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Portfolio Theory and Analysis

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PORTFOLIO THEORYPORTFOLIO THEORYThis theory was developed by Nobel Economist Harry Markowitz in 1952

Dont put all your eggs in one basket.

INSERT VIDEO (https://www.youtube.com/watch?v=c5c_Zgn-Bjg)What is portfolio? Collection of investment vehicles assembled to meet one or more investment goals.

A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts. Portfolios are held directly by investors and/or managed by financial professionals.

Dont put all your eggs in one basket. - don't risk everything on the success of one venture / Don't concentrate all your prospects or resources in one thing or place, or you could lose everything.

2PORTFOLIO THEORYGeneral assumption: Investors want to maximize the returns from the total set of investments for a given level of risk. Portfolio theory also assumes that investors are basically risk averse

RISK AND RETURNRISKThe uncertainty of future outcomes or the probability of an adverse outcome.

RETURNThe gain or loss of a security in a particular period. The return consists of the income and the capital gains relative on an investment.

RISK ATTITUDESPORTFOLIO THEORY

This portfolio variance formula not only indicated the importance of diversifying investments to reduce the total risk of a portfolio but also showed how to effectively diversify.

INSERT VIDEO (https://www.youtube.com/watch?v=lPKtI90f_sE)ALTERNATIVE MEASURES OF RISKExpected ValueVariance or Standard DeviationMeasure of spread of the outcomes around the expected value.

MEASURING RISKS

Design probability distribution of anticipated future outcomes Establish- Probability distribution- Determine expected value - Calculate dispersion around expected valuePORTFOLIO THEORYTHE EFFICIENT FRONTIERRepresents the set of portfolios that has the maximum rate of return for every given level of risk or the minimum risk for every level of return.

INSERT VIDEO (https://www.youtube.com/watch?v=PiXrLGMZr1g)

ULTIMATE GOAL: OPTIMAL PORTFOLIO The optimal portfolio is the efficient portfolio that has the highest utility for a given investor.provides the highest return for a given level of riskGiven the choice between two equally risky investments, an investor will choose the one with the highest potential return.Given the choice between two investments offering the same return, an investor will choose the one that has the least risk. CORRELATIONStatistical measure of the relationship between two series of numbers representing dataPositively Correlated items move in the same direction.Negatively Correlated items move in opposite directions.Correlation Coefficient is a measure of the degree of correlation between two series of numbers representing data.

CORRELATIONPerfectly Positively Correlated describes two positively correlated series having a correlation coefficient of +1Perfectly Negatively Correlated describes two negatively correlated series having a correlation coefficient of -1Uncorrelated describes two series that lack any relationship and have a correlation coefficient of nearly zero

PORTFOLIO THEORY2 KINDS OF RISK:Systematic Risk - These are market risks that cannot be diversified away.Unsystematic Risk - this risk is specific to individual stocks and can be diversified away as you increase the number of stocks in your portfolio

INSERT VIDEO (https://www.youtube.com/watch?v=lPKtI90f_sE)FUNDAMENTAL ANALYSISWhat to Expect?Introduction to Fundamental AnalysisAspects of Fundamental AnalysisFinancial StatementsExample

Fundamental analysis is a technique that attempts to determine a securitys value by focusing on underlying factors that affect a company's actual business and its future prospects.

WHY FUNDAMENTAL ANALYSIS?Fundamental analysis answers the following questionsIs the companys revenue growing? Is it actually making a profit? Is it in a position strong-enough to outrun its competitors in the future? Is it able to repay its debts? Is management trying to "cook the books"? WHAT IS FUNDAMENTAL ANALYSIS?Fundamental analysis can be composed of many different aspects: the analysis of the economy as the whole, the analysis of an industry or that of an individual company.

WHAT IS FUNDAMENTAL ANALYSIS?The performance of a company depends much on the performance of the economy.The first step to this type of analysis includes looking at the macroeconomic situation.

