Method of the Fundamental Analysis Used to Comparison of Stock Portfolio and Stock Index Rate of Returns


  • Radim Gottwald


stock valuation, fundamental analysis, investment analysis, stock portfolio rate of return, stock index rate of return


Purpose of the article: Investing in securities, many individual and institutional investors use the diversification of risk in the framework of their investment strategies. Security risk can be interpreted through the the meaning of risk in portfolio theory. Investing in various types of stocks, investors calculate not only risk rate and liquidity, but also achieved rate of return. It is also possible to compare stock portfolios rates of return with stock index rates of return of stock exchange. Nowadays, many methods leading to stock valuation is known, however new approaches can lead to modified methods. Methodology/methods: Method is theoretically described and applied in real data. Using historical model P/D of the fundamental analysis, linear regression of certain variables is realised. Based on founded values, stocks are dividend into portfolios. The relation between stock portfolio rate of return and stock index rate of return is analysed. The portfolio risk is also considered. Scientific aim: The aim of the article is to describe and apply in practice the modified method of the fundamental analysis, which proceeds from historical model P/D of the fundamental analysis. This method can be used to comparison of stock portfolio and stock index rate of returns and it enables to identify the undervalued, fairly valued and overvalued stocks. Findings: Focusing on the fundamental analysis, its levels were described, concretely macroeconomical analysis, sectoral analysis and company analysis. Often used methods to estimate the intrinsic value of a stock were presented, concretely dividend discount model, profit model and historical model. Modified method was applied to selected stocks from the London Stock Exchange. Using linear regression, the accounting indicators were chosed to final regression relation. It depended on the comparison of R-squared indexes. Average annual and total rates of portfolios, annual and total rates of return of six portfolios, annual and total rates of return of index FTSE 100 were finnaly calculated and compared. Beta coefficients of six portfolios were calculated, too. Conclusions: To make a conclusion, the results of the modified method were commented and compared with results of similar methods. These analyses were focused on comparison of similar variables and low P/E effect. Author also implied, in what directions can next research in the field continue. Applying in other world Stock Exchanges, other methods using linear or other regression are able to identify overvalued, fairly valued and undervalued stocks. The number of used portfolios can be various. Instead of beta coefficient, other coefficients can be used, too.