Portfolio Management is used to select a portfolio of new product development projects to achieve th following goals: Maximize the profitability

ity or value of the portfolio Provide balance Support the strategy of the enterprise

Portfolio Management is the responsibility of the senior management team of an organization or business unit. This team, which might be called the Product Committee, meets regularly to manage the product pipeline and make decisions about the product portfolio. Often, this is the same group that conducts the stage-gate reviews in the organization. A logical starting point is to create a product strategy - markets, customers, products, strategy approach, competitive emphasis, etc. The second step is to understand the budget or resources available to balance the portfolio against. Third, each project must be assessed for profitability (rewards), investment requirements (resources), risks, and other appropriate factors. The weighting of the goals in making decisions about products varies from company. But organizations must balance these goals: risk vs. profitability, new products vs. improvements, strategy fit vs. reward, market vs. product line, long-term vs. short-term. Several types of techniques have been used to support the portfolio management process: Heuristic models Scoring techniques Visual or mapping techniques

The earliest Portfolio Management techniques optimized projects' profitability or financial returns using heuristic or mathematical models. However, this approach paid little attention to balance or aligning the portfolio to the organization's strategy. Scoring techniques weight and score criteria to take into account investment requirements, profitability, risk and strategic alignment. The shortcoming with this approach can be an over emphasis on financial measures and an inability to optimize the mix of projects. Mapping techniques use graphical presentation to visualize a portfolio's balance. These are typically presented in the form of a two-dimensional graph that shows the trade-off's or balance between two factors such as risks vs. profitability, marketplace fit vs. product line coverage, financial return vs. probability of success, etc.

Portfolio Management
What Does Portfolio Management Mean? The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against. performance. Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk.

Investopedia explains Portfolio Management In the case of mutual and exchange-traded funds (ETFs), there are two forms of portfolio management: passive and active. Passive management simply tracks a market index, commonly referred to as indexing

or index investing. Active management involves a single manager, co-managers, or a team of managers who attempt to beat the market return by actively managing a fund's portfolio through investment decisions based on research and decisions on individual holdings. Closed-end funds are generally actively managed.

is a tool provides some basic benefits such as giving a holistic view of the various investments and the alignment of the investments with the long term goals of the individual. However Portfolio is one of the most challenging jobs and therefore isn't easy. Portfolio Management can help you gain control of your investments and deliver some meaningful value to your earnings from the investments. Portfolio Management takes a holistic view of the overall earning strategy of the individual. While managing the investment portfolio; it is important to remember that the riskier strategic investments should always be balanced with more conservative investments. The investment mix should be constantly monitored to assess which investments are on track, and which are the ones that need help and which are the ones that need to be shut down. However, the key of successful portfolio management lies in the execution. A strong portfolio management program can turn any sinking investment around and do the following: -Maximize value of investments while minimizing the risk -Allow investors to schedule resources more efficiently -Reduce the number of redundant investments and make it easier to kill loss making investments. And of course portfolio management definitely means that you are left with more money in your pockets. Efficient portfolio management also reduces overall expenditures by 20% by saving the losses that are otherwise made on loss making investments. So far in India, most of the middle class earners have been risk-averse and therefore park most of their savings in Fixed Deposits and Other Savings Accounts, though the yield from such investment avenues is very low. However, the recent trend has been such that more people have been attracted towards investment in Mutual Funds and Equities. It is in this light that Portfolio Management Companies have been gaining prominence in India. The trend is only set to go upwards in the years to come, as the Indian middle class becomes more risk friendly.

All of us want to earn money and there are thousand of ways to earn. Investment is one of them. Investment is basically postponement of present consumption for the future benefits. It involves two major factors. Postponement of present consumption is certain but the benefit of future is uncertain, and that uncertainty is known as risk. Risk is the chances of loosing or not getting the expected return. All of us take risk in some form when we invest. But some investment avenues involve huge risk and some less risk. Risk is measured in terms of variability of returns from its expected return i.e. standard deviation or variance. Risk can also be defined as the risk arising from the market forces which is known as systematic risk and measured in terms of beta and the unique risk known as unsystematic risk. The basic objective of any investor is to reduce risk to minimum and maximize the return. Investments can be in form of Bank deposit, Post office, Shares and in any other form but all investments involve risk. As an investor the various strategies for investments are

