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Lessons

Session 1: Technical Analysis Basics

Advanced technical analysis involves a sophisticated approach to evaluating and predicting price movements and market trends using historical trading data. Advanced technical analysts use various analysis strategies to identify patterns within large datasets, enabling them to make more precise predictions about future price movements. These advanced methods provide investors with deeper insights into market behavior, allowing for more informed trading decisions.

To perform technical analysis, it’s recommended that you use software to help you along the way. There are several software tools available for technical analysis in the financial markets, ranging from beginner-friendly platforms to advanced software used by professional traders. We highly encourage you to do your own research in finding the software that best meets your needs.

In technical analysis, the initial step for traders is crucial as trading strategies can align with or counter market trends. It’s essential to determine whether the current trend is upward, downward, or sideways. Each of these trends necessitates a different trading strategy based on your approach. Specifically, in trend-following systems, traders usually buy assets in uptrends, sell short in downtrends, and enter positions within trading ranges at established support or resistance levels, anticipating a potential trend reversal (signifies a change in a financial asset’s price trend, marking the shift from an existing trend to a new one).

The next thing to keep in mind is support and resistance levels. These levels mark points where an asset’s price is prone to reverse or break out. Support occurs when buying demand halts a downward trend, prompting a reversal upward. Conversely, resistance happens when upward momentum weakens, suggesting an impending downward shift. Traders often use these levels as valuable opportunities to initiate new trades.

Determining entry and exit points involves more than just recognizing support and resistance areas. Technical traders consider various factors, including indicators like the Average True Range (ATR) and Relative Strength Index (RSI). These indicators gauge volatility and momentum, aiding traders in assessing the strength of a price movement.

In the end, it’s important to practice your skills. After learning the basics, the next step is to take the principles from these courses and apply them in practice through backtesting or paper trading.

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Session 2: Advanced Technical Analysis

Now that you know the basics of where to start in technical analysis, we’ll teach you how to utilize more advanced techniques and strategies to get ahead of the competition. Let’s take a look at some of the analysis strategies you can use that top traders utilize.

Ichimoku Cloud Analysis 

This analysis is a common indicator for identifying support and resistance levels, as well as, entry and exit points. It might seem complex at first, but is pretty straightforward once understood. 

It comprises five lines, with two forming the “cloud.” The Tenkan Sen (red line) shows short-term price averages, indicating trend changes or momentum shifts. The Kijun Sen (light blue line) represents longer-term averages, suggesting support or resistance levels. The cloud, formed by Senkou Span A and Senkou Span B, signifies future price levels and areas of support/resistance. The Chinkou Span (dark blue line) reflects current price levels 26 periods back, indicating trend strength. 

Source: https://corporatefinanceinstitute.com/resources/equities/advanced-technical-analysis/
Usage of this image is permitted through the Fair Use Act.

A buy signal occurs when the Tenkan Sen crosses above the Kijun Sen, but experienced Ichimoku users confirm it only when both lines are above the cloud. Conversely, a sell signal happens when the Kijun crosses above the Tenkan.

Bollinger Bands

Bollinger Bands are a technical analysis tool developed by John Bollinger in the 1980s. They consist of three lines: a middle band (moving average) and upper and lower bands, which are positioned on either side of the moving average. These bands help determine relative price levels and potential trend reversals. Bollinger Bands are defined by two parameters: Period and Standard Deviations.

When the bands tighten due to low volatility, it signals a potential sharp price move and the beginning of a trend. Watch out for false moves in the opposite direction. If the bands separate significantly, volatility increases, indicating a possible end to the existing trend. Prices often bounce within the bands, providing opportunities to identify profit targets. For instance, if the price bounces off the lower band and crosses above the moving average, the upper band becomes the profit target.

A strong trend continuation occurs when the price moves outside the bands. If it quickly returns inside, the suggested strength is negated. Overall, Bollinger Bands combine moving averages and standard deviations to identify overbought/oversold conditions and potential reversals, making them a valuable tool when used in conjunction with other indicators.

Source: https://www.fidelity.com/learning-center/trading-investing/technical-analysis/technical-indicator-guide/bollinger-bands#:~:text=Bollinger%20Bands%20are%20envelopes%20plotted,Period%20and%20Standard%20Deviations%2C%20StdDev
Usage of this image is permitted through the Fair Use Act.

