Posts Tagged: "Investment Analysis"

Formula Plans in Portfolio Management

Posted by Abey Francis on January 6, 2013 in Investment Management / No Comments

The investor uses formula plans to facilitate him in making investment decisions for the future by exploiting the fluctuations in prices. The formula plans have sketched the basic rules and regulations for purchasing and selling of investments. The formula plans make the average investors superior to others. These formula plans are based on the fact that the investors will not have the problem of forecasting fluctuation in stock prices and will continue to act according to formula.

So, formula plans are a type of investment strategy that makes use of pre-determined rules for the nature and timing of change in one’s investment portfolio as the market rises or falls.

Rules for Formula Plans

These plans work according to a methodology which is related for the working of each plan

These plans cannot be used for short periods of time. The longer the period of holding the investments, the easier for formula plans to work.

Generally the formula plans are strict, rigid and straight forward out they are not flexible

These plans suggest that there must be two portfolios of an investor, namely aggressive portfolio and conservative portfolio. These plans do not have a selection procedure for the stocks. The methodology adopted by the formula plans is to find out the difference in movements of the aggressive portfolios and the conservative portfolios.…

Sub Categories of Active Equity Management

Posted by Abey Francis on August 22, 2012 in Investment Management / No Comments

Some of the major sub categories of the two major style of active equity management (top down and bottom up) are listed below;

Growth managers: Growth managers can be classified as either top-down or bottom-up. The growth managers are either divided into large capitalization or small capitalization. The growth managers buy securities that are typically selling at relatively high P/E ratios, due to high earnings growth rate, with the expectation of continued high earnings growth. The portfolios are characterized by high P/E ratios, high returns, and relatively low dividend yields.
Market timers: The market timer is typically a set category of top-down investment style and comes in many varieties. The basic assumption is that he can forecast the market i.e. when it will go up or down. In the sense he market timer is not too distant than the technical analyst. The portfolio is not fully invested in equities. Rather he/she moves in and out of the market depending on the economic, technical and analytical skills he/she dictates.
Hedgers: The hedger seems to buy equities but also to place well-defined limits on the investor’s investment limits. One popular hedging technique involves simultaneously purchasing a stock and put option on that stock.

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What is Stock’s Beta?

Posted by Abey Francis on March 30, 2012 in Investment Management / No Comments

An investor is concerned with the risk of his entire investment portfolio, and that the relevant risk of a particular security is the effect that the security has on the entire portfolio. By “diversified portfolio” we mean that each investor’s portfolio is representative if the market as a whole and that the portfolio Beta is 1.0. A security’s Beta indicate how closely the security’s returns move with from a diversified portfolio. A beta of 1.0 for a given security means that, if the total value of securities in the market moves up by 10 percent, the stock’s price will also move up, on the average by 10 percent. If security has a beta of 2.0, its price will, on the whole, rises or falls by 20 percent when the market rises or falls by 10 percent. A share with –0.5 percent beta will rises by 10 percent, when the market falls by 20 percent.

A beta of any portfolio of securities is the weighted average of the betas of the securities, where the weights are the proportions of investments in each security. Adding a high beta (beta greater than 1.0) security to a diversified portfolio increase the portfolio’s risk, and adding a low beta (beta less than zero) security to a diversified security reduces the portfolio’s risk.

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Random Walk Theory on Stock Markets

Posted by Abey Francis on October 19, 2010 in Investment Management / No Comments

The first specification of efficient markets and their relationship to the randomness of prices for things traded in the market goes to Samuelson and Mandelbrot. “Samuelson has proved in 1965 that if a market has zero transaction costs, if all available information is free to all interested parties, and if all market participants and potential participants have the same horizons and expectations about prices, the market will be efficient and prices will fluctuate randomly.”

According to the Random Walk Theory, the changes in prices of stock show independent behavior and are dependent on the new pieces of information that are received but within themselves are independent of each other. Whenever a new price of information is received in the stock market, the market independently receives this information and it is independent and separate from all the other prices of information. For example, a stock is selling at Rs. 40 based on existing information known to all investors. Afterwards, the news of a strike in that company will bring down the stock price to Rs. 30 the next day. The stock price further goes down to Rs. 25. Thus, the first fall in stock price from Rs. 40 to Rs. 30 is caused because of some information about the strike.…

The Dow Jones Theory on Stock Market Movements

Posted by Abey Francis on October 19, 2010 in Investment Management / No Comments

The Dow Jones Theory is probably the most popular theory regarding the behavior of stock market prices. The Dow Jones theory has been around for almost 100 years, yet even in today’s volatile and technology-driven markets, the basic components of this theory still remain valid. The theory derives its name from Charles H. Dow, who established the Dow Jones & Co. and was the first editor of the Wall Street Journal – a leading publication on financial and economic matters in the U.S.A. Although Dow never gave a proper shape to the theory, ideas have been expanded and articulated by many of his successors.

The Dow Jones theory classifies the movement of the prices on the share market into three major categories:

Primary Movements,
Secondary Movements and
Daily Fluctuations.

1) Primary Movements: They reflect the trend of the stock market and last from one year to three years, or sometimes even more. If the long range behavior of market prices is seen, it will be observed that the share markets go through definite phases where the prices are consistently rising or falling. These phases are known as bull and bear phases.

During a bull phase, the basic trend is that of rise in prices.…

Steps involved in investment planning

Posted by Abey Francis on June 24, 2010 in Investment Management / No Comments

Investors like to invest through the instinct and want to gain profit from the market by investing. However, while financial institutions are undoubtedly a part of the process of investing. As investors, it is not surprising that we focus so much of our energy and efforts on investment philosophies and strategies, and so little on the investment process. It is far more interesting to read about how Peter Lynch picks stocks and what makes Warren Buffett a valuable investor, than it is to talk about the steps involved in creating a portfolio or in executing trades. Though it does not get sufficient attention, understanding the investment process is critical for every investor for several reasons:

Investment planning centrally depends upon the portfolio of the investor; as a result the primary step of the investment process is to make a portfolio. By emphasizing the sequence, it provides for an orderly way in which an investor can create his or her own portfolio or a portfolio for someone else.
The investment process provides a structure that allows investors to see the source of different investment strategies and philosophies. By so doing, it allows investors to take the hundreds of strategies that they see described in the common press and in investment newsletters and to trace them to their common roots.

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