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Security Analysis and Portfolio Management

DEEPAK SINGH

MBA 3RD SEM.RAI BUSINESS SCHOOL,

NEW DELHI

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TECHNICAL ANAYSIS

• DEFINITION: a form of security analysis that attempts to forecast price changes based on historical price and volume trends

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TECHNICAL ANAYSIS

• Two Groups of Strategies Used:1. Momentum and Contrarian Strategies

2. Moving Average and Trading Range Breakout

Strategies

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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

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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

Advantages of Technical Analysis

• Not heavily dependent on financial accounting statements– Problems with accounting statements:

1.Lack information needed by security analyst

2. GAAP allows firms to select reporting procedures, resulting in difficulty comparing statements from two firms

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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

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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

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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.

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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

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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

• Steps of Fundamental Analysis:

Economic Analysis::• GDP Growth rate• Changes in natural resources• Performance of agriculture Economic and

political stability• Inflation

• Corruption

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Industry Analysis:

• Industry Analysis • Product line• Raw material • Nature of demand • Labor• Government Policies related to that industry

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Company Analysis:

Company Analysis

• Marketing policies

• Accounting policies

• Profitability

• Dividend policy

• Capital structure

• Management Financial statement analysis

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