FUNDAMENTAL ANALYSIS

FUNDAMENTAL ANALYSIS
Fundamental analysis is a technique that attempts to determine a securitys value by focusing on underlying factors that affect a company's actual business and its future prospects.

FUNDAMENTAL ANALYSIS
Fundamental analysis serves to answer questions, such as: Is the companys revenue growing? Is it actually making a profit? Is it in a position to beat out its competitors in the future? Is it able to clear its liabilities? Is management trying to make illusions?

FUNDAMENTAL ANALYSIS
All the questions that are asked in the previous slide has the same bottom line, i.e. Is our investment has sound prospects in future or not?

FUNDAMENTAL ANALYSIS
Fundamentals can be categorized in two categories Quantitative capable of being measured or expressed in numerical terms. Qualitative related to or based on the quality or character of something, often as opposed to its size or quantity.

QUANTITATIVE FUNDAMENTALS
Quantitative fundamentals are numeric, measurable characteristics about a business. Its easy to see how the biggest source of quantitative data is the financial statements, form where, one can measure revenue, profit, assets and more with great precision.

QUANTITATIVE FUNDAMENTALS
Examples of Quantitative Fundamentals can be: Stocks Price Market Turnover Stocks annual dividend payout Earning Per Share (EPS) P/E Ratio

INTRINSIC VALUE
One of the primary assumptions of fundamental analysis is that the price on the stock market does not fully reflect a stocks real value. After all, why would you be doing price analysis if the stock market were always correct? In financial jargon, this true value is known as the intrinsic value.

INTRINSIC VALUE
Generally, an investor wants to buy stocks that are trading at prices significantly below their estimated intrinsic value. Most analysts (except followers of EMH) believes that in the long run, market prices would depict intrinsic values, however it is difficult to estimate that how long it would take for a particular security to be in long run.

QUALITATIVE FUNDAMENTALS
Fundamental analysis seeks to determine the intrinsic value of a company's stock. But since qualitative factors, by definition, represent aspects of a company's business that are difficult or impossible to quantify, incorporating that kind of information into a pricing evaluation can be quite difficult. On the flip side, as we've demonstrated, you can't ignore the less tangible characteristics of a company.

QUALITATIVE FUNDAMENTALS
BILLION DOLLAR QUESTION
What exactly does the company do?

QUALITATIVE FUNDAMENTALS
The answer of this question lies in considering the Business Model. Business Model basically tells us that in what sort of business a company is engaged. Sometimes Business model is very complicated to understand if a particular company is attached in several business.

QUALITATIVE FUNDAMENTALS
Competitive Advantage Another business consideration for investors is competitive advantage. A company's longterm success is driven largely by its ability to maintain a competitive advantage - and keep it.

QUALITATIVE FUNDAMENTALS
Competitive Advantage Operational effectiveness means a company is better than rivals at similar activities while competitive advantage means a company is performing better than rivals by doing different activities or performing similar activities in different ways. (Michael Porter)

QUALITATIVE FUNDAMENTALS
Management A company relies upon management to steer it towards financial success. Some believe that management is the most important aspect for investing in a company. It makes sense - even the best business model is doomed if the leaders of the company fail to properly execute the plan.

QUALITATIVE FUNDAMENTALS
Management For the evaluation of any investments management, institutional investors have edge over individual investors; primarily due to economic of scale.

QUALITATIVE FUNDAMENTALS
How to assess management? Conference Calls Management Discussion and Analysis Ownership and Insider Sales Past Performance

QUALITATIVE FUNDAMENTALS
Corporate Governance Corporate governance describes the policies in place within an organization denoting the relationships and responsibilities between management, directors and stakeholders. These policies are defined and determined in the company charter

QUALITATIVE FUNDAMENTALS
Corporate Governance and its bylaws, along with corporate laws and regulations. The purpose of corporate governance policies is to ensure that proper checks and balances are in place, making it more difficult for anyone to conduct unethical and illegal activities

QUALITATIVE FUNDAMENTALS
Corporate Governance Though there is no rule of thumb for gauging corporate governance, but organizations such as S&P attempts to evaluate corporate governance.

QUALITATIVE FUNDAMENTALS
How to evaluate Corporate Governance? Financial and Information Transparency Stakeholder Rights Structure of the board of directors

QUALITATIVE FUNDAMENTALS
Factors Related to Industry Customer Base Market Share Growth or Expansion Competition Regulation

FINANCIAL RISK MODELLING

IMPORTANT RATIOS
Sharpe Ratio Treynor Ratio Jensen Alpha Jarque Bera

Sharpe Ratio
The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher cont

returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a riskless asset would perform better than the security being analyzed.

Sharpe Ratio =

Sharpe Ratio

BENEFITS It adjusts returns for portfolio risk. It does not treat the selected portfolio as fully diversified. It gives us the reward-to-variability ratio. We can compare mutually exclusive investments via Sharpe ratio.

TREYNOR RATIO
Treynor ratio is a risk-adjusted measure of return based on systematic risk. It is similar to the Sharpe ratio, with the difference being that the Treynor ratio uses beta as the measurement of volatility. This ratio is also called as reward to volatility ratio.

Treynor Ratio =

JENSEN ALPHA
A risk-adjusted performance measure that represents the average return on a portfolio over and above that predicted by the capital asset pricing model (CAPM), given the portfolio's beta and the average market return.
The basic idea is that to analyze the performance of an investment manager you must look not only at the overall return of a portfolio, but also at the risk of that portfolio.

Jensen Alpha
P = rP [rf + P (rM rf)]

JARQUE BERA
JarqueBera test is a goodness-of-fit test of whether sample data have the skewness and kurtosis matching a normal distribution.

JARQUE BERA
JB =