Candlestick Patterns

Candlestick patterns are technical trading tools that have been used for centuries to predict price direction. They are created by up and down movements in the price, and while these price movements sometimes appear random, they often form patterns that traders use for analysis or trading purposes. Candlestick charts are a technical tool that packs data for multiple time frames into single price bars, making them more useful than traditional open, high, low, and close bars. 

Candlestick patterns typically represent one whole day of price movement, so there will be approximately 20 trading days with 20 candlestick patterns within a month.

Candlestick charts visually represent price movements using different colors to depict the size of the moves. Traders analyze these charts to identify patterns that can forecast short-term price directions. These patterns are categorized as bullish (indicating potential price increases) or bearish (suggesting price declines). Candlesticks display four essential price points – open, close, high, and low – for a specified trading period.

How to read patterns?

The main component of a candlestick is the “real body,” representing the price range between the day’s open and close. A filled black or red real body indicates a close lower than the open, while a white or green real body signifies a close higher than the open. The vertical lines above and below the real body, known as shadows or wicks, represent the day’s high and low prices. Traders can customize the colors of candlesticks on their platforms.


Patterns are categorized into bullish and bearish types. Bullish patterns suggest potential price increases, while bearish patterns indicate likely price declines. It’s important to note that these patterns represent tendencies in price movements and do not guarantee specific outcomes.

One example of a bearish pattern is the Bearish Engulfing, which occurs during an uptrend when sellers outnumber buyers. It is characterized by a long red or black real body engulfing a small green or white real body, signaling that sellers have regained control, potentially leading to further price drops. Conversely, a Bullish Engulfing pattern happens in a bullish market when buyers outpace sellers. It features a long white real body engulfing a small black real body, indicating potential upward movement in price.

Bearish Engulfing Pattern

Bullish Engulfing Pattern

Another bearish pattern is the Bearish Evening Star, which marks a potential reversal. It is identified by the last candle opening below the preceding day’s small real body and closing deeply within the real body of the candle two days prior. This pattern suggests a shift from buyers to sellers, possibly leading to more selling. The Bullish Harami pattern, on the other hand, occurs in a downtrend and features a small green (or white) real body inside the previous day’s large red (or black) real body, indicating a potential pause in the downtrend and the possibility of further upside if followed by another up day.

Bearish Evening Star

Bullish Harami Pattern

Additionally, there are bearish and bullish harami cross patterns, indicating indecision in the market. The Bullish Rising Three pattern involves a series of small real bodies following a long white day, suggesting a potential upward move despite the preceding days of falling prices. Conversely, the Bearish Falling Three pattern starts with a strong down day, followed by three small real bodies that make upward progress while staying within the range of the initial down day, indicating a potential continuation of the downtrend.

Bullish Rising Three

Bearish Falling Three

Source: https://www.investopedia.com/trading/candlestick-charting-what-is-it/
Usage of this image is permitted through the Fair Use Act.

In conclusion, candlestick patterns serve as indicators of trader sentiment during specific trading periods. There is no definitive “most accurate” pattern, as they reflect the thoughts of both bullish and bearish traders. However, some traders have preferences for specific patterns and act upon them.

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Session 3: Fundamental Analysis

Fundamental analysis is a comprehensive valuation method employed by investors and financial analysts to assess the intrinsic value of a stock, helping them determine whether it is overpriced or underpriced in the market. This analytical approach delves deeply into various layers of information, starting from a macroeconomic perspective and gradually narrowing down to the specific company’s financial health. Let’s explore the key aspects of fundamental analysis in more detail:

1. Economic Analysis

Fundamental analysis begins with an analysis of the overall economy. Analysts study macroeconomic indicators such as GDP growth, inflation rates, employment data, and consumer confidence. These factors provide a broad understanding of the economic environment in which businesses operate. A stable and growing economy generally bodes well for most companies.

2. Industry Analysis

After assessing the broader economic landscape, the focus shifts to the industry in which the company operates. Industry analysis involves evaluating industry trends, market demand, competition, regulatory factors, and technological advancements. Understanding the dynamics of the specific industry helps analysts identify growth prospects and challenges that companies within the sector might face.

