Introduction
Predicting stock performance is extremely difficult and has been called a futile exercise by many people. This is because due to the inefficiency of stock markets about information asymmetry. Many of the fundamental factors affecting stock performance do not fully reflect themselves in stock prices in the Long-run or short run.
Analysis
Fro the charted adapted stock prices and S& P index are not uniform throughout the period under consideration. The prices and index have fluctuated from time to time. The same trends have been taken by the shares under consideration. However, the shares of Newmont Mining Corp are performing very well as compared to Fossil, Inc (Financeyahoo, 1).
Based on the financial market trading structure on the last three months (August to October, 2010) Newmont Mining Corp Shares performed Fossil, Inc. Newmont Mining Corp paced further gains, amid expectations of gold mines in Peru.
From excel calculations the standard deviation of Newmont Mining Corp is 1.596 while Fossil, Inc is 1.939 with means of 0.1601 and 0.6244 respectively. This means that Fossil, Inc has a higher risk and high return. In normal market conditions when the expected return increases, the risk also increases.
The coefficient of correlation for the stocks is 0.0157587. This coefficient correlation shows that the returns of the stocks move almost in the same direction. The amount of relationship in these shares is low as the coefficient of correlation is near to zero. When the coefficient is o then they are not related completely while -1 means they move in the opposite direction and the coefficient of correlation of +1 is a case of perfect correlation
Performance evaluation
Better performance of the stock is the Sharpe ratio, the Treynor ratio, and Jensen’s alpha. The Sharpe ratio is the measure of investment performance that includes an adjustment for risk. The Sharpe ratio is computed as a portfolio’s risk premium divided by the standard deviation of the portfolio’s return:
Sharpe ratio = Rp-r / σp
In this case, the portfolio risk premium is the raw portfolio return less a risk-free return, that is , Rp – Rf, which we know is the basic reward for bearing risk. The return standard deviation, σp, is a measure of risk.
The Sharpe ratio is a reward-to-risk ratio that focuses on total risk. Because total risk is used to adjust, the Sharpe ratio is probably most appropriate for evaluating relatively diversified portfolios. In this case, the market has a SHARPE ratio of 0.07201, Newmont Mining Corp Of 0.09091, and Fossil, Inc of 0.31430. this means that Newmont Mining Corp has a better risk-return.
Another standard measure of investment performance that includes an adjustment for systematic risk is the Treynor ratio. The Treynor ratio is computed as a portfolio’s risk premium divided by the portfolio’s beta coefficient
Treynor ratio = Rp-r / βp
This ratio looks at systematic risk only, not total risk. From the two stocks we can note that FOSSIL, INC has earned excess returns as compared to Newmont Mining Corp whose ratio is 0.37210 as opposed to 0.37622 for Fossil, Inc.
A third common measure of investment performance that draws on capital asset pricing theory for its formulation is Jensen’s alpha is computed as the raw portfolio return less the expected portfolio return predicted by the capital asset pricing model (CAPM).
E(Rp) = Rf + [E(Rm) – Rf] xβp
To compute Jensen’s alpha, we compare the actual return, Rp, to the predicted return. The difference is the alpha, denoted αp = Rp – E(Rp) = Rp – {Rf + [E(Rm) – Rf] xβp
It is simply the excess return above or below the security market line, and, in this sense; it can be interpreted as a measure of by how much the investment “beat the market.” In this case Alpha of Fossil, Inc is higher than that of Newmont Mining Corp meaning that it has.
Factors that contributed to price changes in the stock values
Various factors contributed to changes in the prices of one of the factors that came out was due to the changes in the market rate. This is because the changes in prices did not affect only one company. the other reasons for the changes in the prices are the investor confidence with the market increase something that might have triggered the reduced selling of shares, thus causing shares prices to go up.
In this case market, forces of demand and supply determine efficient prices of securities. If the demand for a stock goes up, the share prices go up and vice versa. Thus the current price of each security at any given moment represents the best estimates of its true value as per all the available information. The current price of any security represents a consensus view of the security’s current worth – its price is the result of the action of buyers and sellers, each with different perceptions of the value of the security. There are three forms of market efficiency including;
Weak Form efficiency- this exists if it were not possible to make abnormal profits from security investing relying on past security price movements or technical rules to indicate when to buy and sell. The other form of market efficiency is called semi-strong market efficiency.
This form of efficiency is where all relevant publicly held information is impounded or included in the share prices. The last form of market efficiency is strong form where all relevant information including the information held by privileged individuals Is reflected in the share prices of the company in the stock exchange. However, the current happenings in the market are due to information that is publicly held and was not reflected initially in the share prices. Making the market looks like a semi-strong form. I describe it as a semi-strong market because the information of improving the economy was trickled into the market and share prices went up (Fischer and Jordan, 82).
Some investors decided to buy a large number of shares after witnessing improvement in share values during the previous days, and given the rebound, he might have thought it prudent to re-purchase those shares after a sufficiently large drop in share values to capitalize on momentary irrationality in the market.
In my opinion, the market efficiency currently is in semi-strong form and the upward trend of share prices is due to the information relating to the performance of the economy.
Stock news over three months
Newmont Mining Corp acquired a gold mine in Peru and spot gold prices went up causing the rise in the shares of the company.
The information that came to the market that caused the increase prices of Fossil, Inc was that fossil Stock due to economic recovery and the increase in company repurchases to make the stock perform better in the market(Financeyahoo, 1).
Summary
My recommendation of buying Fossil, Inc is correct as shown by measures of performance.
Worked Cited
Financeyahoo. “Fossil, Inc. (FOSL)”. Financeyahoo. 2010. Web.
Financeyahoo. “Newmont Mining Corp. (NEM)”. Financeyahoo. 2010. Web.
Fischer, Donald, & Jordan, Ronald. Security Analysis and Portfolio Management. New Delhi: Prentice-Hall of India Private Limited, 2007.