ECONOMIC ANALYSISFiscal & Monetary PoliciesFiscal Policy (Keynesians)Government expenditures (demand)Tax & Debt policies

Monetary Policy (Monetarists M. Friedman)Interest rates (discount, fed funds)Money supply (Open market ops): M1, M2Reserve requirements (commercial banks)Goals of PolicyFull EmploymentInterest RatesMoney Supply

Price Stability (control inflation)Interest RatesMoney Supply

Economic GrowthInterest RatesMoney SupplyECONOMIC INDICATORS AND THEIR IMPACT ON THE STOCK MARKETINDICATORFAVOURABLE IMPACTUNFAVOURABLE IMAPACTGDP/GROWTH RATEHIGH GROWTH RATESLOW GROWTH RATEDOMESTIC SAVINGS RATEHIGHLOWINTEREST RATESLOWHIGHTAX RATESLOWHIGHINFLATIONLOWHIGHIIP/INDUSTRIAL PRODUCTIONHIGHLOWBALANCE OF TRADEPOSITIVENEGATIVEBALANCE OF PAYMENTSPOSITIVENEGATIVEECONOMIC INDICATORS AND THEIR IMPACT ON THE STOCK MARKETINDICATORFAVOURABLE IMPACTUNFAVOURABLE IMAPACTFOREIGN EXCHANGE POSITIONHIGHLOWDEFICIT FINANCING/FISCAL DEFICITLOWHIGHAGRICULTURAL PRODUCTIONHIGHLOWINFRASTRUCTURAL FACILITIESGOODNOT GOODIndustry AnalysisAn industry intelligence is a business tool carried out to assess profit potential and the complexity of a particular industry. Industry intelligence is assessed based of key factors relating to the industry such as the history of the industry, industry life cycle, a review of how differing trends such as seasonal fluctuations affect the industry, external influences on the industry such as government laws and a review of levels of competition both present and future for the specific industry. Porters Five Forces- Industry Analysis:

Industry rivalry: Indicates degree of competition among existing firms, cut throat competition leads to reduced profit potential for companies in the same industryThreat of substitutes: Availability of substitute products or services will limit a firms ability to raise pricesBargaining power of buyers: It represents powerful buyers have a significant impact on pricesBargaining power of suppliers: It highlights powerful suppliers can demand premium prices and limit your profitBarriers to entry: it includes threats of new entrants that can act as a deterrent against new competitorsCompetitors intelligenceCompetitors intelligence in international business is an assessment of the strengths and weaknesses of current and potential competitors. It involves primarily two activities:obtaining information about important competitors and using that information to predict competitor behavior. Most firms face four basic types of Competition:Brand competitors, refers to competition with different brands offering with similar features, prices and benefits to the same potential customers. Product competitors, offer same product class but with offer different benefits, features, and prices.Generic competitors, are rival firms offering products which are different but are capable of satisfying the same basic want or provide the same benefit or utility to the prospective customer.Total budget competitors, primarily focus on prices, they compete for the limited financial resources of the same customers.Various types of competitionProductNeedBrand CompetitorsProduct CompetitorsGenericCompetitorsTotal BudgetCompetitorsCollegesEducationSt. Josephs, Christ, Jain, Jyoti Nivas, Mounts, Kristu JayantiDistance Education, Community college. Books, Internet, Apprenticeship, Seminars.Public CollegesMoviesEntertainmentAvengers, Spiderman, Ice age, Shrek, Batman, Immortals, Mission Impossible.Cable TV, Pay-per-view on DTH, DVD rentalsSporting events like IPL, Music Concerts, Exhibitions, Melas.Relative and friends house, reading, Parks, Museum. Soft DrinksRefreshmentCoca-Cola, Pepsi, Tropicana, FrootiMinute Maid, AppyTea, Coffee, Badam Milk, Fruit Juice, Lime soda, Butter milk.Tap water, Prasadam (given in religious places)Candy, Pani puri, Pop corn, Vada pav, Pakoda.Sedans (Large Cars)TransportationMaruti Suzuki, FordHyundai, Toyota Honda, NissanJeeps, Hatchbacks, SUVs, Minivans, MUVsRental cars,Bikes, BMTC, Metro.car-sharing, ride-sharing, lift-sharing It involves a close investigative scrutiny of the companies financial and non financial aspects with a view to identifying its strength, weaknesses and future business prospects.

Non Financial FactorsMarketing successBusiness ModelCompetitive AdvantageManagementCorporate Governance

Company AnalysisCompany Analysis-Non FinancialSales Revenue (growth)Profitability (trend)Product line (turnover, age)Output rate of new productsProduct innovation strategiesR&D budgetsPricing StrategyPatents and technology

Company Analysis-Non Financial

Organizational performanceEffective application of company resourcesEfficient accomplishment of company goalsManagement functionsPlanning - setting goals/resourcesOrganizing - assigning tasks/resourcesLeading - motivating achievementControlling - monitoring performance

Company Analysis-Non FinancialEvaluating Management QualityAge and experience of managementStrategic planningUnderstanding of the global environmentAdaptability to external changesMarketing strategyTrack record of the competitive positionSustainable growthPublic imageFinance Strategy - adequate and appropriateEmployee/union relationsEffectiveness of board of directors