3. Company-Specific Analysis

The most intricate part of fundamental analysis involves evaluating the specific company’s financial performance and future potential. Analysts dive deep into the company’s financial statements, including the balance sheet, income statement, and cash flow statement. These documents provide insights into the company’s assets, liabilities, revenues, expenses, and cash position.

Balance Sheet: The balance sheet offers a snapshot of a company’s financial position at a given point in time. It shows the company’s assets, liabilities, and shareholders’ equity. Analysts examine the composition of assets, including cash, inventory, and property, plant, and equipment. Liabilities, such as debts and obligations, are also scrutinized.

Income Statement: The income statement details a company’s revenues, expenses, and profits over a specific period. Analysts assess revenue sources, cost of goods sold, operating expenses, and net income. They analyze profit margins and trends in revenue and expenses to gauge the company’s profitability and operational efficiency.

Cash Flow Statement: The cash flow statement outlines the cash inflows and outflows from operating, investing, and financing activities. Analysts pay close attention to operating cash flow, as it reflects the company’s ability to generate cash from its core business operations. A healthy cash flow indicates strong liquidity and financial stability.

Financial Ratios: Analysts calculate various financial ratios, such as price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, debt-to-equity ratio, and return on equity (ROE). These ratios provide valuable insights into a company’s valuation, financial leverage, and profitability. Comparing these ratios with industry peers helps analysts assess the company’s relative performance.

Qualitative Factors: In addition to quantitative metrics, fundamental analysis considers qualitative factors like the company’s management team, corporate governance practices, competitive advantages, brand reputation, and strategic initiatives. Evaluating management’s quality and track record is crucial, as effective leadership is essential for a company’s long-term success.

4. Valuation Models

Fundamental analysts often employ various valuation models to estimate a company’s intrinsic value. Common models include discounted cash flow (DCF) analysis, price-to-earnings ratio analysis, and comparable company analysis (CCA). These models help analysts project future cash flows, earnings, or market multiples to determine a fair value for the stock.

5. Risks and Challenges

Fundamental analysis also involves identifying and assessing risks and challenges that could impact the company’s performance. These risks can include industry-specific challenges, regulatory changes, technological disruptions, geopolitical events, and management-related risks. Understanding these factors is crucial for making well-informed investment decisions.

6. Monitoring and Updating Analysis

Fundamental analysis is an ongoing process. Analysts continuously monitor the company’s financial reports, industry developments, and market trends to update their analysis. Changes in economic conditions, company strategies, or competitive landscapes can significantly impact a company’s valuation, requiring analysts to adapt their assessments accordingly.

In summary, fundamental analysis provides a holistic view of a company’s financial health and growth potential. Analysts can make informed investment decisions by considering economic, industry, and company-specific factors, along with qualitative and quantitative metrics. Regular monitoring and adaptation of the analysis ensure that investors stay abreast of market dynamics and make timely adjustments to their investment portfolios.

DCF Modeling

Discounted Cash Flow models is a very popular method to value a business. Essentially, you are using future cash flows to find out how much the company is worth today. If done correctly, it is a good method to measure whether the investment opportunity is worth it. 

What goes into the DCF model? The direct answer would be using this formula. 

CF1 = Cash flow of the first year
CF2=Cash flow of the second year 
CFn = any additional years 
r = discount rate

Free Cash Flow is the cash left over once a business pays for capital expenditures and operating expenses

Discount rate brings future cost to present value. It is usually just the company’s weighted average cost of capital (WACC). Weighted average cost of capital represents the opportunity cost that investors face for investing their funds in one particular business instead of others with similar risk.

DCF Valuation Example:

We can now put all of this information into practice using this example: The discount rate we are going to use is 9%. The time period we’re going to use is 5 years

YearProjected Cash FlowDiscounted Cash Flow(To the nearest dollar)
11,000,000917,431
21,500,0001,262,520
35,000,0003,860,917
47,000,0004,958,976
59,000,0005,849,382

Adding the DCF’s together, you get a value of 16,849,226. This is the value of the company. This is a very simple DCF model. For example, it does not include a terminal value. The concept of Terminal value in the next session.  

What are some of the cons to the process?

