Fundamental and Technical Analysis of Portfolio Management.

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  Introduction Portfolio management  may refer to: portfolio is a combination of securities such as bonds stocks and other instruments. for example if i have purchase 100 shares of reliance, one lot of gold and one lot of silver along with few bonds and debenture, all the above securities comprise my portfolio. PORTFOLIO CONSTRUCTION: the process of blending together the broad assets classes so as to obtain optimum return with minimum risk called portfolio construction. There are two approaches of portfolio construction:- Traditional approach. Modern approach. We all dream of beating the market and being super investors and spend an inordinate amount of time and resources in this endeavor. Consequently, we are easy prey for the magic bullets and the secret formulae offered by eager salespeople pushing their wares. In spite of our best efforts, most of us fail in our attempts to be more than average investors. Nonetheless, we keep trying, hoping that we can be more like the investing legends  –   another Warren Buffett or Peter Lynch. We read the words written by and about successful investors, hoping to find in them the key to their stock-picking abilities, so that we can replicate them and become wealthy quickly. In our search, though, we are whipsawed by contradictions and anomalies. In one corner of the investment townsquare, stands one advisor, yelling to us to  buy businesses with solid cash flows and liquid assets because that’s what worked for Buffett. In another corner, another investment expert cautions us that this approach worked only in the old world, and that in the new world of technology, we have to bet on companies with solid growth prospects. In yet another corner, stands a silver tongued salesperson with vivid charts and presents you with evidence of his capacity to get you in and out of markets at exactly the right times. It is not surprising that facing this cacophony of claims and counterclaims that we end up more confused than ever. The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk. In the case of mutual and exchange-traded funds (ETFs), there are two forms of  portfolio management: passive and active. Passive management simply tracks a  market index, commonly referred to as indexing or index investing. Active management involves a single manager, co-managers, or a team of managers who attempt to beat the market return by actively managing a fund's portfolio through investment decisions based on research and decisions on individual holdings. Closed-end funds are generally actively managed Portfolio Management - Technical vs. Fundamental Analysis There are two schools of thought about how a stock will behave relative to the market, and like any investment strategy or philosophy, both have their advocates and adversaries. ã   Technical analysis, which involves detecting patterns in security prices, goes on the assumption that the price of a stock - like the price of everything else - is a matter of supply and demand. Technical analysts, or technicians, generate and interpret charts of the price and volume histories of stocks to  predict movement in stock prices according to perceived trends. ã   Fundamental analysis, which examines the earning potential of the company issuing a stock, goes on the assumption that a share of ownership of a company has an intrinsic value that is a function of the underlying value of the company as a whole. Fundamental analysts report which shares are undervalued by the investor community and which are overvalued, then trust the market to make corrections. In the world of stock analysis, fundamental and technical analysis are on completely opposite sides of the spectrum. Earnings, expenses, assets and liabilities are all important characteristics to fundamental analysts, whereas technical analysts could not care less about these numbers. Which strategy works  best is always debated, and many volumes of textbooks have been written on both of these methods. We'll discuss each in turn.   Portfolio Management - Technical Analysis Technical analysis is all about trends. Here is a simplified chart showing the movement of a stock price over 18 months, as well as a trend line: Figure 12.2   Trends Figure 12.2 is not intended to be a particularly useful chart for analytical purposes; however, it demonstrates what a trend line looks like against the day-to-day changes in a stock price. Specifically, it shows a downtrend; if the stock had started the period at $18 then risen to $22, it would show an uptrend. One reason the trend line above is not especially useful from an analytical standpoint is that it is simply a linear, straight-arrow bullet path. In technical analysis, trend lines have to be far subtler than that. Technical analysis searches not only for trends, but also for reversals of trends. Using a polynomial trend curve, a technician may see a different pattern emerge, as shown on Figure 3:   Figure 12.3      Saucer As you can see above, the data line is exactly the same, but at this point a technician might see a saucer shape, which suggests a trend reversal. A saucer  bottom indicates the stock price has reached its support level, the lowest price at which it is likely to trade, and it has nowhere to go but up. A saucer top signals exactly the opposite: the stock has reached its resistance level, the highest price at which it is likely to trade. The band between the support and resistance levels is called the trading channel.  Head and Shoulders Another sign of a trend reversal is the head-and-shoulders pattern:     Figure 12.4  You do not need a trend line for this: the data line tells the story. The stock price glided up until it formed its first shoulder in May 2001, then it dropped off; then it surged to form a higher peak - its head - in December. It then fell off again and surged one more time - weakly - to form the second shoulder in March 2002. Technicians consider this a bearish chart. An inverted head-and-shoulders would  be bullish.
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