Financial Portfolio and Technical Analysis - Essay Example

Portfolio and technical analysis of the Portfolio risk assessment A portfolio may consist of a number of different types of securities, embedded with differential risk factors. The portfolio of Emirates National Bank PJS included shares as well as bonds. The current section of the paper focuses upon assessing the risk associated with the shares and bonds of the company. Firstly the rates of return in case of both shares and the bond have been calculated and shown in the following graph. The return on bond issued by the company is seen to remain adequately high. The instances of sharp fall in bond returns have been low. This indicates that investors who which to invest in the bonds of Emirates National Bank PJS are likely to continue obtaining average or more than average returns. However procuring more capital through bond issue is likely to enhance the risk position of the business (Carter & Van Auken, 1990). The returns earned by the firm on the share prices are seen to be highly fluctuating. Returns on equity are also seen to be lower than the returns on bond. This indicates that the company pays off a large amount of its year end profits as interests to bondholders. As a result of the earnings available to shareholders becomes less. It also implies that the company does not earn adequate levels of earnings to cover both interests and tax related expenses. Considering the returns which the form provides to both the shareholders and the investors of bond, majority investors would prefer to invest in the bonds of the company (Reilly & Brown, 2011). The risk factors embedded in the portfolio of the company has also been analyzed through the calculation of different statistical factors. These are as shown as below. Bond Shares Standard deviation based on returns 7.508281855 2.280396792 Variance based on returns 56.36787458 5.199119403 Covariance based on returns on the portfolio 0.571009945 Correlation coefficient based on the portfolio moving average returns -0.017811173 Standard deviation essentially measures the deviation from the mean value. In case of the standard deviation values for the equity and bond, it is preferred that the results remain high. When the standard deviation values are high, it would indicate that the returns provided to the shareholders and bondholders are high. From the tabulated results it can be seen that the standard deviation value of returns provided to share holders are lower than the returns provided to the bondholders, indicating that investing in bonds is likely to be more profitable. Variance analysis is essentially the analysis of mean values. The higher the variance, it is predicted that the average value of the data set is high. In case of the variance calculated for the Emirates National Bank PJS stock and bond, it is seen that variance costs in respect of bond are higher than stock. Both covariance and correlation co efficient are adequately low for the company. This is due to the vast difference in the mean values of both the data set procured for stock and bond returns. From the overall analysis it is understood that investing the company’s bond would be more profitable than stock. Hence an investor must develop a portfolio consisting more of stock rather than bond (Elton, et al., 2009). Technical analysis Technical analysis involves analyzing the movement of the prices of stocks and bonds of the company. The following graph has been constructed for Emirates National Bank’s stock and bond values, on the basis of 8 years moving average technique. Series 1 in the above chart is in respect of the values of bond while series 2 depicts the price trend of bond. The price trend of stocks represents the triangles format. The following graph depicts the different types of triangles pattern in such charts. The stocks of Emirates National Bank are seen to follow the symmetrical triangle trend. The rise and fall of the values of stocks are almost symmetrical. The bond prices are also seen to follow the triangle chart type. However the prices of bond essentially follow the ascending triangle format. This indicates that the prices of bonds are continuously soaring. Technical analysis essentially facilitates in understanding the trend in prices over a considerably long period of time and accordingly takes investment related decisions (Elton, et al., 2009). Literature review Portfolio analysis Portfolio analysis may essentially be described as a process whereby the performance of specific portfolio under different circumstance or over a considerable period of time is analyzed. The purpose of portfolio analysis is to achieve the best trade off between risk and return. A portfolio, in which an investor invests, usually consists of a number of different types financial instruments. Each of the financial instruments carries differential rates of risks and returns. Investors through careful analysis are required to understand the different types of risks and returns associated with different types of investments and accordingly develop a portfolio which not only sets off risks against adequate returns, but also remains highly profitable. Portfolio analysis usually incorporates analyzing the returns available from different forms of securities and accordingly determining a suitable mix. Investors are also required to consider sales, profits and asset utilization rates before investments are actually made. Additional analysis also may include understanding firm’s competitive position in the market, management efficiency and technology position. Investors generally presume if the internal operational efficiency of a firm are strong, the resultant profits are high (Edwards, Magee & Bassetti, 2007). While analyzing a firm’s stock performance, it is essential to assume a long position. Earnings over a considerably longer period of time require being calculated. Both past and future rate of returns must be considered while calculating returns. In many cases, investors analyze important ratios such as price earnings and return on capital invested by the firm in order to understand the returns available from the firm’s securities. In many cases, investors may also undertake