1. To look for the economic, industry and company fundamentals to find out the intrinsic value of the stock and see weather the stock is selling cheap in the market or not. 2. To look at various statistical graphs and historical price movements to identify trends for future. 3. Go for the noise as following what others are doing in the market. 4. Believing that the prices are moving in random and then try to pick stocks on random. A professional investor generally go for more then one investment i.e. the investor go for a collection of investment, which is known as a portfolio. Investor by construction of portfolio tries to use the effect of diversification and reduces the unsystematic risk to a great extent. Portfolio theory was originally proposed by Harry Markowitz in 1950`s was the first formal attempt to quantify the risk of a portfolio and developed a model for determining optional portfolio. Prior to the development of portfolio model investors dealt with the concept of risk and return somewhat loosely. Intuitively smart investors knew the benefit of diversification which reflected in the traditional edge "Do not put all your eggs in one basket". Harry Markowitz was the first person to show quantitatively why and how diversification reduces risk. In recognition of its seminal contribution in this field he was awarded the Nobel Prize in economics in 1990. Markowitz model was highly information intensive. If one is considering a portfolio of n securities it requires n expected returns, n variances, n(n-1)/2 covariance and in total it requires n(n+3)/2 information. In his contribution Markowitz had suggested that an index, to which securities are related, may be used for the purpose of generating the covariance terms. Taking clue from this William sharpe developed his single Index model. The number of information required reduces significantly i.e. to (3n+2) in total from n (n+3)/2 in the model suggested by William sharpe. A major breakthrough in the field of portfolio management was the development of CAPM (Capital asset pricing model) which is concerned with 1. What is the relationship between risk and return of an efficient portfolio? 2. What is the relationship between risk and return for individual security? The CAPM in essence, predicts the relationship between the risk of a security and its return. This relationship is useful in producing a benchmark. It also helps us to make an informed guess about the return that can be expected from a security that has not yet been traded in the market. Although the empirical evidence on the CAPM is mixed, it is widely used because of the valuable insights. William Sharpe its principal originator was awarded the Nobel Prize in economics for his work.

Once the portfolios are constructed the optimal and the efficient portfolios are selected. This is done through construction of efficient frontier. All the superior portfolios lie on the efficient frontier. The selection of best portfolio is done on the basis of indifference curves of investor's choice. Indifference curve represents a set of risk and expected return combinations that provide an investor with the same amount of utility. The investor is indifferent about the risk expected return combinations on the same indifference curve. The portfolio which suits the requirement of investor is selected even though all portfolios on the efficient frontier are best ones. The above presented methods of selecting portfolio need investor to calculate expected returns and variances for all the securities under consideration. Furthermore, all the covariances among these securities need to be estimated, and the risk free rate needs to be determined. Once this is done, the investor can identify the composition of the tangency portfolio as well as its expected return and standard deviation. The investor can then identify the optimal portfolio by noting where one of his or her indifference curves touches but does not intersect the efficient frontier. This portfolio involves an investment in the tangency portfolio along with a certain amount of either risk free borrowing or lending because the efficient set is linear. Such an approach to investing is an exercise in normative economics, wherein investors are told what they should do. Thus, the approach is prescriptive in nature. In the realm of positive economics a descriptive model is presented, how assets are priced? CAPM is widely used model in this. The CAPM reduces the situation to an extreme case. Everyone has the same information and agrees about the future prospectus for securities. Implicitly this means that investors analyze and process information in the same way. There are perfect markets for securities because potential impediments such as finite divisibility, taxes, transaction costs, and different risk free borrowing and lending rates have been assumed away. This approach allows the focus to shift from how an individual should invest to what would happen to security price if everyone invested in a similar manner. Examining the collective behavior of all investors in the market place enables one to develop the resulting equilibrium relationship between each security's risk and return.

Technical analysis
In finance, technical analysis is a security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume.[1] Behavioral economics and quantitative analysisincorporate substantial aspects of technical analysis,[2][page needed] which being an aspect of active management stands in contradistinction to much of modern portfolio theory. According to the weakformefficient-market hypothesis, such forecasting methods are valueless, since prices follow a random walk or are otherwise essentially unpredictable.

[edit]History
The principles of technical analysis derive from the observation of financial markets over hundreds of years.[3]The oldest known hints of technical analysis appear in Joseph de la Vega's accounts of the Dutch markets in the 17th century. In Asia, the oldest example of technical analysis is thought to be a method developed byHomma Munehisa during early 18th century which evolved into the use of candlestick techniques, and is today a main charting tool.[4][5] In the 1920s and 1930s Richard W. Schabacker published several books which continued the work of Dow and William Peter Hamilton in his books Stock Market Theory and Practice andTechnical Market Analysis. At the end of his life he was joined by his brother in law, Robert D. Edwards who finished his last book. In 1948 Edwards and John Magee published Technical Analysis of Stock Trends which is widely considered to be one of the seminal works of the discipline. It is exclusively concerned with trend analysis and chart patterns and remains in use to the present. It is now in its 9th edition. As is obvious, early technical analysis was almost exclusively the analysis of charts, because the processing power of computers was not available for statistical analysis. Charles Dow reportedly originated a form of chart analysis used by technicianspoint and figure analysis. Dow Theory is based on the collected writings of Dow Jones co-founder and editor Charles Dow, and inspired the use and development of modern technical analysis from the end of the 19th century. Other pioneers of analysis techniques include Ralph Nelson Elliott, William Delbert Gann and Richard Wyckoff who developed their respective techniques in the early 20th century. Many more technical tools and theories have been developed and enhanced in recent decades, with an increasing emphasis on computer-assisted techniques.

