Portfolio Management using Fundamental and Technical Analysis

Running Head: PORTFOLIO MANAGEMENT 1
Portfolio Management using Fundamental and Technical Analysis

PORTFOLIO MANAGEMENT 2
Table of Contents
Introduction...........................................................................................................................................3
Literature Review..................................................................................................................................3
Rational and Methodology....................................................................................................................5
Result and Analysis................................................................................................................................9
Conclusion...........................................................................................................................................10
References...........................................................................................................................................12
Appendix 1 Fundamental Portfolio......................................................................................................14
Appendix 2 Technical Portfolio............................................................................................................14
Appendix 3 Portfolio 1 Valuation.........................................................................................................15
Appendix 4 Portfolio 2 Valuation.........................................................................................................15
Appendix 5 Stock Profits 1...................................................................................................................16
Appendix 6 Stock Profits 2...................................................................................................................16
Appendix 7 Final Return......................................................................................................................17
Appendix 8 Market Return..................................................................................................................17

PORTFOLIO MANAGEMENT 3
Introduction
Investment in stocks and portfolio management involves analysing different
parameters using various techniques. Fundamental analysis and technical analysis are two
most commonly employed methods for stock selection. The study of macro-economic data
and financial performance of an organization for evaluating the intrinsic value of a stock is
referred to as fundamental analysis (Krantz, 2016). On the other hand, technical analysis
involves examination of historical trends in stock movements and prediction of future prices
on the basis of past trends (Grimes, 2012). This report involves construction of two portfolios
of 10 stocks each. First portfolio is constructed on the basis on fundamental analysis and
other one is based on technical analysis. Apart from this report also discusses about the
efficient market hypothesis and behavioural finance. The report also gives view about the
conflict between the EMH and behavioural finance.
Literature Review
Stock selection and evaluation is commonly carried using various methods of
fundamental and technical analysis. This consists of analysis of past financial position of a
company and studying movements of price fluctuations of its stock. On the other hand,
efficient market hypothesis and behavioural finance add another dimension to stock selection
and their performance evaluation According to Efficient market hypothesis, stock prices
always reflect all the information that is available in the market and trade at their intrinsic
value. New information is transferred to all the investors without any cost and is randomly
distributed. Therefore passive investment strategy will be more effective than active
management. Behaviour finance believes that investors do not behave rationally and their
emotional biases affect their choices. Overconfidence, conservatism and risk aversion are
some of many such behavioural influences which affect market sentiments (Forbes, 2009).

PORTFOLIO MANAGEMENT 4
Overconfidence in markets leads excessive buying during market rally. Another
empirical evidence of irrationality of investors is that low price to earnings ratio companies
react more positively to good news than high P/E ratio companies (Byrne, 2008). Stock
market crashes in one part of the world affect investor sentiments in other regions. This was
particularly evident during global financial crisis of 2008 and dot com bubble, when market
crash in USA not only had an effect on neighbouring markets but also in markets of China,
Australia and other regions of the world. This was due to selling pressure which had built due
to negative news from USA. However, macro-economic conditions in these countries were
better than USA. This is purely because of irrational investor behaviour (Baker and
Nofsinger, 2010).
Various theories of finance lay their foundation on the basis of efficient market
hypothesis. Capital asset pricing model (CAPM) and modern portfolio theory which form the
basis of most of the investments are based on efficient market hypothesis. Efficient market
hypothesis has been useful in securities pricing. This is particularly true in the case of
shareholder appraisal cases and benefit plans for employees. According to EMH, investors
are assumed to rational and it is believed that markets are self-correcting. EMH also is
contrary to technical analysis and believes that it cannot be used to outperform the market.
Proponents of EMH argue that past prices and data cannot be used to predict future returns.
So a portfolio can outperform a market only by chance and past information is already
reflected in market (Harder, 2010).
There seems to be a conflict in ideologies of believers of EMH and behavioural
finance. EMH believes in superiority of market and rationality of investors. EMH also causes
no random price movements in the markets. Apart from stock market, EMH is also used in
other fields of finance such as construction of portfolio, dividends and efficiency of funding.
On the other hand, behaviour finance argues that prices of securities in markets are not the