analyzing the discounted cash flows and accordingly estimate the future returns on different types of shares. Relative models such as capital assets pricing and dividend discount models are used to understand the efficiency and the risks which are associated with a company’s portfolio and accordingly take investment decisions. Investors are required to develop a portfolio which balances risks and returns perfectly. Usually investors consider keeping those securities mostly which provide maximum returns. However those securities which provide higher returns are laden with greater risks. Therefore, for setting off the risks from higher return providing securities, it becomes essential to procure low return securities as well (Small, 2006). Technical analysis Technical analysis is essentially the forecasting of future financial price movements on the basis of the pat price movements. Technical analysis involves making a number of predictions. As a result it is not necessary that predicted assessment should be correct. Technical analysis facilitates making investors understand the likely future positions of the future and accordingly determine the value of the prices. Technical analysis predominantly makes use of a number of charts which depicts the price movements of stocks. Technical analysis can be performed in respect of stocks, commodities, futures and other tradable instruments which get adequately influenced by market forces of supply and demand. In technical analysis prices may the high, low or closing values based upon the investor’s preference. Most investors consider taking a mixture of all these prices. Certain technical analysts consider taking volume or open interest’s figures while studying the price actions (Small, 2006). The Dow Theory has been considered by many as the foundations of the modern technical analysis process. The theory is essentially based on the concept of movement in prices and the discounting role which prices play. The Dow Theory fundamentally believes that prices of stock contain sufficient information regarding the past performance of a firm. Therefore investors must give adequate importance towards analyzing the movements of the prices of stock before investing. Through technical analysis, information relating to the fluctuation of prices is captured and presented through graphs. These graphs are used to interpret the market suggestions regarding the overall performance of an organization. However, many investors do not consider technical analysis alone to be enough to take investment decisions. Price fluctuations may result out of a variety of market forces such as inflation or economic downturn. Hence associating the overall market conditions with a firms performance might not be considered to be suitable. It is also required to be understood that while adopting technical analysis, even though prices may be falling, the net returns might remain adequately high (Edwards, Magee & Bassetti, 2007). While adopting technical analysis, it is also many at times noticed that prices do not trend very often. In many occasions the prices may remain stagnant while the returns might be soaring or dropping. Prices may remain stagnant due to the conditions such as weak demand. However if the internal operations of a firm are efficient, there will not be much impact upon the returns provided to shareholders. Investors may however may not able to grasp such information through mere technical analysis. For such reasons it is often suggested that analysis in respect of different types of securities must be done in association with both technical and portfolio risk assessment tools. Portfolio risk assessment focuses upon returns available on different stocks. Prices are mainly used for calculating the returns (Elton, et al., 2009). Technical analysis often raises the question, whether importance must be given to historical prices or the current prices. In most cases it is witnessed that investors give important to the overall trend of rise and fall of prices. While analyzing the rise and the fall of prices, investors are able to consider both historical and current prices. Usually a rising trend of prices is considered to be profitable as it is associated with higher returns. Hence when a particular stock is seen to have a rising trend in prices, it is considered that the profits earned are rising and as a result the firm will be able to provide its investors with higher returns (Elton, et al., 2009). Summary and Conclusion From the conducted analysis in respect of Emirates National Bank’s stock and bonds, it can be understood that investing in their bonds are more profitable than stock. The returns available on bonds depict a rising trend while that on the stocks depicts a highly volatile trend. Returns on stock and stock prices have displayed a non static movement. Very frequently the stock prices and returns have become sharply negative. This indicates that investors of stock are likely to face more risks than those of bonds. However returns available to bondholders are adequately affected by the rates of interest prevailing in the market. A sharp decline in interests would cause the investors to lose their returns. Hence it can be stated that even bond holders are likely to face certain levels of risks. In order to trade off the risks which arises out of bond, investors must consider investing in a certain number of equity as well. Although the returns available from equity are adequately low, this type of security is less risk induced. References Carter, R. B. & Van Auken, H. E. (1990). Security analysis and portfolio management: a survey and analysis. The Journal of Portfolio Management, 16(3), 81-85. Edwards, R. D., Magee, J. & Bassetti, W. H. C. (2007). Technical analysis of stock trends. London: CRC Press. Elton, E. J., Gruber, M. J., Brown, S. J. & Goetzmann, W. N. (2009). Modern portfolio theory and investment analysis. New Jersey: John Wiley & Sons. Reilly, F. & Brown, K. (2011). Investment analysis and portfolio management. Connecticut: Cengage Learning. Small, M. H. (2006). Justifying investment in advanced manufacturing technology: a portfolio analysis. Industrial Management & Data Systems, 106(4), 485-508. Read More