Question 1
In the following report the questions on various investment decision criteria has been taken into consideration. There are four questions which have been answered in the following way. We can see that the investment and securities market provide opportunities to the companies as well as to the people in order to increase the wealth. There are many players in the securities market; securities are either the stocks or the bonds.
Indicate various approaches for the possible investment styles under GDC and also interpret comparison of approaches
The following are the comparative analysis on the ways to approach investment styles under GDC:
There are three methods of common stock valuation, the anticipation method, the relative value approach and the intrinsic value approach which is also called the absolute value approach. All these investment style are different from each other (Betermier, Calvet and Sodini 2017).
Anticipation Approach: According to GDC, it is one of the oldest approaches to the security analysis in the share or stock. In this approach the current market price is taken in order to measure the current value of those stocks which can outperform by anticipating the performance. This approach involves the prediction of the future value of the various stocks by anticipating on the specific variables (Browne 2016).
Relative Value Approach: This approach is alike the anticipation approach. The approaches values or measure the current value of the stock by taking the current market price of the share as the correct measures. This approach helps to identify the relative attractiveness arrived from the various stocks. As per GDC, the relative value helps in deriving the capitalization for the individual in terms of the rate of earnings or dividend. This approach is used to value the fund which is invested in the equity shares (Kok, Ribando and Sloan 2017).
Intrinsic or absolute Value Approach: The intrinsic value of the security is dependent on many underlying factors. The intrinsic value is derived by penetrating analysis of the many factors relating to the company as well as the industry. In this approach the travailing market prices differs from the intrinsic value of the share. Higher returns under this approach can be earned by buying the undervalued securities and selling the securities which are overvalued.
The comparison between the three approaches is that of the variables which is used to predict the future cash flow and estimate the process. There is also a difference in the length of holding period and in case of the anticipation period is the shortest and in case of the intrinsic or absolute value it is much longer (Yan 2017).
Question 2
Value investing is a type of investment strategy and the stocks are traded at a price less than its intrinsic value. Investors who use the strategy of value investing believes that the market acts according to the up and down fluctuations and the news and thus it results in the stock price moving and thus it does not correspond to the company’s long-term policies, giving an opportunity to the company to gain profit when the price of the stock has deflated (Williams 2015)
Value investing means the buying of the securities which appears to be underpriced after the analysis. The essence in the term value investing is that buying stocks at a price less than the intrinsic value.
Philip Fisher says in case the companies hit the stock market, the small investors’ gets attracted about the behavioral patterns of the company. Fisher advices to stay away from such stocks –
The second principle, says Graham, is “Investment is most intelligent when it is most businesslike.” Which simply means that to be able to invest profitably, you need to think like a businessman? Buffett, based on his experience, confirmed, “I am good investor because I a businessman and a good businessman because I am an investor” (Picchi 2016).
A mortgage pass is instrument which consists of a pool of the fixed income securities which is backed by assets. In this case a servicing intermediary, which helps in the collection of payments from the issuers and thus it deducts a fee and then it passes them to the holders of pass through security.
The collateralized mortgages are those mortgages which have been created by redirecting the cash flows from other mortgage securities. They are created so as mitigate the prepayment risk that creates securities to the potential investors.
The obligation is that these bonds are highly rated since they are government backed mortgages and the risk of default is low (Fabozzi 2016). The collateralized mortgage can be sold in the secondary market where the prices fluctuate with the changes in the interest rate.
- Sequential CMO’s
- CMO’s with accrual bonds
- CMO’s with the floating or the inverse floating rate
Option Adjusted Spread is the spread which is added to the benchmark yield curve so as to discount the rate of security in order to match the market price and a dynamic model is used, thus OAS is model dependent.
Static spread is the yield spread and it is added to the point where there is spot rate treasury and where the cash flows from the bond and it is received and it will make the price of the bond equate with that of the present value of their cash flows.The static spread is also called zero volatility or Z- spread (Neill 2014).
Question 3
Traditional yield spread is the spread which measures the difference between yields of different yield instruments of varying maturities, credit ratings and risk, calculated by deducting the yield of one instrument from another.
The immunization strategy is a certain return which comes during a period of time so as to gain success. The main motive of the company is to match the assets along with the liabilities so as to offset with each other. There is an example of the bonds which seeks to have a limit on the immunization and to change the price of reinvestment risk. The immunization formula is such that the bond investment creates to set off the assets and liabilities (Zaremba 2017).
