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Case 2 Security Analysis & Portfolio Management FINA 4315 Finance Submitted by: Rahma Alkhuder 200-800-624 Dec.18, 2012 1. What are the benefits of technical analysis over fundamental analysis? Unlike fundamental analysis, technical analysis is a simple and a straightforward method. It makes use of the tools that are readily available to everybody, from the most novice trader to the executive mangers in an industry. Moreover, the technical tools used in this method are easy to interpret, unlike the methods used in fundamental method, where there is a need for careful study to understand the tools. A person doing the analysis has only one pointer to handle the price. This is because technical analysis places its focus only on price auction. Thus, the analyst is in a better position to calculate profits and losses. The use of visual aids in this method allows the investors and other interested party to have a quick overview of the market and its performance. In turn, this allows them to determine the best way to enter the stock market, to invest in it to avoid entering there altogether. This is primarily because visual aids such as graphs and charts are the main way of information presentation in technical methods, with minimum need for voluminous statements. 2. Plot the stock price data for the last 60 months. Then also plot the return data of the same firm for 59 months (because you will lose 1 month’s data to calculate return from stock price). 25 20 15 10 Series1 5 2012, Sep 2012, Jun 2012, March 2011, Dec 2011, Sept 2011, June 2011, March 2010, Dec 2010, Sept 2010, June 2010, March 2009, Dec 2009,Sept 2009, June 2009, March 2008, Dec 2008,Sept 2008, June 2008, March 2007, Dec 0 Figure 1: stock price data plot for the last 60 months 25 20 15 10 Series1 5 2007, Nov 2008, Feb 2008, May 2008, Aug 2008, Nov 2009, Feb 2009, May 2009, Aug 2009, Nov 2010, Feb 2010, May 2010, Aug 2010, Nov 2011, Feb 2011, May 2011, Aug 2011, Nov 2012, Feb 2012, May 2012, Aug 2012, Nov 0 Figure 2: Plot for the return data for the last 59 months 3. Find the breadth of the market for the last 12 months. For this, you have to use data from other sources, if necessary. Comment on that. In predicting the strength of the market for the stocks, it is necessary to determine the breadth of the market by taking the ratio of the gaining and the losing/ stock prices. In this case, the stock breadth for the last 12 months is given by: (4.809200209 + 2.244389027+4.876419506 +2.038216561 + 4.93133583+ 1.835853132 + 1.060445387+ 6.549257017 ÷ (-9.658536585-4.669464848 2.995867769 -20.28753994) = (28.34511667: -37.61140914) = - 75% The market breadth in this case is -75%, which means that the number of stocks going down is relatively larger than the number of improving stocks. There is a high risk of a crisis in the stock market. 4. Find the 100-day moving average for your firm’s stock price and the index. You need daily data for your firm and the index. Comment on that. Moving day averages are given by finding the number of daily closing prices for the stocks as a ration of the number of months. In this case, the last 100 days, the total price amounted to around 65.3 in 100 days. Thus, the moving average in this case is given by: 65.3 / 100 days = 0.653 The moving averages are estimation because the numbers of days are counted for every month, and not daily records have been given. In addition, the theoretical concept is that the moving average keeps changing as more prices are added and the old ones removed. 5. Using your stock price data show the major trend, intermediate trend and short-run movements. Do the same for the index. Give comments on this. 25 20 15 10 Series1 5 2002, Dec 2003, June 2003, Dec 2004, June 2004, Dec 2005, June 2005, Dec 2006, June 2006, Dec 2007, June 2007, Dec 2008, June 2008, Dec 2009, June 2009, Dec 2010, June 2010, Dec 2011, June 2011, Dec 2012, Jun 0 Figure 3. Trend developed with share price 4 3 2 1 -1 -2 2002, Dec 2003, June 2003, Dec 2004, June 2004, Dec 2005, June 2005, Dec 2006, June 2006, Dec 2007, June 2007, Dec 2008, June 2008, Dec 2009, June 2009, Dec 2010, June 2010, Dec 2011, June 2011, Dec 2012, Jun 0 Series1 -3 -4 -5 Figure 4: Trend developed with share index The trends shown with share price are less volatile than the one shown by the index. As such, this is an indication that the share market is quite volatile, which agrees with the results of the market breadth above. 6. Find the relative strength for your firm in the last 60 months. What is your comment? The Average stock price of the stock over the last 60 months is given by: 914.35/ 60 = 15.24 Therefore, the relative strength is given by a comparison between the average share prices and the other share price. in this case the S&P 500, which stands at 18.53 is taken as the reference share price and compared with the Tyson share price. Thus, the relative strength is given by: 15.24/18.53 = 0.82 Since this is a positive number, it is an indication that the market value is trending upwards, which could attract new investors. By looking at this figure, investors will be interested in investing not only by buying the Tyson shares, but also by buying other shares in the stock market. The value provides the investors with an easy way to predict the market’s future, especially concerning the possibility of making profits from the investment. In case the number was is negative, investors will shy away from investing in the market. 7. Based on all the previous findings, make your final comment? This is the time to buy or sell? From the analysis of the market given here, it is worth noting that the market is characterized with a number of facets that define its trend. First, the plot of return on shares is quite good, indicating that there could be some potentials to make profits. This is the initial indication that shares in a given stock market are potential points for investments. They provide a. quick indication that the market is not only performing well, but also headed towards a profitable future. In most cases, investors will be looking for such indications because they are simple to calculate and interpret. Even among the people who have no background in marketing and stock market analysis, statistical figures provided in technical methods provide them with adequate information on which they base their search for better points for investments. However, the market breadth, the moving average and the trends indicate a negative growth in the specific stocks, which further indicates a possible risk in buying these shares. Market breath is an important technical indication of a growing or slowing stock market. Where market breadth is weaker, it is an indication that the market could be headed for a crisis. In such cases, it is advisable that the investors take time to study the market to avoid putting their investments in a failing market. However, the relative strength indicates a strong market. Therefore, the best decision is to sell the current shares (Tyson) but not to move out of the market; rather it is better to purchase other shares in the market since the market is perfuming pretty good.