Advanced Business Finance and Advanced Financial Management - Essay Example

ADVANCED BUSINESS FINANCE AND ADVANCED FINANCIAL MANAGEMENT by The of the The of the School (University) The City and State where it is located The Date A. Introduction This report illustrates on how individual traders applied investment strategies through a combination of fundamental and technical information thus distinguishing the winners stock from loser stock. £100,000 is invested in UK stock market from October to January 2014. Proper risk management and control skills employed will determine the portfolio returns. In addition, the report explored the investment opportunities by thorough examination of financial power, which includes profitability, business efficiency, stability in accounting conservatism, and associated solvency. Ciana, (2011, p. 34) argues that when investor points at reliable quotation in a potential market, the entire data on the key traits that shall promote success in such an investment usually go unnoticed as price-to-earnings ratio, volume and size of the market, or even ex-share date targeted as priority. Previous studies on fundamental and technical analysis framework has created sizeable prove on their respective capabilities to discuss the arena of stock prices or to predict future variation of the share value. Despite this achievement, the literature has been silent on developing a reliable approach of integrating both technical and fundamental analysis methods in determining equity valuation as well as reaching to an investment decision. The current study utilizes fused fundamental framework whereby objective analysis of the share value is integrated with the technical analysis of the past returns and value in the stock market. More specifically, the report focused on the share values in banks, supermarket, telecommunication companies and RandGold Resource limited. The technical information in UK stocks has been utilized frequently by the investors to make decision pertaining which industry they should invest in. Generally, the technical information focuses on the shares’ price over a short term as well as the returns attained from sale volume information. Even when the stock price strays, the arbitrager can end up acquiring excess simultaneous returns in the market. A notable business research based on technical information in the UK stock price is the momentum investment approach (Konecny, 2013, p. 175). Along with the increase of the abnormal phenomena, attempted exploration on feasibilities of UK stock market anomalies stretch out to shaping investment behavior on account of the financial capacity. For instance, the investor applies heuristics to cement subjective marks and regarded as crucial decision criteria to attain abnormal return. By applying stock’s past perfoamces, Ciana (2011, p. 67) advocated that on basis of cumulative returns between four months (October to January), the highest return decile portfolio surpasses the smallest decile portfolio in the next four months. This costing anomaly is generated from the previous returns and the investors will not use the specific information on a given firm to separate the winners from the losers in the stock. The pricing in conjuction with past trading returns are utilized to forecast the profitability, magnitude, value, and consistency of the future returns (Thomsett, 2011, p 34). Any fundamental information about the firms gives the investors reliable crude methodology of decision making based on the valuation of the shares. Share information and pricing model by Zacks (2011, p. 78) applied the book value and average earnings per share to determine the stock prices across all firms. Financial statements such as inventories, gross margins, solvency and account receivables have been above aggregated measurements of the entire performance to illustrate the fundamental behaviors of a firm. Common fundamanetal indicators such as FSCORE and GSCORE were developed by Henning (2010, p. 89) and Tortoriello (2009, p 72) in evaluating the value and the growth stock of the different firms in the stock market. These financiers advocated that a healthier portfolio scheme is characterized by a higher FSCORE or GSCORE, hence outdoing those depicting low scores. Based on Tortoriello (2009, p. 74), creative investment is categorized into value investment and momentum investment strategy. Investors of value investment strategy overreact so that stock values are undervalued and growth stocks are overvalued. Market overreaction develops forward momentum investment strategy whereby investor creates a buy-and-hold portfolio on basis of past returns. In addition, he suggested that the approach applied to fund the study effects of the level of optimism of an expert. Generally, value and growth stock are defined by calculating the price-to-book ratio where high percentages are growth stocks while value stocks are low proportions. To make the approach more appealing and reliable, constructing a scoring system that considers fundamental analysis to filter value stocks and creating a value style portfolio. Such portfolio integrated with fundamental financial factors and price-to-book ratio, complementing heuristic and biases, hence more beneficial for investors to make strategic plans. This report shows a variation of 1.63% on technical information such as total trading volume and past return against the ratio of book-to-market stock. The return from fundamental analysis and technical momentum strategy are negatively correlated, and therefore high monthly returns from the share investments are inversely proportional to lower tracking errors from combination of varying variables. The findings in this report create insight to potential investors through comparison of corporate value between the firms. This is attained by finding the product of investments with the difference between actual and required returns. Some firms experienced significant losses between October and January, and such results are applied to separate momentum winners from stock losers (Gayed, 1990, p. 10). B. Methodology Our sample includes all non-financial firms listed on FTSE ALL Share index from October to January. The listed firms were selected on the basis of type of operation, trading behaviors, and level of investment. This selection was essential in order to maintain consistency across the stock market. Firms with prices with average price less than $5 were excluded as well as those with negative book-to market ratio. The stock data on return and prices from sale of shares will be beneficial in the construction of FSCORE and GSCORE. Besides, all firms with inconsistence time-series data are eliminated during computation of the score (Ciana, 2011, p. 277). First, the market stock will be sorted based on price-to-book ratio and take the top half of the entire sample as growth stock. The fundamental traits of the stock market are then calssified on both scoring systems. In our classification, the score within different factors will be given a point for the excellent part; else, zero, that is, the higher the score, the better evaluation on the fundamental analysis. Winner portfolios are then constructed separately by selecting higher point group between GSCORE and FSCORE. In the FSCORE model, the measurement of the firm’s financial power is conditioned under three areas: profitability, operating efficiency, and solvency. There are up to ten critical signals that applied to measure financial condition of the high price-to-market firms in the above three areas. Each signal can get a point if reached. At the end each month from October to January, the stock at top or bottom quantile portfolio in regard to price to book ratio also represents the stock sample. Further, the stock is sorted categorically based on cumulative returns within the stock-exchange period, the BOS ratio, and Fundamental scores. The overall portfolios are represented by (QMi,QBi,QFi) where QMi, QBi, and QFi are the ith quintile portfolio classified from returns in previous month, the BOS ratio, and the fundamental indicator, FSCORE or GSCORE respectively (Henning, 2010, p. 235). For instance, the portfolio representing the highest achiever (top winner) is denoted by QM1, smallest BOS ratio (QB5), and highest FSCORE (QF5). Simply, this chain is denoted by (QM1,QB5,QF5). Equally, the stock with top losers, highest BOS ratio and lowest FSCORE will be denoted by QM5,QB5,QF1). The uninformed investor in market causes adverse selection based on information symmetry and transaction cost. This makes the stock prices to deviate from the original standard of the momentum. The strength of the momentum is gauged from the BOS ratio. Read More