Modern Portfolio Theory and Investment †Free Samples to Students

Question: Discuss about the Modern Portfolio Theory and Investment Management. Answer: Introduction: This report emphasize about the fundamental and technical analysis. For preparing this report, various companies have been taken into the context to prepare two portfolios. For preparing the portfolios 2 technique has been taken into the consideration which are technical analysis and fundamental analysis. The top FTSE companies have been analyzed and 20 companies have been chose from them to make 2 portfolios. Firstly, technical analysis has been taken into consideration to prepare the first portfolio and second portfolio has been prepared after conducting the fundamental analysis over that. Both the methods are quite crucial to make a better decision about the investment in stocks. Technical analysis study considers the demand and supply of stocks and makes investment decision on the basis of demand and supply at the same time fundamental analysis considers the financial statement and various changes into the company in a particular period and makes a better decision accordingly about the investment in the security management. In fundamental analysis, worth of business is the main concern whereas in technical analysis, stock price is the main concern of the portfolio managers and the investors. EMH (Efficient Market Hypothesis) is a theory which is supported by the random walk theory. In this theory, stock prices are the main concern of the investors to analyze and make a decision about the stocks and a portfolio. According to this theory, the hypothesis is made by the investors according to the current market price. The random walk theory depict that investors only look over the current stock price of the company. This theory says that only current stock prices are reflected in the news and the changes in the stock prices are independent. In addition, this theory depict that the changes in the stock price are quite normal and impulsive. According to the result, the prices of the stock are only reflected over the current news and information. Although the unaware investors still trades according to the market prices and also ignores the current trends and only look over the rate of return. Schlichting (2013) has depicted in his research that the stock prices fluctuations are independent and probability distribution is also similar. Normally stock prices are unpredictable and random. Phillips and Stawarski (2016) has argued that the capital market and the shares might be only recognized as an arbitrary in which a coin is tossed while it has been depicted by Madura, (2014) into a study that share prices mainly explain about the theory of random walks throughout a period: it has been found that the changes in the stock prices are hasty as they take place just in the reaction to genuinely analyze the new information which are currently new. Additionally, behavioural Finance have been studied and found that this theory depicts that the investors make decision by influencing through their individual behaviour. Basically, this theory has been derived from the psychosomatic principles to make a better decision. Normally, investors make a decision through using their behaviour such as changes into one market would affect over the international market as well. Cognitive psychology affects this theory that explains about the making process of and also explains the investors about the economics of financial market (Kurth, 2013). Behavioral finance concept mainly focuses over the interpretation of shareholders and proceeds according to the information to make decision about the informed investment management. Palicka, (2011)s study depicts that Investors do not always act in a standard, conventional and an unbiased manner. Behavioral finance concept depicts about an accent upon investors behavior which leads to a selection of ma rket indiscretion. Krantz, (2016) has depicted into his study that Behavioral Finance is just a psychological study that how the behavior makes an impact over the investors decision as well as the capital market. According to Kinsky, (2011), this concept is quite good concept to take a better decision. Further it has been depicted by Elton et al, (2009) that this study of Behavioral finance is the psychologys pressure on the behavior of practitioner in context of finance and the consecutive effect over the financial markets. More it has been investigated that some belongings of finance are probably depends over the shareholders which are quietly less balanced behavior and it directly outcome from psychosomatic variables, prejudices and heuristics. It has been observed through study over both the theories and investment analysis technique that fundamental and technical both the theories are quite different from each other and thus both are crucial in their own way (Baker and Nofsinger, 2010). Usually, it has been analyzed that if the investors want to make investment for a long time than they take the help of fundamental analysis and analyze every single factor of the company whereas if the investors want to make investment for a short time than they take the help of technical analysis and only look over the stock price of the company (Ackert and Deaves, 2009). It has been observed through a study that all the models are quite diverse in nature but somehow they are connected to each other and help the investors to make a better decision about the performance of the company and make a decision about the investment in the stock or not. Both the techniques are quite important for the inventors and EMH and behavioral finance affects the decision of the investors to invest or not to invest into the stock of the company. Rational and methodology: For preparing the portfolio, 20 companies have been analyzed according to the technical and fundamental basis and 2 portfolios have been prepared accordingly. First portfolio has been prepared after analyzing the stock according to the technical analysis and at the same time second portfolio has been prepared after analyzing the stock according to the fundamental analysis. Firstly, technical analysis has been taken into consideration to prepare the first portfolio and second portfolio has been prepared after conducting the fundamental analysis over that. Both the methods are quite crucial to make a better decision about the investment in stocks. Technical analysis study considers the demand and supply of stocks and makes investment decision on the basis of demand and supply at the same time fundamental analysis considers the financial statement and various changes into the company in a particular period and makes a better decision accordingly about the investment in the security. In fundamental analysis, worth of business is the main concern whereas in technical analysis, stock price is the main concern of the