[edit]General

description
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While fundamental analysts examine earnings, dividends, new products, research and the like, technical analysts examine what investors fear or think about those developments and whether or not investors have the wherewithal to back up their opinions; these two concepts are called psych (psychology) and supply/demand. Technicians employ many techniques, one of which is the use of charts. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns.[6] Technicians use various methods and tools, the study of price charts is but one. Supply/demand indicators monitor investors' liquidity; margin levels, short interest, cash in brokerage accounts, etc., in an attempt to determine whether they have any money left. Other indicators monitor the state of psych are investors bullish or bearish? - and are they willing to spend money to back up their beliefs. A spent-out bull

cannot move the market higher, and a well heeled bear won't!; investors need to know which they are facing. In the end, stock prices are only what investors think; therefore determining what they think is every bit as critical as an earnings estimate. Technicians using charts search for archetypal price chart patterns, such as the well-known head and shoulders or double top/bottomreversal patterns, study technical indicators, moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns. Technical analysts also widely use market indicators of many sorts, some of which are mathematical transformations of price, often including up and down volume, advance/decline data and other inputs. These indicators are used to help access whether an asset is trending, and if it is, its probability of its direction and of continuation. Technicians also look for relationships between price/volume indices and market indicators. Examples include the relative strength index, and MACD. Other avenues of study include correlations between changes in options(implied volatility) and put/call ratios with price. Also important are sentiment indicators such as Put/Call ratios, bull/bear ratios, short interest and Implied Volatility, etc. There are many techniques in technical analysis. Adherents of different techniques (for example, candlestick charting, Dow Theory, andElliott wave theory) may ignore the other approaches, yet many traders combine elements from more than one technique. Some technical analysts use subjective judgment to decide which pattern(s) a particular instrument reflects at a given time, and what the interpretation of that pattern should be. Others employ a strictly mechanical or systematic approach to pattern identification and interpretation. Technical analysis is frequently contrasted with fundamental analysis, the study of economic factors that influence the way investors price financial markets. Technical analysis holds that prices already reflect all such trends before investors are aware of them. Uncovering those trends is what technical indicators are designed to do, imperfect as they may be. Fundamental indicators are subject to the same limitations, naturally. Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions which conceivably is the most rational approach. Users of technical analysis are often called technicians or market technicians. Some prefer the term technical market analyst or simply market analyst. An older term, chartist, is sometimes used, but as the discipline has expanded and modernized, the use of the term chartist has become less popular, as it is only one aspect of technical analysis.[citation needed]

[edit]Characteristics
Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, cycles or, classically, through recognition of chart patterns.

Technical analysis stands in contrast to the fundamental analysis approach to security and stock analysis. Technical analysis analyses price, volume and other market information, whereas fundamental analysis looks at the actual facts of the company, market, currency or commodity. Most large brokerage, trading group, or financial institution will typically have both a technical analysis and fundamental analysis team. Technical analysis is widely used among traders and financial professionals, and is very often used by active day traders, market makers, and pit traders. In the 1960s and 1970s it was widely dismissed by academics. In a recent review, Irwin and Park[7] reported that 56 of 95 modern studies found it produces positive results, but noted that many of the positive results were rendered dubious by issues such as data snooping so that the evidence in support of technical analysis was inconclusive; it is still considered by many academics to bepseudoscience.[8] Academics such as Eugene Fama say the evidence for technical analysis is sparse and is inconsistent with the weak form of the efficient-market hypothesis.[9][10] Users hold that even if technical analysis cannot predict the future, it helps to identify trading opportunities. [11] In the foreign exchange markets, its use may be more widespread than fundamental analysis.[12][13] This does not mean technical analysis is more applicable to foreign markets, but that technical analysis is more recognized there as to its efficacy there than elsewhere. While some isolated studies have indicated that technical trading rules might lead to consistent returns in the period prior to 1987,[14][15][16][17]most academic work has focused on the nature of the anomalous position of the foreign exchange market.[18] It is speculated that this anomaly is due to central bank intervention, which obviously technical analysis is not designed to predict.[19] Recent research suggests that combining various trading signals into a Combined Signal Approach may be able to increase profitability and reduce dependence on any single rule.[20]

[edit]Principles

Stock chart showing levels of support (4,5,6, 7, and 8) and resistance (1, 2, and 3); levels of resistance tend to become levels of support and vice versa.

Technicians say that a market's price reflects all relevant information, so their analysis looks at the history of a security's trading pattern rather than external drivers such as economic, fundamental and news events. Price

action also tends to repeat itself because investors collectively tend toward patterned behavior hence technicians' focus on identifiable trends and conditions.

[edit]Market

action discounts everything

Based on the premise that all relevant information is already reflected by prices, technical analysts believe it is important to understand what investors think of that information, known and perceived; studies such as by Cutler, Poterba, and Summers titled "What Moves Stock Prices?" do not cover this aspect of investing.

[edit]Prices

move in trends

See also: Market trend Technical analysts believe that prices trend directionally, i.e., up, down, or sideways (flat) or some combination. The basic definition of a price trend was originally put forward by Dow Theory.[6] An example of a security that had an apparent trend is AOL from November 2001 through August 2002. A technical analyst or trend follower recognizing this trend would look for opportunities to sell this security. AOL consistently moves downward in price. Each time the stock rose, sellers would enter the market and sell the stock; hence the "zig-zag" movement in the price. The series of "lower highs" and "lower lows" is a tell tale sign of a stock in a down trend.[21] In other words, each time the stock moved lower, it fell below its previous relative low price. Each time the stock moved higher, it could not reach the level of its previous relative high price. Note that the sequence of lower lows and lower highs did not begin until August. Then AOL makes a low price that doesn't pierce the relative low set earlier in the month. Later in the same month, the stock makes a relative high equal to the most recent relative high. In this a technician sees strong indications that the down trend is at least pausing and possibly ending, and would likely stop actively selling the stock at that point.

