Modern Portfolio Theory and Investment Analysis †MyAssignmenthelp

Question: Discuss about the Modern Portfolio Theory and Investment Analysis. Answer: Introduction: This report has been presented to analyze the fundamental as well as technical analysis briefly. For conducting this report, capital land limited and Singapore airlines limited has been considered for this report. For making a portfolio of both of this company, technical analysis has been done over Capital land limited and fundamental analysis has been done over Singapore airlines Limited. Technical analysis is a method to analyze the investment decision in a security or a portfolio. This method looks over the supply and demand of securities and makes the decision accordingly whereas fundamental analysis is a method to analyze the investment decision in a security or a portfolio. This method looks over the financial statement of the company to make the decisions about investment and divestment. It looks over the fair value of firm while technical analysis expects that share price would depict entire position and strength of the company. Literature review: The Efficient Market Hypothesis (EMH) is based on an initiative of a theory which is random walk theory, It is used to differentiate a price sequence, where the previous price get alter then the current share price of a particular stock. The random walk ideas logic depict that if the information flow is unchecked and the information have a quick reflection over the stock prices, then the price change on tomorrow would depict only news about tomorrow and it would also be independent in concern to todays price changes. Furthermore news at this time would by impulsive and therefore price changes should be impulsive and casual. As an outcome, the share prices would fully reflect all the new information and still unaware investors trading a diversified portfolio over the price in the market and would get a rate of return as liberal as that attained by the experts. According to Schlichting (2013), fluctuations in the stock price are free from each other and they also have the similar probability distribution. The prices of a stock are normally known as unpredictable and random. It has been argued by Phillips and Stawarski, (2016), that the market and the stocks might be just as arbitrary as tossing a coin while Madura, (2014) has depicted into a study that stock prices roughly explain random walks throughout a time: the changes in the prices are impulsive since they take place only in reaction to authentically new information whereas according to a fact it is quite new. Further, the behavioural Finance is just a study over the investor market behaviour which derives from psychosomatic principles of making the decision. It is normally used to explain that why investors sell or buy a product. This concept of behavioural science is related to the cognitive psychology theory which depicts about the human decision making process and also depict the user about the financial market economics (Kurth, 2013). This concept focuses upon how shareholders interpret and proceed on information to make a decision about informed investment. It has been analyzed through a study by Palicka, (2011) that Investors do not constantly act in a normal, conventional and an impartial manner. This concept of behavioral finance depicts about an emphasis upon shareholder behavior leading to a variety of market irregularity. According to Krantz, (2016), Behavioral Finance is a study about psychology that how it affects the financial decision process and the financial market of a s hareholder and a state respectively. According to Kinsky, (2011), behavioral finance is a simple and good concept to make a better decision about investment. Moreover it has been stated by Elton et al, (2009) that Behavioral finance is the study of the pressure of psychology on the practitioners behavior in concern of finance and the successive effect on financial markets. Further it has been analyzed that some financial belongings are probable to depend upon the shareholders less balanced behavior that results from prejudices, psychosomatic variables and heuristics. According to the EMH, the financing markets are informational efficient. Every individual could have entre to obtainable information and as an outcome; the news of investment could not be subjugated. Though, the exact hypothetical replica has generated substantial debate in concern of 2 concepts which are access and availability. From a hypothetical view, it is quite easy for every individual to have an access for collecting the information about the market; while if it put into practice than it do not take place. Daily custom and diverse lifestyles entail diverse accessible time and technique to have admittance to information about the market (Baker and Nofsinger, 2010). Often, in the processes of investment, information is obtainable only to a partial group of shareholders or it is obtainable to speculators long before it turns into obtainable to the common community. Therefore, the people who have the knowledge about the EMH, must work in an efficient manner. Apart from all the ot her significant factors, the information is quite compulsory for every shareholder to maintain and make the decision accordingly. The methods which have been used to examine the securities and formulate the investment results fall into two groups: fundamental analysis and technical analysis. In the investment processes, for preserving a long association with the company and invest the amount for a longer period, fundamental analysis is a good choice for an investor. In other words, when an investor is trying to assess the financial data, he or she tends to shape an image of the corporation to be incorporated in their portfolios and they afterward foster an assurance relationship with the company (Ackert and Deaves, 2009). In the circumstance of EMH, fundamental analysis has been replaced by the semi strong model form efficiency. Efficient Market Hypothesis (EMH) disagrees with the emphasis which has been placed by the technical analysis on analyzing over the prices direction through the past market data study and it also suggests that investment procedures should be connected with current prices and market information. In result, the historical development and direction of a corporation or investment procedure are absolutely reflected on their collision on investment decision process. Past market data and charts should not be in the main focus of investigate or this depicts to attain high returns, but they must not be simply delighted as recollections. However, the principle that history repeats itself? economy runs in a circle have been strappingly highlighted for the investors and individuals. As already it has been stated that Behavioral Finance is a framework with interdisciplinary that combines the elements from sociology, history anthropology and psychology. Consequently its theoretical viewpoints are more complex, in difference to Efficient Market Hypothesis (EMH) that mischaracterized as a quite simplified or inexperienced approach. The potential costs for investors, though, are quite serious. In distinction, Behavioral Finance, on explanation of its complex and inventive nature does not appear to be extensively accepted by the mass of the investing group of people as a minute. though the fact that decision making in concern of investing