Assignment reflect upon the issues with understanding the stock market while doing portfolio analysis.

Introduction

The study of stock market is a critical study. There are several hypothesis and theories that have evolved which intend to understand the pattern of the stock market. In this context there are three theories of the stock market that will be analysed. The theories are Behavioural Finance, Modern Portfolio Theory, and the Efficient Market Hypothesis. This theories are one of the most popular theories that are being used by the economist and the market analysts to understand the stock market. The article will also be followed by a case study that will help in a better understanding of the theories.

Detailed Summary

Analysis of behavioural Finance

As stated by Coleman (2014) behavioural Finance of stock market and various financial aspects from the point of view of the psychology. This is a branch of behavioural Economics with its analysis and tends to understand the reason why people makes various financial choices. It is important to understand that human beings operates from the point of view of emotion and there are where is logical as well as illogical factors that influencers the financial transaction of human being. People makes financial choices out of leaves, sentiments end influences. As stated by De Bondt et al. (2015) behavioural Finance attempts to understand the various choices that an individual makes and also tend to find the working influence that leads and individual to make these choices. For this purpose this field of study keeps a track on the investments and the expenditures of individual based on various factors like age, location financial background and various other aspects that has an influence on the Finance.

Analysis of modern portfolio theory

As stated by Pilbeam (2018) modern portfolio theory is a Theory that helps in the construction of portfolio for the investors to ensure the fact that the returned that are expected or highly been optimised and maximized. This theory is considered to be one of the most influential theories in economics which deals with the aspects of investment and Finance. As stated by Spronk, Steuer&Zopounidis (2016) the theory of modern portfolio is based on the fact that the profit and the risk are both interlinked. This also helps in analysing the unnecessary risk associated with the investments. This is one of the reason why this theory is considered to be one of the most important and one of the most influential theories when it comes to the aspects of investment. This helps the investors to create a portfolio that ensures the minimum risk based on the studies, calculation and analysis.

Analysis of Efficient Market Hypothesis

As stated by Hamid et al. (2017) efficient market hypothesis is the approach in which the information about the share is believed to be reflected on the price of the share. There are no theoretical or practical approach that can be used for the purpose of adjustment of the risk and churning out excess return for the shares in the market. According to the hypothesis a stock can never be purchased at a value which is lower to the market value and be sold at the price that is above the price which is inflated. This is one of the reason why the hypothesis suggest that the higher returns can only be obtained through riskier investments. The study and the understanding of the theory suggests the fact that the market efficiency can be divided in the three forms namely the weak form, the semi-weak form and the strong form. This study also suggest the fact that extended profit can never be achieved with the analysis of the history of trading or in other words it states that the uncertainty of the stock market can never be defined by a particular theory.  

Case study

The stock market of Paris which is also known as the Paris stock exchange has the higher number of investors who are male. It is also seen that despite of being in the most influential region in the world in terms of stock exchange the people of the region lacks the right approach of the investments and sales of the stock. Failures in the stock markets are higher than the expected results. It is also seen that the decision in the terms of finance are mostly being taken by the males in the market rather than the females. Sound investment is one of the most important challenge in the contemporary market when it comes to the investments and the purchase of the stocks in Paris. It is seen that over the several years the stock market has witnessed an uneven graph that highlights the unpredictability of the stock market of Paris. The study of the stock market in Paris analyses highlights the fact that most of the investors in the market tends to play the safe game of investments yet end up in failure. The strategic approaches that is being adopted by the investors in Paris are mostly in the path of failure. Researchers and the analysis of the stock market are often stuck with the calculations to find the pattern of the stock in the market however, there is no definite pattern that can be concluded in the stock market of Paris. There are several challenges in the investments and purchasers and investors tends to realise the fact that investments in the stock market is a risky venture. This is one of the most important challenge that is being faced by the people in the stock markets of Paris. The price change in the stocks are seen to be random in stock market of Paris. There are several experts and professionals who attempts to provide the right prediction of the stock market however, often the predictions of the professionals also miserably fail. The most important question that arises out of the unpredictable market is “is there a particular approach that can be adopted to make the maximum profit in the stock market?” One of the most important factor that needs to be analysed is the behaviour of the stock market and the ways the stock market reacts to various situation. 

The given case highlights the various aspects of the stock market of Paris which is also applicable to the other stock markets in the world. The understanding of the stock market is extremely critical due to the unpredictability of the market. This is one of the major concern of the analyst who tends to understand the patterns of the stock market and the ways it operates. Due to the fact that the stock market is unpredictable there are several theories and hypothesis that can be applied to the given case. As stated by Akbar et al. (2016) one of the most important theory that can be applied to the given case is the behavioural finance. The case indicate the fact that the male group in the stock market of Paris are more active. This indicates the fact that there are several factors of finicky decisions that are being taken. As per the psychological understanding male member of the society are more prone to take finicky decisions. This can be considered to be one of the important reasons for the failures in the stock exchange of Paris. Behavioural finance highlights the fact that the male and the female members of stock markets have different patterns of investments and sales this is one of the reason why the investments in the market varies with the influence of the genders. Another important theory that can be applied for the analysis of the given situation is that Modern portfolio theory. The study indicates the fact that the market efficiency is not rightly being assessed in the given case and this is one of the reason why the failures are high in the given case. As stated by Chen (2016) the right portfolio study is extremely important for the success. If the investors are in an intention to make the maximum profit without the understanding of the market there are several chances of failure in the market. This is one of the reason why the investment needs to be made based on the modern portfolio theories. However, there is a contrasting theory that highlights the fact that the market predictability in the stock market is an impossible task. The fluctuation in the market and the ways the investments are being done tends to highlight the efficiency market hypothesis. The efficiency market hypothesis indicates the fact that stock market walks an unpredictable path and this is one of the reason why it is not possible for the analysis to define a definite pattern of the market. It is seen in the given case that the investors are always tending to play in the safe zone when it comes to the investments. According to the given hypothesis the risk is one of the most important factor for the success in the market. Thus, the hypothesis defines the various aspects of the market and the reasons for its failure.             

Conclusion

There are several theories and hypothesis that intends to define the stock market however, it is important to understand the fact that the right prediction of the stock market is not possible however the theories of the stock market provides the definite guideline that would maximise the success in the stock market. 

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