  • All the numbers used are estimates, not exact figures. Underestimating or overestimating cash flows could also lead to a lost opportunity.
  • The discount rate you use is extremely important as it ensures your NPV gives you the right value.
  • The example used here is quite basic and to the point. Doing a full DCF model on excel can be extremely time consuming. Therefore, a good rule of thumb to keep in mind is to use it as a model only when looking at a potential opportunity that you’re going to invest in for 5+ years. 

Need more practice? Use JPMorgan’s free TheForage lessons: https://www.theforage.com/simulations/jpmorgan/investment-banking-hkyd

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Session 4: Financial Ratios

Financial ratios are powerful tools used to analyze and interpret a company’s financial performance by providing a quantitative insight into its operations. These ratios help translate raw financial data from income statements, balance sheets, and cash flow statements into meaningful metrics that enable informed decision-making. Ratios are comparison points for companies. They evaluate stocks within an industry. Likewise, they measure a company today against its historical numbers. In most cases, it is also important to understand the variables driving ratios as management has the flexibility to, at times, alter its strategy to make it’s stock and company ratios more attractive. Generally, ratios are typically not used in isolation but rather in combination with other ratios. Having a good idea of the ratios in each of the four previously mentioned categories will give you a comprehensive view of the company from different angles and help you spot potential red flags.

Let’s explore the primary categories of financial ratios and their significance:

Liquidity Ratios

  • Current Ratio: This ratio assesses a company’s short-term liquidity by comparing its current assets to its current liabilities. A ratio above 1 indicates the company has more assets than liabilities due within the next year.
  • Quick Ratio: Similar to the current ratio, but excludes inventory from current assets. It provides a more stringent measure of liquidity.

Profitability Ratios

  • Return on Equity (ROE): ROE measures a company’s ability to generate profit from shareholders’ equity. It is a key indicator of how efficiently a company is utilizing equity capital.
  • Net Profit Margin: Calculated by dividing net profit by revenue, this ratio shows the percentage of revenue that translates into profit. A higher net profit margin indicates better profitability.
  • Return on Assets (ROA): ROA gauges how effectively a company utilizes its assets to generate earnings. It is calculated by dividing net income by average total assets.

Leverage Ratios

  • Debt-to-Equity Ratio: This ratio measures the proportion of debt used to finance a company’s assets relative to shareholders’ equity. It indicates the level of financial risk associated with a company.
  • Interest Coverage Ratio: Evaluates a company’s ability to cover interest payments on its debt with its operating income. A higher ratio suggests better financial health.

Efficiency Ratios

  • Inventory Turnover Ratio: Measures how many times a company sells and replaces its inventory within a specific period. It reflects operational efficiency.
  • Receivables Turnover Ratio: Indicates how effectively a company collects payments on its receivables. A higher ratio suggests efficient credit management.

Coverage Ratios

  • Interest Coverage Ratio: Evaluates a company’s ability to meet its interest obligations. A higher ratio indicates a healthier ability to cover interest costs.
  • Debt Service Coverage Ratio: Examines a company’s ability to meet its debt obligations, including both principal and interest payments.

Market Ratios

  • Price-to-Earnings (P/E) Ratio: Compares a company’s current share price to its earnings per share. It is a key metric for assessing a company’s valuation.
  • Earnings Per Share (EPS): Indicates a company’s profitability on a per-share basis. It is a fundamental measure for investors.
  • Dividend Yield: Calculates the annual dividend income relative to a company’s current share price. It’s crucial for income-oriented investors.

Financial ratios are integral tools in financial analysis, serving multifaceted purposes for stakeholders. Primarily, they act as dynamic gauges for performance evaluation, allowing for the assessment of a company’s historical trajectory and identifying trends of improvement or deterioration. Beyond performance, ratios play a crucial role in risk assessment by providing insights into short-term liquidity and long-term solvency. This multifaceted view aids analysts in developing a comprehensive understanding of the various risks associated with an investment. Moreover, ratios are pivotal in decision-making processes for investors, creditors, and management. Investors utilize profitability ratios for assessing potential returns, creditors rely on ratios to make credit extension decisions, and management incorporates ratios into strategic planning, aligning choices with overarching organizational goals. In essence, ratios are not just numerical metrics; they serve as strategic enablers, guiding insightful and proactive decision-making that contributes to the long-term success of a business.