[edit]History

tends to repeat itself

Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them. "Everyone wants in on the next Microsoft," "If this stock ever gets to $50 again, I will buy it," "This company's technology will revolutionize its industry, therefore this stock will skyrocket" these are all examples of investor sentiment repeating itself. To a technician, the emotions in the market may be irrational, but they exist. Because investor behavior repeats itself so often, technicians believe that recognizable (and predictable) price patterns will develop on a chart.[6] Technical analysis is not limited to charting, but it always considers price trends. For example, many technicians monitor surveys of investor sentiment. These surveys gauge the attitude of market participants, specifically whether they are bearish or bullish. Technicians use these surveys to help determine whether a trend will continue or if a reversal could develop; they are most likely to anticipate a change when the surveys report extreme investor sentiment. Surveys that show overwhelming bullishness, for example, are evidence

that an uptrend may reverse the premise being that if most investors are bullish they have already bought the market (anticipating higher prices). And because most investors are bullish and invested, one assumes that few buyers remain. This leaves more potential sellers than buyers, despite the bullish sentiment. This suggests that prices will trend down, and is an example of contrarian trading.

[edit]Industry This section does not cite any references or sources.

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The industry is globally represented by the International Federation of Technical Analysts (IFTA), which is a Federation of regional and national organizations and the Market Technicians Association (MTA). In the United States, the industry is represented by both the Market Technicians Association (MTA) and the American Association of Professional Technical Analysts (AAPTA). The United States is also represented by the Technical Security Analysts Association of San Francisco (TSAASF). In the United Kingdom, the industry is represented by the Society of Technical Analysts (STA). In Canada the industry is represented by the Canadian Society of Technical Analysts. Some other national professional technical analysis organizations are noted in the external links section below. Professional technical analysis societies have worked on creating a body of knowledge that describes the field of Technical Analysis. A body of knowledge is central to the field as a way of defining how and why technical analysis may work. It can then be used by academia, as well as regulatory bodies, in developing proper research and standards for the field. The Market Technicians Association (MTA) has published a body of knowledge, which is the structure for the MTA's Chartered Market Technician (CMT) exam.

[edit]Use
Traders generally share the view that trading in the direction of the trend is the most effective means to be profitable in financial orcommodities markets. John W. Henry, Larry Hite, Ed Seykota, Richard Dennis, William Eckhardt, Victor Sperandeo, Michael Marcus andPaul Tudor Jones (some of the so-called wizards in the popular book, Market Wizards by Jack D. Schwager) have each amassed massive fortunes via the use of technical analysis and its concepts.[citation needed] George Lane, a technical analyst, coined one of the most popular phrases on Wall Street, "The trend is your friend!"[citation needed] Many non-arbitrage algorithmic trading systems rely on the idea of trend-following, as do many hedge funds. A relatively recent trend, both in research and industrial practice, has been the development of increasingly sophisticated automated trading strategies. These often rely on underlying technical analysis principles (see algorithmic trading article for an overview).

[edit]Systematic [edit]Neural

trading

networks

Since the early 1990s when the first practically usable types emerged, artificial neural networks (ANNs) have rapidly grown in popularity. They are artificial intelligence adaptive software systems that have been inspired by how biological neural networks work. They are used because they can learn to detect complex patterns in data. In mathematical terms, they are universal function approximators,[22][23] meaning that given the right data and configured correctly, they can capture and model any input-output relationships. This not only removes the need for human interpretation of charts or the series of rules for generating entry/exit signals, but also provides a bridge to fundamental analysis, as the variables used in fundamental analysis can be used as input. As ANNs are essentially non-linear statistical models, their accuracy and prediction capabilities can be both mathematically and empirically tested. In various studies, authors have claimed that neural networks used for generating trading signals given various technical and fundamental inputs have significantly outperformed buyhold strategies as well as traditional linear technical analysis methods when combined with rule-based expert systems.[24][25][26] While the advanced mathematical nature of such adaptive systems has kept neural networks for financial analysis mostly within academic research circles, in recent years more user friendly neural network software has made the technology more accessible to traders. However, large-scale application is problematic because of the problem of matching the correct neural topology to the market being studied.

[edit]Rule-based

trading
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Rule-based trading is an approach intended to create trading plans using strict and clear-cut rules. Unlike some other technical methods and the approach of fundamental analysis, it defines a set of rules that determine all trades, leaving minimal discretion. The theory behind this approach is that by following a distinct set of trading rules you will reduce the number of poor decisions, which are often emotion based. For instance, a trader might make a set of rules stating that he will take a long position whenever the price of a particular instrument closes above its 50-day moving average, and shorting it whenever it drops below.

[edit]Combination

with other market forecast methods

John Murphy states that the principal sources of information available to technicians are price, volume and open interest.[27] Other data, such as indicators and sentiment analysis, are considered secondary.