The complication in the nature of immunization, thus this formula helps to find the duration and convexity of the future liabilities. This requires the use of the sophisticated software to access the information on bond market. Immunization requires a lot of complicated calculations.
A portfolio is something which combines all the government securities and the high grade bonds so as to make the calculations simple. The financial market is huge and many companies are investing in hard-to-grasp financial instruments, such as CDOs and junk bonds (Soares da Fonseca 2014). Bonds are also with the embedded options and thus it makes it more volatile, thereby making the duration harder to calculate.
Technical analysis is a tool used for trading and it helps in the evaluation of securities and the attempt to forecast that the future movement so as to analyze the statistics for the price movement and volume from the trading activity.
The fundamental analysis helps to evaluate the securities intrinsic value and the technical analysis focuses on the charts of the price movements and the tools so as to evaluate the strength as well the weakness in forecasting the future changes in the prices (Han, Yang and Zhou 2013). This method helps in the evaluation of securities and it involves statistical analysis of the market, such as the volume and the price of the securities. It measures the charts and other tools to identify the pattern which is used as a basis of investment decision.
There are many types of technical analysis, some people use the chart analysis, some use technical indicators and some on the oscillator in the combination of all the techniques (De Bondt et al.2015). The technical analyst exclusively use the historical price and data and the past data trend which might provide about future price movements.
An oscillator is tool of trading and it is banded between the two extreme values and this result from a trend indicator and used for taking out overbought or oversold conditions. The oscillator which approaches the lower extreme is the overbought and which approach the lower extreme is oversold. The purpose of an oscillator is to measure on a percentage scale from 0 to 100.This can be achieved by manipulating and smoothing out the multiple moving averages (Naved and Srivastava 2015.)
Conclusion
During the initial period when the company has just started its promotional plan, the investors check the blueprint and determines the positive and negative aspects.. This is a much more difficult thing to do. It allows a much greater probability of error in the conclusions reached. There are enough spectacular opportunities among established companies that ordinary individual investors should make it a rule never to buy into a promotional enterprise, no matter how attractive it may appear to be (Butt 2015).People believed that the stocks are a case of venturing outside the circle of the odds and it is high that they make mistake. These kinds of companies ride on the hope that in future they will make fortune.
References
Betermier, S., Calvet, L.E. and Sodini, P., 2017. Investors’ striking migration from growth to value investing over their life cycle. LSE Business Review.
Browne, C.H., 2016. The little book of value investing (Vol. 5). John Wiley & Sons.
Butt, N.N., 2015.Quantitative Fundamentals Value Investing And Systematic Factor Insulation Innovations.
De Bondt, W.F., Muradoglu, Y.G., Shefrin, H. and Staikouras, S.K., 2015. Behavioral finance: Quo vadis?.
Fabozzi, F.J. ed., 2016. The handbook of mortgage-backed securities. Oxford University Press.
Han, Y., Yang, K. and Zhou, G., 2013. A new anomaly: The cross-sectional profitability of technical analysis. Journal of Financial and Quantitative Analysis, 48(5), pp.1433-1461.
Kok, U.W., Ribando, J. and Sloan, R., 2017. Value Investing: Do Quant Strategies Measure Up?.
Naved, M. and Srivastava, P., 2015. Profitability of Oscillators used in Technical Analysis for Financial Market.
Neill, J.P., 2014. Credit Default Swaps Regulation and the Use of Collateralized Mortgage Soares da Fonseca, J., 2014. Stochastic durations, the convexity effect, and the impact of interest rate changes. The European Journal of Finance, 20(11), pp.994-1007.
Picchi, A., 2016. Practical Applications of Fact, Fiction, and Value Investing. Practical Applications, 3(4), pp.1-5.
Williams, D., 2015. Warren Buffet as a Global Magnate. What to learn from him about Business.
Yan, W., 2017. Does the Bull Market Have “Buffett”?—An Empirical Study on Chinese Mutual Fund Value Investing in Bull and Bear Markets. Technology and Investment, 8(02), p.108.
Zaremba, L., 2017. Does Macaulay Duration Provide The Most Cost-Effective Immunization Method–A Theoretical Approach. Foundations of Management, 9(1), pp.99-110.
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