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Session 5: Behavioral Finance

Behavioral finance, a branch of behavioral economics, studies how psychological biases and emotions influence financial decisions. It challenges the traditional view of rational, emotionless investors, highlighting biases like loss aversion and familiarity tendencies. Unlike mainstream finance theories, it recognizes that people often deviate from rational decision-making due to emotions and cognitive limitations. Understanding behavioral finance helps us make better financial decisions, acknowledging the impact of human behavior on investments, payments, and risk management. 

To understand behavioral finance, you have to grasp some key concepts as this topic is highly theoretical. Here are the 5 basic and arguably most important concepts:

  1. Mental accounting is the tendency of individuals to assign specific funds for designated purposes, demonstrating how people compartmentalize their money for various uses.
  1. Herd behavior, especially prevalent in the stock market, illustrates the phenomenon where people imitate the financial actions of the majority, often leading to significant market fluctuations due to collective decision-making.
  1. The emotional gap highlights the impact of intense emotions such as anxiety, anger, fear, or excitement on decision-making processes. These strong emotions often cloud rational judgment, influencing individuals to make choices that might not be in their best interest.
  1. Anchoring involves linking spending patterns to specific references, like adhering to a consistent budget or justifying expenses based on perceived satisfaction levels. This psychological tendency often results in repetitive spending habits based on established anchors.
  1. Self-attribution refers to the inclination to make decisions based on an inflated sense of confidence in one’s own knowledge or abilities. This overconfidence is typically rooted in a person’s expertise in a particular area, leading them to overestimate their capabilities even when objective measures indicate otherwise. People falling into this category tend to believe their expertise surpasses that of others, even when evidence suggests otherwise.

The Efficient Market Hypothesis (EMH) suggests that in highly liquid markets, stock prices accurately reflect all available information. 

Behavioral finance argues that markets aren’t perfectly efficient, allowing for the study of how psychological and social factors impact stock trading. Behavioral finance biases are used daily to analyze stock and market movements. These theories explain market anomalies like bubbles and recessions, providing valuable insights for investors and portfolio managers to make informed decisions and speculations.

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Session 6: Alternative Investments

An alternative investment is a financial asset that falls outside the conventional categories of stocks, bonds, and cash. It encompasses diverse options, including private equity, venture capital, hedge funds, real estate, commodities, art, collectibles, cryptocurrencies, and more. These investments are often pursued by institutional investors and high-net-worth individuals due to their unique characteristics, such as complexity, lack of regulation, and higher risks.

One key feature of alternative investments is their limited correlation with traditional financial markets. This means that their value does not necessarily move in sync with stocks or bonds, making them attractive to investors looking to diversify their portfolios and mitigate risks. For example, during market downturns, certain alternative investments, like gold and real estate, tend to retain their value, providing a hedge against economic volatility.

Examples of Alternative Investments

Private equity involves investing capital in private companies not listed on public exchanges. It includes venture capital for startups, growth capital for mature firms, and buyouts for outright company or division purchases. Private equity firms offer more than just funding; they provide expertise, talent sourcing, and mentorship.

Private debt refers to non-bank-financed investments traded outside open markets. It provides capital to growing companies and is managed by private debt funds. These funds are earned through interest payments and loan repayment, catering to both public and private businesses.

Hedge funds are exclusive investment funds employing various strategies to yield high returns. These funds trade liquid assets and specialize in skills like long-short equity and quantitative strategies. They are accessible to institutional investors and high-net-worth individuals.

Real estate encompasses land, timberland, and intellectual property like artwork. Valuation methods include income capitalization, discounted cash flow, and comparable sales. Property owners gain cash flow from rent and aim for long-term value increases, known as capital appreciation.

Commodities, including agricultural products, oil, and metals, serve as a hedge against inflation. Their value fluctuates based on supply and demand, offering profit opportunities. Commodities have been traded for centuries, evolving through formal exchanges like the Chicago Board of Trade.

Collectibles range from rare wines to stamps, requiring expertise for successful investment. Investors buy and maintain physical items, hoping for appreciation over time. These investments can be fun but involve risks due to high acquisition costs and potential asset damage if not cared for properly.

Challenges of Alternative Investments

Alternative Investments are generally less liquid than traditional assets, meaning they cannot be easily bought or sold without affecting their prices. For instance, selling a rare piece of art or a vintage wine collection might take considerable time and effort, unlike trading stocks on an open market. Moreover, these investments often involve higher fees, making them costlier to manage compared to mutual funds or ETFs.