SWOT ANALYSISStrengthsLatest TechnologyLower delivered CostEstablished productsCommitted manpowerAdvantageous locationStrong financesWell- known brand namesWeaknessesLoose controlsUntrained labour forceStrained cash flowsPoor product qualityFamily fundsPoor public imageOpportunities Growing domestic demandExpanding export marketsCheap labourBooming capital marketsLow interest ratesWeaknessesPrice WarIntensive competitionUndependable componentSuppliersInfrastructure bottlenecksPower cuts

30Company Analysis-FinancialOperating efficiencyProductivityProduction functionFinancial Ratio AnalysisPast financial ratios With industry, competitors, and Regression analysisForecast Revenues, Expenses, Net IncomeForecast Assets, Liabilities, External Capital Requirements

Company Analysis-FinancialBalance SheetSnapshot of companys Assets, Liabilities and Equity.Income statementSales, expenses, and taxes incurred to operateEarnings per shareCash flow statementSources and Uses of funds

Company Analysis-FinancialFinancial Ratio AnalysisLiquidity (ability to pay bills)Debt (financial leverage)Profitability (cost controls)Efficiency (asset management)DuPont AnalysisTop-down analysis of company operationsObjective: increase ROE

Liquidity RatiosMeasure ability to pay maturing obligations

Current ratioCurrent assets / current liabilitiesQuick ratio(Current assets less inventories) / current liabilities

Company Analysis-FinancialCompany Analysis-FinancialDebt RatiosMeasure extent to which firm uses debt to finance asset investment (risk attribute)

Debt-equity ratioTotal long-term debt / total equityTotal debt - total assets ratio(Current liabilities + long-term debt) / total assetsTimes interest earnedEBIT / interest charges

Profitability RatiosMeasure profits relative to sales

Gross profit margin ( % ) = Gross profit / salesOperating Profit Margin = Operating profits / salesNet profit margin = Net profit after taxes / salesROA = Net Profit / Total AssetsROE = Net Profit / Stockholder Equity** Excludes preferred stock balances

Company Analysis-FinancialCompany Analysis-FinancialProfitability RatiosMeasure effectiveness of asset management

Average collection period (in days)Average receivables / Sales per dayInventory turnover (times per year)Cost of Goods Sold / average inventoryTotal asset turnoverSales / average total assetsFixed asset turnoverSales / average net fixed assets

37Company Analysis-FinancialOther RatiosEarnings per share (EPS): (Net income after taxes preferred dividends)/ number of sharesPrice-earnings (P/E): Price per share/expected EPSDividend yield: Indicated annual dividend/price per shareDividend payout: Dividends per share/EPSCash flow per share: (After-tax profits + depreciation and other noncash expenses)/number of sharesBook value per share: Net worth attributable to common shareholders/number of shares

Ratio 1 = NPM Ratio 2 = TATO Ratio 3 = Equity Kicker

The DuPont System suggests that ROE (which drives stock price) is a functionof cost control, asset management, and debt management.Company Analysis-FinancialThe end goal of performing fundamental analysis is to produce a value that an investor can compare with the underlying assets current price in hopes of figuring out what sort of position to take with that security(under priced = buy, overpriced = sell).

Valuation of StockThe intrinsic value of a share is the present value of all future cash flows INTRINSIC VALUE = DIVIDENDS + CAPITAL APPRECIATION

Investment decision:If the market price of a share is currently lower than its intrinsic value, such a share would be bought because it is perceived to be under-priced. A share whose current market price is higher than its intrinsic value would be considered as overpriced and hence sold.

ConclusionREFERENCESModern Portfolio Theory: Why It's Still Hip | Investopedia http://www.investopedia.com/articles/06/mpt.asp#ixzz3y9Sm161dhttp://www.investopedia.com/Investment Analysis and Portfolio Management By: Reilly & Brown http://philpad.com/list-of-accredited-online-trading-brokers-in-the-philippines/http://www.pinoymoneytalk.com/philippine-stocks-exchange-complete-list/http://philpad.com/list-of-accredited-online-trading-brokers-in-the-philippines/https://www.youtube.com/watch?v=lSY4L5Y2q1Ehttps://www.youtube.com/watch?v=tE5Py6Vt61wPhilippine Stock Exchange http://www.slideshare.net/delasalask/philippine-stock-exchange-30869666http://www.investopedia.com/financial-edge/0511/the-top-17-investing-quotes-of-all-time.aspxhttp://www.investopedia.com/walkthrough/corporate-finance/1/financial-markets.aspxTHANK YOU!!!