However, many technical analysts reach outside pure technical analysis, combining other market forecast methods with their technical work. One advocate for this approach is John Bollinger, who coined the term rational analysis in the middle 1980s for the intersection of technical analysis and fundamental analysis.[28] Another such approach, fusion analysis,[29] overlays fundamental analysis with technical, in an attempt to improve portfolio manager performance. Technical analysis is also often combined with quantitative analysis and economics. For example, neural networks may be used to help identify intermarket relationships.[30] A few market forecasters combine financial astrology with technical analysis. Chris Carolan's article "Autumn Panics and Calendar Phenomenon", which won the Market Technicians Association Dow Award for best technical analysis paper in 1998, demonstrates how technical analysis and lunar cycles can be combined.[31] Calendar phenomena, such as the January effect in the stock market, are generally believed to be caused by tax and accounting related transactions, and are not related to the subject of financial astrology. Investor and newsletter polls, and magazine cover sentiment indicators, are also used by technical analysts.[32]

[edit]Empirical

evidence

Whether technical analysis actually works is a matter of controversy. Methods vary greatly, and different technical analysts can sometimes make contradictory predictions from the same data. Many investors claim that they experience positive returns, but academic appraisals often find that it has little predictive power.[33] Modern studies may be more positive: of 95 modern studies, 56 concluded that technical analysis had positive results, although data-snooping bias and other problems make the analysis difficult.[7] Nonlinear prediction using neural networks occasionally produces statistically significant prediction results.[34] A Federal Reserve working paper[15] regarding support and resistance levels in short-term foreign exchange rates "offers strong evidence that the levels help to predict intraday trend interruptions," although the "predictive power" of those levels was "found to vary across the exchange rates and firms examined". Technical trading strategies were found to be effective in the Chinese marketplace by a recent study that states, "Finally, we find significant positive returns on buy trades generated by the contrarian version of the moving average crossover rule, the channel breakout rule, and the Bollinger band trading rule, after accounting for transaction costs of 0.50 percent."[35] An influential 1992 study by Brock et al. which appeared to find support for technical trading rules was tested for data snooping and other problems in 1999;[36] the sample covered by Brock et al. was robust to data snooping. Subsequently, a comprehensive study of the question by Amsterdam economist Gerwin Griffioen concludes that: "for the U.S., Japanese and most Western European stock market indices the recursive out-of-sample forecasting procedure does not show to be profitable, after implementing little transaction costs. Moreover, for

sufficiently high transaction costs it is found, by estimating CAPMs, that technical trading shows no statistically significant risk-corrected out-of-sample forecasting power for almost all of the stock market indices."[10] Transaction costs are particularly applicable to "momentum strategies"; a comprehensive 1996 review of the data and studies concluded that even small transaction costs would lead to an inability to capture any excess from such strategies.[37] In a paper published in the Journal of Finance, Dr. Andrew W. Lo, director MIT Laboratory for Financial Engineering, working with Harry Mamaysky and Jiang Wang found that "Technical analysis, also known as "charting," has been a part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis. One of the main obstacles is the highly subjective nature of technical analysisthe presence of geometric shapes in historical price charts is often in the eyes of the beholder. In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression, and apply this method to a large number of U.S. stocks from 1962 to 1996 to evaluate the effectiveness of technical analysis. By comparing the unconditional empirical distribution of daily stock returns to the conditional distribution conditioned on specific technical indicators such as head-and-shoulders or double-bottomswe find that over the 31-year sample period, several technical indicators do provide incremental information and may have some practical value."[38] In that same paper Dr. Lo wrote that "several academic studies suggest that ... technical analysis may well be an effective means for extracting useful information from market prices." [39] Some techniques such as Drummond Geometry attempt to overcome the past data bias by projecting support and resistance levels from differing time frames into the near-term future and combining that with reversion to the mean techniques.[40]

[edit]Efficient

market hypothesis

The efficient-market hypothesis (EMH) contradicts the basic tenets of technical analysis by stating that past prices cannot be used to profitably predict future prices. Thus it holds that technical analysis cannot be effective. Economist Eugene Fama published the seminal paper on the EMH in the Journal of Finance in 1970, and said "In short, the evidence in support of the efficient markets model is extensive, and (somewhat uniquely in economics) contradictory evidence is sparse."[41] EMH advocates say that if prices quickly reflect all relevant information, no method (including technical analysis) can "beat the market." Developments which influence prices occur randomly and are unknowable in advance. Technicians say that EMH ignores the way markets work, in that many investors base their expectations on past earnings or track record, for example. Because future stock prices can be strongly influenced by investor expectations, technicians claim it only follows that past prices influence future prices.[42] They also point to research in the field of behavioral finance, specifically that people are not the rational participants EMH makes them out to be. Technicians have long said that irrational human behavior influences stock prices, and that this

behavior leads to predictable outcomes.[43] Author David Aronson says that the theory of behavioral finance blends with the practice of technical analysis: By considering the impact of emotions, cognitive errors, irrational preferences, and the dynamics of group behavior, behavioral finance offers succinct explanations of excess market volatility as well as the excess returns earned by stale information strategies.... cognitive errors may also explain the existence of market inefficiencies that spawn the systematic price movements that allow objective TA [technical analysis] methods to work.[42] EMH advocates reply that while individual market participants do not always act rationally (or have complete information), their aggregate decisions balance each other, resulting in a rational outcome (optimists who buy stock and bid the price higher are countered by pessimists who sell their stock, which keeps the price in equilibrium).[44] Likewise, complete information is reflected in the price because all market participants bring their own individual, but incomplete, knowledge together in the market.[44]

