one can successfully apply strategy that is prepared asreflect by behaviour finance concept in short term. In long term such kind of gain can not be made. This is because trends also keeps on changing consistently and strategy that is effective in single time can not provebeneficial in other time. Thus, EMH proved and it reflect that investors can not beat market. There are number of investors that earn good amount of profit in long term because they keep an eye on market andfundamental of stocks. If market is declining then investors start selling their investments because in that situation it is not possible to beat market. They consider fundamentals of stock and on that basis determinewhether to keep stock in portfolio. If yes then in what quantity units of specific company shares must be in portfolio is determined. Thus, in this EMH is followed by investors to earn profit or minimize loss whenmarket declined consistently.Type of analysis Rational and methodologySpecific approach was follow to select companies for portfolio. It must be noted that in report two portfolios are prepared namely technical analysis and fundamental analysis portfolio. In case of technicalanalysis by using charts firms are taken in portfolio. Whereas, in fundamental analysis PE and PB ratios are considered. First of all chart of all 20 firms was prepared which are known as MACD (Moving averageconvergence divergence). Those firms whose MACD line was above signal line most of times are considerd for portfolio of technical analysis. Whereas, in case of fundamental analysis by taking in to account PE andPB ratio firms are selected.1 | P a g e
Technical theoriesDow theory: Dow theory is followed in portfolio construction as this theory state that there are two sort of trends in case of stocks which are known as primary and secondary trend (Brigham. and Ehrhardt,2013). Primary trend may be for one year or more and it may be in bearish and bullish or mix trend. On other hand, secondary trend refers to correction phase under which usually share price plunged at fast ratewhen it is in bullish mode but after reaching certain point share price erosion start which is second stage and by nearly around 30% or more share price decrease and after it again start moving upward (Nisar.and Hanif, 2012). This phase is known as correctiion phase. Mentioned theory is followed in the report and accordingly charts are interpreted. None of company is identified in correction stage or trend reversal.In this regard MACD and head and shoulder pattern charts are used. MACD reflect whether stock closing average price difference of 12 day and 24 day EMA is greater then 9 day moving average (MA) of thisprice difference (DRURY, 2013). On this basis entry and exit time is identified. On basis of head and shoulder pattern is analyzed. Best buying opportunity is identified and in this way use of these methods isjustified in the report.PE and PB ratio: PE ratio is the one of the most important concept which help investor in identifying whether shares are overvalued or undervalued. Usually industry PE ratio is used to identify whether sharesare overvalued. In this regard company PE ratio is compared with industry and on that basis valuation is done (Price earnings ratio, 2017). Most often undervalued shares are purchased by investors. In currentreport also PE ratio is used and under this instead of taking industry PE ratio average average PE by considering PE of all firms that are proposed to be taken in portfolio is computed. Each firm ratio iscompared with same of industry and on that basis firms are selected. In this way approach is justified. PB ratio of all stocks is low and due to this reason relevant firms are selected in the portfolio. Hence,approach is justified.Results and analysisFigure 1Comparison chart of portfolios and index100.020.040.060.080.10.120.140.120.080.01Chart TitleTechnical Analysis PortfolioFundamental Analysis PortfolioFTSE ST All-Share IndexFigure 2Comparison chart of portfolios and index2 | P a g e
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