The Benefits of Fundamental Analysis Towards the Creation of a Successful Portfolio

...

From what I have learned in class if I were to recreate my portfolio, I would, first of all, invest more with less “fear” of losing money, and accept the “trade-off between return and risk” (Dr. Agapova). I would be less conservative and a bit more aggressive, mostly because the analysis I learned in class gave me more confidence to trade. Before attending this class, I would just do a chart study of the security (candlesticks, Bollinger bands, tops and bottoms, volume; an overall basic technical analysis) and trade as I had previously done in the stock market in my native county. However, studying market efficiency made me also realize why this is considered “gambling”; it is riskier to trade based on technical analysis as it does not provide any fundamental basis for building up strategies, but mere suggestions of possible trends. You really have to believe in luck.

Secondly, I would have created a portfolio based on the Expected Return / HPR and the Capital Asset Pricing Model to find out whether the stock is fairly priced, underpriced or overpriced (abnormal return results) , and build up my strategies from there (whether go long or short on the positions).

Thirdly, in order to diversify to minimize risks (hedging), I would had invested more in BBB and above corporate bonds and T-Bonds as well, as they tend to move in opposite directions of stocks. I would have done that by evaluating the price of the bond, YTM, coupon rate, etc., using the Bond Pricing model.

I would also had managed to balance my portfolio based on the Portfolio Theory, by weighting and, thereafter, allocating the calculated percentage of my investment budget to the risky portfolio (compounded by risky assets) and also to the risk-free asset (Treasury bond). By creating a Capital Allocation Line, I could then calculate the Reward-to-Volatility Ratio and, by identifying the highest Reward-to-Volatility ratio, I could had gone even further and created an Optimal Risky Portfolio.

On the other hand, after studying derivatives, I would not have as many interest in trading this type of security. Possibly I could still trade Options if I find good opportunities there, whether I believe the price of a security will fall or go up, I could benefit from either a call or a put option, with the only risk of losing the premium, in case the strategy of “buy low, sell high” (Dr. Agapova) does not work and I end up not exercising the option. However, I find Futures very risky as the contract must be exercised at a specified delivery date. For inexperienced traders like me, the risk involved in trading Futures could jeopardize the overall return of a well-balanced portfolio.

To conclude, I believe the slightly positive return I had on my portfolio was mostly due to researches made (Wall Street Journal, Yahoo Finance and Nasdaq), in which financial analysts set target prices and recommendations for specific securities and from there I assumed whether the stock was under or overvalued and what strategy to implement, either go long or short. However, my performance on all the other types of securities did not generate me any profit (I have not closed all positions and orders). For that, I can honestly say that even though I am not satisfied with my portfolio performance, I am glad that the fundamental analysis I learned in this class will help me create successful well-balanced portfolios in the future, a knowledge that not only will help towards the development of my professional career, but most importantly, it will definitely help towards my personal financial goals as well.