[edit]Random walk hypothesis

The random walk hypothesis may be derived from the weak-form efficient markets hypothesis, which is based on the assumption that market participants take full account of any information contained in past price movements (but not necessarily other public information). In his bookA Random Walk Down Wall Street, Princeton economist Burton Malkiel said that technical forecasting tools such as pattern analysis must ultimately be self-defeating: "The problem is that once such a regularity is known to market participants, people will act in such a way that prevents it from happening in the future."[45] In the late 1980s, professors Andrew Lo and Craig McKinlay published a paper which casts doubt on the random walk hypothesis. In a 1999 response to Malkiel, Lo and McKinlay collected empirical papers that questioned the hypothesis' applicability[46] that suggested a non-random and possibly predictive component to stock price movement, though they were careful to point out that rejecting random walk does not necessarily invalidate EMH, an entirely separate concept from RWH. Technicians say that the EMH and random walk theories both ignore the realities of markets, in that participants are not completely rational and that current price moves are not independent of previous moves.[21][47]

Fundamental Analysis
What Does Fundamental Analysis Mean? A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management).

The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security's current price, with the aim of figuring out what sort of position to take with that security (underpriced = buy, overpriced = sell or short). This method of security analysis is considered to be the opposite of technical analysis. Investopedia explains Fundamental Analysis Fundamental analysis is about using real data to evaluate a security's value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security.

For example, an investor can perform fundamental analysis on a bond's value by looking at economic factors, such as interest rates and the overall state of the economy, and information about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth. In terms of stocks, fundamental analysis focuses on the financial statements of the company being evaluated.

One of the most famous and successful fundamental analysts is the Oracle of Omaha, Warren Buffett, who is well known for successfully employing fundamental analysis to pick securities. His abilities have turned him into a billionaire. What Does Technical Analysis Mean? A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

Watch: Fundamental Vs. Technical Analysis

Investopedia explains Technical Analysis Technical analysts believe that the historical performance of stocks and markets are indications of future performance. In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, the technical analyst's decision would be based on the patterns or activity of people going into each store.

Fundamental analysis
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Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on

the overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis.[1] The term is used to distinguish such analysis from other types ofinvestment analysis, such as quantitative analysis and technical analysis. Fundamental analysis is performed on historical and present data, but with the goal of making financialforecasts. There are several possible objectives:

to conduct a company stock valuation and predict its probable price evolution, to make a projection on its business performance, to evaluate its management and make internal business decisions, to calculate its credit risk.
Contents
[hide]

1 Two analytical models 2 Use by different portfolio styles 3 Top-down and bottom-up 4 Procedures 5 Criticisms 6 See also 7 References 8 External links

[edit]Two

analytical models

When the objective of the analysis is to determine what stock to buy and at what price, there are two basic methodologies 1. Fundamental analysis maintains that markets may misprice a security in the short run but that the "correct" price will eventually be reached. Profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and reprice the security. 2. Technical analysis maintains that all information is reflected already in the stock price. Trends 'are your friend' and sentiment changes predate and predict trend changes. Investors' emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the 'value' of a stock is. Their price predictions are only extrapolations from historical price patterns.

Investors can use any or all of these different but somewhat complementary methods for stock picking. For example many fundamental investors use technicals for deciding entry and exit points. Many technical investors use fundamentals to limit their universe of possible stock to 'good' companies. The choice of stock analysis is determined by the investor's belief in the different paradigms for "how the stock market works". See the discussions at efficient-market hypothesis, random walk hypothesis, capital asset pricing model, Fed model Theory of Equity Valuation, Market-based valuation, and Behavioral finance. Fundamental analysis includes: 1. Economic analysis 2. Industry analysis 3. Company analysis On the basis of these three analyses the intrinsic value of the shares are determined. This is considered as the true value of the share. If the intrinsic value is higher than the market price it is recommended to buy the share . If it is equal to market price hold the share and if it is less than the market price sell the shares.

[edit]Use

by different portfolio styles

Investors may use fundamental analysis within different portfolio management styles.

Buy and hold investors believe that latching onto good businesses allows the investor's asset to grow with the business. Fundamental analysis lets them find 'good' companies, so they lower their risk and probability of wipe-out.

Managers may use fundamental analysis to correctly value 'good' and 'bad' companies. Eventually 'bad' companies' stock goes up and down, creating opportunities for profits.

Managers may also consider the economic cycle in determining whether conditions are 'right' to buy fundamentally suitable companies.

Contrarian investors distinguish "in the short run, the market is a voting machine, not a weighing machine".[2] Fundamental analysis allows you to make your own decision on value, and ignore the market.

Value investors restrict their attention to under-valued companies, believing that 'it's hard to fall out of a ditch'. The value comes from fundamental analysis.

Managers may use fundamental analysis to determine future growth rates for buying high priced growth stocks.

Managers may also include fundamental factors along with technical factors into computer models (quantitative analysis).