portfolio managers and the investors. Both the portfolios which have been made according to the fundamental and technical analysis are connected to each other somehow. Fundamental analysis look over the stocks selection which are mainly focuses over the financial performance of the company while the technical analysis look over the share price while selecting the stock. For this report paper, it has been analyzed that the performance of the CapitaLand Limiteds stock are quite strong and the P/E ratio of the company is 22.66% (Yahoo finance, 2017). Further, various other stocks have also been analyzed to prepare the portfolio as well as trading the share in the market (Yahoo finance, 2017). Thus, it has been found that both the technical and fundamental analysis has been focused to select the best stocks (Palicka, 2011). It has been observed that the option of choosing both the methods of stock selection are better the outcome is quite significant. Therefore, in this report, 2 portfolios have been made where every portfolio includes 10 stocks which are based on technical and fundamental analysis. Analysis of one Stock from Fundamental Portfolio For conducting the fundamental analysis, PE multiple model and dividend discount model have been used as both the techniques are quite appropriate and significant for the company. For this report, Courts Asia Limited has been taken into the context to analyze the stock: Dividend discount model has been taken into the context to calculate the intrinsic value of the stock by analyzing the expected dividend. Intrinsic value of firm is as below: Dividend Discount Model Dividend expected 0.08 Growth rate 5% Discount rate 5.26% Intrinsic Value 30.67 Through the analysis over the courts Asia limited, it has been observed that intrinsic value of the company is SGD 30.67 which has been investigated after applying the DDM (Madura, 2014). Further, the current market price of stock is SGD 25.68 (Yahoo finance, 2017). Thus it has been found that the stock is undervalued. PE Multiple Model PE multiple models have been taken into the context to calculate the intrinsic value of the stock. Intrinsic value of firm is as below (Madura, 2014): PE Multiple Model Industry PE ratio 20.00 EPS of Courts Asia Limited 1.50 Intrinsic Value 30.00 Through the analysis over the courts Asia limited, it has been observed that intrinsic value of the company is SGD 30 which has been investigated after applying the PE multiple model (Madura, 2014). Further, the current market price of stock is SGD 25.68 (Yahoo finance, 2017). Thus it has been found that the stock is undervalued. Analysis of a Stock from Technical Portfolio For conducting the technical analysis, line chart and moving average model have been used as both the techniques are quite appropriate and significant for the company. For this report, Chip Eng Send Corporation limited has been taken into the context to analyze the stock: Through the line chart over the Chip Eng Seng Corporation Ltds stock price, it has been found that the stock price of the company is quite fluctuate and currently the share price of the company is enhancing and thus it is a good option for the investors to invest into the stock of this company. Further, the moving average model has been analyzed over the Chip Eng Seng Corporation Ltds stock price, it has been found that the stock price average of the company is 0.72664 and currently the share price of the company is quite good and thus it is a good option for the investors to invest into the stock of this company. Activities in Fundamental Portfolio In fundamental portfolio, 2 trades have taken place. Under 1st activity, Star Hub Ltds 1000 shares have been traded at the rate of S$2.81 per share on June 30, 2017. The stock of Star Hub Ltd has been taken into the context as the stock price of the company was on peak and thus the profits of the company could be maximum. More, in 2nd activity, courts Asia limiteds 4697 shares had been purchased on august 22, 2017 at the rate of SGD $0.455 (Appendix). The total profit of the investor which has been got through selling the shares of Start hub limited has been used in buying the shares of courts Asia limited. In technical portfolio, 2 trades have taken place. Under 1st activity, OUE Ltds 1000 shares have been traded at the rate of S$0.57 per share on June 30, 2017. The stock of OUE Ltd has been taken into the context as the stock price of the company was quite less and thus the profits of the company could be maximum. More, in 2nd activity, Chip Eng Seng limiteds 800 shares had been sold on august 22, 2017 at the rate of SGD $0.72 (Appendix). The total profit of the investor which has been got through selling the shares of OUE limited has been used in buying the shares of Chip Eng Seng limited. Through investigating over both the portfolio, it has been found that the second portfolio of the fundamental analysis has been performed better than the first portfolio of technical analysis. It has been analyzed that the portfolios would perform better. Conclusion: Thus according to the report, it has been found that the second portfolio of the fundamental analysis has been performed better than the first portfolio of technical analysis. It has been analyzed that the portfolios would perform better. References: Ackert, L. and Deaves, R. (2009). Behavioral Finance: Psychology, Decision-Making, and Markets Management. Cengage Learning. Baker, H.K. and Nofsinger, J.R. (2010). Behavioral Finance: Investors, Corporations, and Markets. John Wiley Sons. Elton, E.J., Gruber, M.J., Brown, S.J., and Goetzmann, W.N. (2009). Modern Portfolio Theory and Investment Analysis. John Wiley Sons. Kinsky, R. (2011). Charting Made Simple: A Beginner's Guide to Technical Analysis. John Wiley Sons. Krantz, M. (2016). Fundamental Analysis for Dummies. John Wiley Sons. Kurth, S. (2013). Critical Review about Implications of the Efficient Market Hypothesis. GRIN Verlag. Madura, J. (2014). Financial Markets and Institutions. Cengage Learning. Palicka, V.J. (2011). Fusion Analysis: Merging Fundamental and Technical Analysis for Risk-Adjusted Excess Returns. McGraw Hill Professional. Phillips, P.P. and Stawarski, C.A. (2016). Data Collection: Planning for and Collecting All Types of Data. John Wiley Sons. Schlichting, T. (2013). Fundamental Analysis, Behavioral Finance and Technical Analysis on the Stock Market. GRIN Verlag. Yahoo finance. (2017). SBS transit Limited: Key Statics. [Online]. Available at: https://sg.finance.yahoo.com/quote/SBVV.SI/history?p=SBVV.SI [Accessed on: 28 Aug 2017]. Yahoo finance. (2017). Chip eng Seng corporation limited: Key Statics. [Online]. Available at: https://sg.finance.yahoo.com/quote/C29.SI/history?p=C29.SI [Accessed on: 28 Aug 2017]. Yahoo finance. (2017). Global Logistic Properties Limited. [Online]. Available at: https://finance.yahoo.com/quote/MC0.SI/profile?p=MC0.SI7 [Accessed on: 28 Aug 2017].