Student no. 497432
Unit Code U21083
Due Date 19/02/2013
This project is about whether or not an investor with only publicly available information is able to “beat the market”. We have £100,000 which we can invest in the stock market however this amount must be split into two portfolios. Each portfolio will be made up of investments chosen through theories and strategies which come from either the fundamental analysis or technical analysis approaches. Fundamental analysis is method which looks at fundamental information such as competitive advantage, earnings growth, market share and quality of management to indicate a security’s future value. Technical analysis is the other basic trading technique which relies on statistical methods and data charts to detect and predict current and future trends. The Efficient Market Hypothesis is an investment theory that states that the stock market cannot be “beaten” as the stock market has a level of efficiency which causes existing share prices to integrate all the information which is available and relevant to making decisions on investments. According to the Efficient Market Hypothesis, it is impossible for investors to ascertain undervalued stocks from overvalued stocks as stocks always trade at their fair value on the stock exchange without much fluctuation. This assignment is about testing this theory by applying the fundamental analysis and technical analysis techniques to try to outperform the stock market. The Efficient Market Hypothesis is composed of three progressively stronger forms: Weak form
We traded on the FTSE All Share index for four months to try to make a profit which is greater than the percentage change of the market. Over the time that I was trading for this assignment, the FTSE All-Share Index grew by 7.85%. To beat the market the investments in both portfolios would have to make a total percentage gain of over this market change which they did. Overall, both portfolios produced a gain of £20,194.03, which is 20.22% increase from the investment which means that I did beat the market. Method
Fundamental analysis is a method of evaluating securities by trying to gain an understanding and measuring the intrinsic or fundamental value of the company. This means that you must analyse the entirety of the company; both tangible and intangible factors must be taken into account. By studying all aspects of a stock option fundamental analysis can show you securities which have been mispriced under their fair value which if bought and held for a short time will return a profit when the stocks are re-priced once other investors become aware of this information. Technical analysis, on the other hand, does not try to measure a company’s share’s fair value. Alternatively, this type of analysis uses charts and data to find patterns which can be used to predict future activity. Technical analysts are not concerned with whether stocks are undervalued, but instead exclusively use historical data to see how the market or individual security’s price might move in the future. Research into the weak form of the Efficient Market Hypothesis seems to reject the effectiveness of this approach. ¬¬¬¬For the fundamental analysis approach two methods were used to choose companies in which to invest. The first method was to look at news articles online and invest in companies which would seemingly perform positively on the stock market once share prices reflected this information. The company’s financial position was disregarded in this decision as this is not relevant to the new information which would presumably improve the company’s earnings and returns and so on. Once I had invested in a security I kept a close watch on news, either online or in broadsheet newspapers such as the Financial Times, coming in about the company so that the stocks could be sold for a return before the market reacted unfavourably...