[edit]Top-down

and bottom-up

Investors can use either a top-down or bottom-up approach.

The top-down investor starts his analysis with global economics, including both international and national economic indicators, such asGDP growth rates, inflation, interest rates, exchange rates, productivity, and energy prices. He narrows his search down to regional/industry analysis of total sales, price levels, the effects of competing products, foreign competition, and entry or exit from the industry. Only then he narrows his search to the best business in that area.

The bottom-up investor starts with specific businesses, regardless of their industry/region.

[edit]Procedures
The analysis of a business' health starts with financial statement analysis that includes ratios. It looks at dividends paid, operating cash flow, new equity issues and capital financing. The earnings estimates and growth rate projections published widely by Thomson Reuters and others can be considered either 'fundamental' (they are facts) or 'technical' (they are investor sentiment) based on your perception of their validity. The determined growth rates (of income and cash) and risk levels (to determine the discount rate) are used in various valuation models. The foremost is the discounted cash flow model, which calculates the present value of the future

dividends received by the investor, along with the eventual sale price. (Gordon model) earnings of the company, or cash flows of the company.

The amount of debt is also a major consideration in determining a company's health. It can be quickly assessed using the debt to equity ratioand the current ratio (current assets/current liabilities). The simple model commonly used is the Price/Earnings ratio. Implicit in this model of a perpetual annuity (Time value of money) is that the 'flip' of the P/E is the discount rate appropriate to the risk of the business. The multiple accepted is adjusted for expected growth (that is not built into the model). Growth estimates are incorporated into the PEG ratio, but the math does not hold up to analysis.[citation needed] Its validity depends on the length of time you think the growth will continue. IGAR models can be used to impute expected changes in growth from current P/E and historical growth rates for the stocks relative to a comparison index. Computer modelling of stock prices has now replaced much of the subjective interpretation of fundamental data (along with technical data) in the industry. Since about year 2000, with the power of computers to crunch vast

quantities of data, a new career has been invented. At some funds (called Quant Funds) the manager's decisions have been replaced by proprietary mathematical models.[3]

[edit]Criticisms

Economists such as Burton Malkiel suggest that neither fundamental analysis nor technical analysis is useful in outperforming the markets[4]

[edit]See

also

Lists of valuation topics Stock picking Security analysis Stock selection criterion John Burr Williams: Theory Mosaic theory Chepakovich valuation model

[edit]References

1. ^ "An Introduction to Fundamental Analysis and the US Economy". InformedTrades.com. 2008-02-14. Retrieved 2009-07-27. 2. ^ Graham, Benjamin; Dodd, David (December 10, 2004). Security Analysis. McGraw-Hill. ISBN 9780071448208. 3. ^ "Quant Fund". Investopedia. 4. ^ "Financial Concepts: Random Walk Theory". Investopedia.

[edit]External

links

Free 300 Page Fundamental Analysis and Stock Valuation E-Book from IACAM MIT Financial-Management course notes
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Types of stocks

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Participants Exchanges

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Alpha Arbitrage pricing theory Beta Book value CAPM Dividend yield Earnings per share Earnings yield Gordon model SCL Cap rate D/E ratio Dividend cover Dividend payout ratio EV/EBITDA P/B ratio P/CF ratio P/E PEG P/S ratio RAROC ROA ROCE ROE ROIC SGR Sharpe ratio Treynor ratio

Financial ratios

Trading theories and strategies

Algorithmic trading Buy and hold Day trading Efficient-market hypothesis Fundamental analysis Market timing Modern portf theory Momentum investing Mosaic theory Pairs trade Post-modern portfolio theory Random walk hypothesis Swing trading analysis Trend following

Related terms

Block trade Dark liquidity Dividend DuPont Model Flight-to-quality Haircut IPO Margin Market anomaly Market capitaliza depth Market manipulation Market trend Mean reversion Momentum Open outcry Public float Rally Reverse stock split S capital Short selling Slippage Speculation Stock dilution Stock split Trade Uptick rule Volatility Voting interest

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Fundamental analysis is the process of looking at a business at the basic or fundamental financial level. This type of analysis examines key ratios of a business to determine its financial health and gives you an idea of the value its stock. Many investors use fundamental analysis alone or in combination with other tools to evaluate stocks for investment purposes. The goal is to determine the current worth and, more importantly, how the market values the stock. This article focuses on the key tools of fundamental analysis and what they tell you. Even if you dont plan to do in-depth fundamental analysis yourself, it will help you follow stocks more closely if you understand the key ratios and terms. Earnings Its all about earnings. When you come to the bottom line, thats what investors want to know. How much money is the company making and how much is it going to make in the future. Earnings are profits. It may be complicated to calculate, but thats what buying a company is about. Increasing earnings generally leads to a higher stock price and, in some cases, a regular dividend. When earnings fall short, the market may hammer the stock. Every quarter, companies report earnings. Analysts follow major companies closely and if they fall short of projected earnings, sound the alarm. For more information on earnings, see my article: Its the Earnings. While earnings are important, by themselves they dont tell you anything about how the market values the stock. To begin building a picture of how the stock is valued you need to use some fundamental analysis tools. These ratios are easy to calculate, but you can find most of them already done on sites like cnn.money.com or MSN MoneyCentral.com.

