2. Stock and Portfolio Analysis

• changes in the price of stocks, bonds, and currencies due to market movements and/or changes in the yield curve and volatilities.

• They can be broken down into foreign-exchange and inflation risks, risks of movement in interest rates, and equity price risks as well as risks associated with trading commodities

• Country risk denotes the hazards that can arise as a result of convertibility, transfer, freezing of payment and moratorium on the part of a country, i.e., due to the hazard of political intervention in the financial market. As a result, it is possible that foreign-exchange restrictions will prevent foreign debtors, regardless of their solvency, from servicing a debt.

• Liquidity risk is the risk that the scope and temporal structure of payment flows cannot be maintained at a level of quality sufficiently adequate to ensure liquidity.

• Capital maintenance risk refers to the possibility that the investor could lose some or all of his or her capital in the event of a company’s bankruptcy.

• Information risk is the risk that the investor is not directly supplied with all the information necessary for an assessment of a financial instrument; this is encountered particularly in cases involving intermediaries, in which information asymmetries place the investor at a relative disadvantage.

• Settlement and management risk describes the misappropriation or disloyal management of capital placed by the investor.

• Advocacy risk refers to the possibility that a representative exploits an investor’s interests to his or her disadvantage, for instance in the delegation of proxy voting rights at a corporation’s shareholders’ meeting.

• Conditions risk involves the chance of acquiring an investment at unfavorable terms.

Appropriate processes must be developed and implemented for identifying, measuring, and

managing financial risk. risk management:

• Sharpe ratio

• Treynor ratio

calculated without subsequent outflows or inflows of funds. I0 denotes the value of the investments at the outset of the

investment period, and I1 denotes the value of the investments at a later point in time.

indicates the percentage change in the value of the initial investment

• to measure historical performance, which compensates for external cash flows

  • External cash flows are net movements of value, which result from transfers into or out of the initial investment or portfolio.

• To compensate for such movement, the overall time under consideration is broken down into several periods whenever there is an external cash flow, with a return calculated for each period.

• The single period returns are combined to produce the time-weighted return.

• takes the money value of cash flows into account.

• What is needed is the starting value of the portfolio at the beginning of the year, the end-of-year value, and the cash flows attributed to the months involved.

• Money-weighted return is highly dependent on the timing of an investment or withdrawal, i.e., on whether inflows or outflows occur at favorable or unfavorable times.

• provides an indication not only of the timing of payments but also of what the market situation was like. If money-weighted return is less than time-weighted return, then the investor’s timing of deposits and withdrawals was unfavorable. If the situation is the other way around, then timing was favorable.

methods for stock-price forecasting can be broken down into objective and subjective components. Objective methods include fundamental analysis, technical analysis, and innovative methods. Subjective methods include surveys of experts and intuitive methods.

• assumes that each share has what is known as intrinsic value: a parameter also referred to as “fair value.”

  • result of both internal and external corporate data

• A share’s over- or undervaluation can be determined by comparing its intrinsic value with its current market price (stock-exchange price). Important influencing factors for the stock price are macro- and microeconomic data that need to be analyzed in order to assess the accuracy of its valuation.

• makes use of various key ratios to determine whether a stock is worth buying. These key ratios are readily available, and some of them can be derived from the valuation of equity markets, such as the price/earnings ratio (P/E), or the price/cash flow ratio (P/CF). Discountet cash flow can also be used

• ratio between the current share price and estimated future annual earnings per share:

• can be compaired with a competitor or with the entire market.

  • if higher than market-> stock is relatively expensive

• it will take P/E years until investment is received back

• problem with P/E as a parameter:

  • it is retrospective: the current price is considered in relation to the company’s last known annual earnings.

  • Market participants’ expectations, e.g., of higher future earnings or lower risk on the part of a company, influence the price.

  • High and lower, rising and falling P/Es are a barometer of the market’s attitude with regard to a company’s future prospects.

Particularly in an international context, price/cash flow ratios permit more meaningful statements for assessing a company: by taking depreciation, amortization, and provisions into account, it can largely ignore differences in accounting standards. Yet even P/CF must be regarded critically. If, for instance, a company makes a bad investment, it leads to an increased write-down that does not negatively affect P/CF. Hence, P/CF should only be considered a complementary ratio for use when assessing true value.

• deals exclusively with price and trading volume trends of securities.

• comprise classic chart analysis as well as mathematical forecasting systems.

  • Classic methods offer a graphic presentation of stock price trends in chart form, drawing on past price data to provide orientation for future price trends.

• Price trends are the result of supply and demand.

• There are numerous rational and irrational factors at play, and the market continuously compensates for these.

• Prices tend to develop along lines of predictable phases and trends.

• It is possible to forecast changes in basic direction brought on by changes in supply and demand.

• Past patterns brought about by certain influencing factors repeat themselves because human behavior repeats itself under similar circumstances. As a result, price trends observed to date can be used for forecasting purposes.

• chaos theory

  • assumption that movements in stock prices are not random but rather based on certain complex patterns. In contrast to chart analyses, chaos theorists assume that prices follow a nonlinear, dynamic process, one in which effects are not just linear outcomes of causes but also influence the causes (feedback). This gives rise to self-reinforcing effects.

• neural networks

  • constitute such an innovative process. With the aid of the first artificial neural networks, neurobiologists have used a computer to try to simulate the models of learning, thinking, and forgetting that have arisen from their own field of science and from the theory of learning. To date, however, neural network processes are not yet

    widely utilized in practice

Even if in theory market risks cannot be eliminated through diversification, it is nonetheless possible to evaluate them using appropriate ratios, and to factor these ratios into a decision to buy or sell.

Calculation of the return on a portfolio reveals the extent to which an investor has been successful in his or her decisions and in estimating risk.

Time-weighted return, which eliminates the timing effect of any cash flows, identifies the rate of return for a given time interval. Money-weighted return, on the other hand, also takes purchases and sales into account as well as incoming and outgoing payments. It allows for more specific statements about aspects such as the quality of the investor’s timing.

Stock analysis is used to obtain and process information for individual securities, to generate fundamental and technical market assessments of securities, and to provide an outlook on their future performance. The emphasis of fundamental analysis is on determining the intrinsic value of a share of stock. If the market price of the share is below this intrinsic value, then excess return will be derived. Important ratios in the context of fundamental analysis include P/E and P/CF. Technical analysis, on the other hand, is based on past data. It draws on the price history of a stock to date, examining trends, supporting factors, sources of resistance, and formations in an effort to forecast the future performance of the security