Risk and Return

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14/12/12|
Risk and Return|
Advising Mark on issues relating to finance|
|
Martin Murphy|
S12795258|

Contents
The usefulness of stocks screeners2
Defined Ratio’s2
Dividend Yield2
Dividend Cover3
Price-Earnings Ratio3
Price-Cash Flow Ratio3
Beta Coefficient4
Cash Is King, Everything else is opinion4
Advising Mark on the general riskiness of financial models:4
Equities with high dividend and earnings yields4
Small companies (low market capitalisations5
High growth companies5
Taking momentum into consideration5
6

The usefulness of stocks screeners
A stock screener is a quantitative research tool used by investors to create models for testing stocks against specific fundamental variables. The investor will input specific variables they consider important to their investment process then the screener will produce a list of suitable candidates for the investor. The use of a stock screener will reduce the workload for the investor by acting as a filter to cut down stocks to a manageable amount. The ease of use and the amount of information generated makes the stock screener a powerful tool. Furthermore investors can save time by segmenting different sectors and markets hence scanning as many or few stocks at one time. Without the stock screener filtering out the undesired criteria investor would have too much information to collect and analyse therefore the tool is essential to modern day investors however the investor needs to know what the reason is behind the scans for the tool to be appropriate. Depending on the sophistication of the stock screener there may be different weights given to different stocks. Modern stock screener’s such as VectorVestScreener allow for technical and fundamental analysis combined. This stock screener will return search results while giving stock analysis in risk, timing and value. Though the stock screeners can identify companies which appear suitable the data is subjective. The investor considers what they believe to be good fundamental values for their given investment strategy. Interpreting the information generated can help investors to pick stocks by using the numerical values when compared against other stocks. These values can be organised by highest to lowest clearly showing for instance which companies has the highest dividend yield. Merely picking stocks with the highest dividend yields is not going to be an effective strategy if not compared with other factors. The stock screener will allow the investor to look at the company’s profile. Using the fundamental values as selection criteria would allow the investor to be disciplined by not overanalysing information which can be a hindrance to decision making. By using the stock screener the investor can input fundamental values that take advantage of historic investment strategies. Proven strategies that have returned consistently over a historic period can be used numerous times. For instance a popular search would be for dividend income, inputting a low beta co-efficient, a high dividend yield and a large market capitalisation. This particular criteria produced 15 results as you can see from fig 1.1, the investor has to adequately analyse this information for example Kingfisher has a -5.57% price change over the last 30 days, this is because Comet part of the Kingfisher group have went into administration while Kesa Electrics posted £300m loses. Mark being risk adverse would not accept this volatility for the given dividend yield. Even though the screener believes the stock is suitable. The stock screener is a powerful tool for narrowing down stocks that match the investor criteria however the stock screener is only as good as the person using it as the data needs to be interpreted and analysed .Investment is not as simple as choosing fundamental values that match an investors search. This tool has to be used with other information. Defined Ratio’s

Dividend Yield
The...
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