Fundamental Analysis Tools These are the most popular tools of fundamental analysis. They focus on earnings, growth, and value in the market. For convenience, I have broken them into separate articles. Each article discusses related ratios. There are links in each article to the other articles and back to this article. The articles are: 1. 2. 3. 4. 5. 6. 7. 8. 9. Earnings per Share EPS Price to Earnings Ratio P/E Projected Earning Growth PEG Price to Sales P/S Price to Book P/B Dividend Payout Ratio Dividend Yield Book Value Return on Equity

No single number from this list is a magic bullet that will give you a buy or sell recommendation by itself, however as you begin developing a picture of what you want in a stock, these numbers will become benchmarks to measure the worth of potential investments.

fundamental analysis
Definition
A method of security valuation which involves examining the company's financials and operations, especially sales,earnings, growth potential, assets, debt, management,products, and competition. Fundamental analysis takes intoconsideration only those variables that are directly related to the company itself, rather than the overall state of themarket or technical analysis data.

How to manage a stock portfolio

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Retails investors often trade in stocks without understanding the deeper implications of their buy or sell decisions. When you invest in stocks, you implicitly are building a stock portfolio.
Here is a set of actionable steps that you must keep in mind to help you with building your stock portfolio. 1. Diversify: Just buying stocks in 1 or 2 companies is not enough. You could be taking on too much risk through a concentrated portfolio, akin to putting all your eggs in one basket. Ideally, your portfolio should have no more than 20-25 names to give you the benefits of diversification. However, this also does not mean that you can have just say 5 shares of one company and 2 shares of another, because that is all you can afford because you cant create wealth through just purchasing a handful of shares in a company. Good stockpicking is about knowing how to allocate your capital efficiently across your best ideas in a diverse portfolio. 2. Review Your Exposure Frequently: While one investment strategy is to buy and hold, that does not imply that you do not manage your exposure by ignoring your portfolio. Market prices move, sometimes dramatically. As a result, you might have too much or too little exposure to one sector or stock. Avoid this by being disciplined about setting aside some time to review your exposure. This will help you understand if you need to trim or add to the exposure to a certain sector or stock in your portfolio and take care of risk management. 3. Create your own set of rules to guide you: Formulate your own rules for when to buy or sell a stock based on an investment philosophy that you can be disciplined about. Dont just follow the herd or come under peer pressure. What is good for others might not be suitable for you or your portfolio because your risk, investment criteria, tax situation and entry price might be different. If a stock has met your price target, have some rules that guide you whether you will take money off the table or stay invested.

If a stock is a constant underperformer, will you continue holding on to it because psychologically you are unwilling to admit that you made a poor decision, or will you be unemotional and make the rational decision to cut your losses and sell? 4. Keep some cash available: This is one area where the professional investors stand out. They recognize that good investment opportunities come unannounced, but in order to take advantage of them they need to have cash available to make these investments.

How to Manage Your Own Portfolio

By Joan Collins, eHow Member

Manage Your Own Portfolio

User-Submitted Article

As the economy turns down, more individuals are finding it necessary to manage their own portfolios. If you have made the decision recently, learn all you can before you actually start handling it on your own. With the right amount of education combined with carefully made decisions, you can manage your own portfolio successfully.
Difficulty: Moderately Challenging

Instructions
1. 1 Study. Read books. Check out websites. Educate yourself about the market, its process and the laws that are involved in managing your own portfolio. Ignorance may be bliss, but not when it affects your financial stability. 2. 2 Determine which asset classes you want to use. To do this successfully, you must be very aware of your own goals and risk tolerance. Become knowledgeable about stocks, bonds, real estate, commodities, collectibles, and cash and learn how each of them can help or hinder your goal. Learn about the different sub-divisions within stocks. Choose the asset classes that will help you achieve your overall goal

To gain a basic understanding of the market, check out "Beginners' Guide to Asset Allocation, Diversification, and Rebalancing." Check resources for the website. Other websites, like 'The Motley Fool' (link found below) can offer you an inexpensive education as well.

Reading current books on the stock market and portfolios is another way to increase your knowledge. Check out the local library. More current material will be available at the bookstores in your community. 3. 3 Remember to diversify. Putting all your income into one market can wipe you out. Diversification is one way to avoid potential ruin. 4. 4 Learn with markets are popular and successful for both institutional and individual investors. Index funds do well and are relatively safe because they avoid many risks associated with the actively managed mutual funds. 5. 5 Re-balance your portfolio when your investments become over-concentrated. Be aware that you should neither neglect to re-balance your portfolio nor should you re-balance it excessively. Extreme re-balancing can add unnecessary costs and tax liabilities. Remember that your portfolio need not be attended every day. Fine tuning requires a gentle, thoughtful hand. Rotate into asset classes that are under performing by buying low. Rotate out of outperforming asset classes by selling high. Once you've done all your homework, get started. Nobody cares more about your financial success than you. Like others, you will find success once you've prepared yourself to manage your own portfolio.

Read more: How to

Manage Your Own Portfolio | eHow.com http://www.ehow.com/how_5699313_manage-own-portfolio.html#ixzz1BrCXXRvJ