is significantly make possible by a variety of considerations included in BF from other regulations is favorable to ornamental its position and setting up its supremacy over customary financial paradigms. Rational and methodology: For this portfolio, 20 companies have been taken into consideration for making 2 portfolios on the basis of technical and fundamental basis, technical analysis has been done over first 10 companies and fundamental analysis has been done over rest. Technical analysis has been done to analyze the data of the company which depict that this company is a better option to invest on the basis of its securitys demand and supply in the market. Further, it has been analyzed that this fundamental analysis has been done to analyze the data of the company on the basis of its financial statement of last 5 year. It has been analyze through conduction the analysis on 20 companies that this portfolio would offer a great return to the investor. It has been found through this study that this portfolio is the best portfolio for the investor to invest 100000 Singapore dollars in the Singapores FTSE companies. In fact both the fundamental and technical methods could be said to be corresponding to each other. Fundamental analysis effects in stocks selection that are quite strong in terms of companys financial performance while the technical analysis offers for stocks selection which are presenting growth in the share price though, financial performance might not has been good. For this report, it has been found that the CapitaLand Limiteds stock is financial strapping as the profit margin ratio of the company is 22.66% (Yahoo finance, 2017). Additionally, another stock are also available there which comprised in the portfolio shaped according to the fundamental analysis which is Courts Asia Limited with the ROE of 8.83% (Yahoo finance, 2017). Therefore, fundamental analysis would be good in relation of their financial performance amongst the studied stocks. Further, it has been analyzed that the stocks on which investment analysis has been done are offering the good price in the market (Pal icka, 2011). It has been considered as a better option to choose both the techniques of stock selection since it would result in sensible choices and the outcome of the study would be significant. Therefore, for current investigation, 2 portfolios have been shaped where one includes 10 stocks selected which are based on fundamental analysis and the former one includes 15 stock selected which are based on technical analysis. The fundamental analysis over the companies has been analyzed with the DDM (dividend discount method) and PE method as these methods are considered as the most appropriate technique. In regards to this report, the stock named by Global Logistic Properties Ltd has been taken into consideration to analyze the share: Dividend Discount Model DDM model has been used to calculate the stocks intrinsic value by taking concern of the expected dividend. The intrinsic value of company is as below: Dividend Discount Model Dividend expected 0.06 Growth rate 3% Discount rate 5.26% Intrinsic Value 2.57 It has also been observed that the Global Logistic Properties Ltds intrinsic value is SGD 2.57 which has been evaluated after applying DDM (Madura, 2014). Though, the stocks current market price is SGD2.68 (Yahoo finance, 2017). This entails that the stock has been overvalued. PE Multiple Model The Global Logistic Properties Ltds intrinsic value has been calculated by applying PE Model (Madura, 2014): PE Multiple Model Industry PE ratio 28.30 EPS of CapitaLand Limited 0.14 Intrinsic Value 3.96 The stocks intrinsic value as shown is SGD 3.96 that is quite higher than shares current market price which is SGD2.68 (Yahoo finance, 2017). Therefore stock is undervalued. Analysis of a Stock from Technical Portfolio While conducting the technical analysis, most common and effective methods are line chart and moving average for the analysis (Kinsky, 2011). The Chip Eng Seng Corporation Limiteds stock has been evaluated by applying the above discussed 2 methods: It has been observed from the above method trend line chart depict that the stocks price of Chip Eng Seng Corporation Ltd has elevated higher and higher above the period. Therefore, if this trend would be relied than it could be said that investing in this share would be worth. The Chip Eng Seng Corporation moving average has been established to be SGD 0.7264 (Appendix). The moving average could be taken into the consideration as the cut off stage which depicts that is the stocks price will go beyond this stage, the changes in the price would go higher and equally if the stocks price goes under this stage than the price of the stock would go less. Activities in Fundamental Portfolio In the fundamental portfolio, two activities are there. Under first activity, Global logistic Properties Ltds 700 shares have been traded @ S$2.78 per share on August 25, 2017. The stock of Global logistic Properties Ltd has been taken as the share price was on peak and the profits could be at the maximum. More, in second activity, Wing Tai Holdings ltds 1044 shares were purchased on august 25, 2017 @ SGD $1.855 (Appendix). The total amount which has been received by selling of Global logistic Properties Ltds 700 shares of has been used in trading the stocks of Wing Tai Holdings ltd. Analyzing over the Wing Tai Holdings Limited through using the fundamental analysis, it has been calculated that the shares would rise in future and thats why the shares have been purchased. In the fundamental portfolio, two activities are there. Under first activity, SBS transit Ltds 800 shares have been traded @ S$2.56 per share on August 25, 2017. The stock of SBS transit Ltd has been taken as the share price was on peak and the profits could be at the maximum. More, in second activity, Chip Eng Seng corporation ltds 1044 shares were purchased on august 25, 2017 @ SGD $10.725 (Appendix). The total amount which has been received by selling of SBS transit limiteds 800 shares of has been used in trading the stocks of Chip Eng Seng Corporation limited. Analyzing over the Chip Eng Seng Corporation limited through using the technical analysis, it has been calculated that the shares would rise in future and thats why the shares have been purchased. Evaluation of Performance of both the Portfolios Through evaluating both the portfolios performance, it has been expressed that the portfolio-2 of technical analysis has been executed better than the portfolio-1 of fundamental analysis. The general return of second portfolio has been analyzed to be 57.79% which is quite greater than the first portfolio return of 12.18% (Appendix-2). Additional, it has been analyzed that both technical and fundamental analysis could not been beaten by the market as the holding period return of first portfolio has remained inferior to the expected market return of 5%. However, the second portfolio beaten the market by making higher return than the expected return of the market. Conclusion: Thus through this report, it could be concluded that both the portfolios are performing well and the trading had taken place twice in both the portfolios according to the market changes and for the profitability of the company. References: Ackert, L. and Deaves, R. 2009. Behavioral Finance: Psychology, Decision-Making, and Markets. 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].