The lack of regulation is another characteristic of alternative investments. While they fall under the purview of the SEC, they do not have to be registered, leading to a less clear legal structure. This regulatory ambiguity increases the potential for scams and fraud, making it essential for investors to conduct thorough due diligence before venturing into alternative assets.

Furthermore, alternative investments can have different tax implications compared to traditional investments. For instance, profits from the sale of certain collectibles or art pieces may be subject to higher capital gains taxes. On the other hand, some alternative investments, such as specific real estate or energy investments, offer tax-deferred or tax-free investing options, creating a complex landscape for investors to navigate.

In summary, alternative investments offer a diverse and intriguing array of opportunities for investors, ranging from tangible assets like real estate and art to digital currencies like cryptocurrencies. While they present the potential for higher returns and diversification, investors need to carefully weigh the advantages against the complexities, risks, and regulatory challenges associated with these investments before making decisions in this dynamic and evolving market.

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Session 7: Risk Management Strategies

In this session, you’ll explore advanced risk management strategies for investing. Advanced risk management strategies in investing help with safeguarding investments, while maximizing returns within tolerable risk levels ensuring stable development of your portfolio. 

Let’s take a look into the 5 most important and well known risk management strategies: 

  1. Asset allocation: This strategy involves dividing your investment portfolio among different asset classes, such as stocks, bonds, and cash. The idea is to spread your money across different types of investments to reduce the impact of any one investment’s poor performance on your overall portfolio.
  2. Portfolio Diversification: This strategy involves spreading your money across different investments within the same asset class. For example, instead of investing all your money into one stock, you can utilize factor investing, which is the strategy of targeting securities with specific characteristics such as value, quality, momentum, size, and minimum volatility.
  3. Hedging: This strategy involves using financial instruments, such as options or futures contracts, to protect your portfolio against potential losses. An example includes buying a put option. This is a financial derivative that grants the holder the right to sell an asset at a predetermined price to the option writer by a specified date, which in turn would give you the right to sell the stock at that price if its value falls below it.
  4. Dollar-cost averaging: This strategy involves investing a fixed amount of money at regular intervals, regardless of the market’s ups and downs. This way, you buy more shares when prices are low and fewer shares when prices are high, which can help reduce the impact of market volatility on your portfolio
  5. Investing in ETFs: You could avoid investing in individual stocks and instead invest in mutual funds or exchange-traded funds (ETFs), which offer greater diversification and lower risk overall. 

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Session 8: Sensitivity Analysis 

Sensitivity analysis determines how different values of an independent variable affect a particular dependent variable under a given set of assumptions. 

It can be phrased as “what if? Analysis. In simple terms, it is a financial model that allows you to understand the effect of fluctuations in selected variables on your business’ profitability.

Lucky enough, you don’t have to do sensitivity analysis hand-by-hand. This can be done through computed values into Excel files. Steps for doing so are down below

Step 1: Define the input parameters of the model. These variables can be quantitative or qualitative, and can be either continuous or discrete. For example, if you are building a model to predict the sales of a product, the input parameters might include the price of the product, the marketing budget, and the quality of the product.

Step 2: Define the output parameters of the model. These variables can be quantitative or qualitative, and can be either continuous or discrete. For example, if you are building a model to predict the sales of a product, the output parameter might be the total revenue generated by the product.

Step 3: Determine the range of values for each input parameter. This is important because it allows you to test the sensitivity of the output parameters to changes in the input parameters over a range of values.

Step 4: Determine the mathematical relationship between the input and the output parameters. This can be done using regression analysis, correlation analysis, or other statistical techniques.

Step 5: Calculate the sensitivity of the output parameters to changes in the input parameters. This can be done using various techniques, including one-way sensitivity analysis, two-way sensitivity analysis, and Monte Carlo simulation.

Here’s a Youtube link that will better explain sensitivity analysis in more detail: https://www.youtube.com/watch?v=EM0tYUrg9YI (this video explains how to do sensitivity analysis on Microsoft Excel)

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Session 9: Scenario Analysis

The future is unpredictable, so using multiple scenarios to see how the business will perform gives us an idea of what the future could look like. Scenario analysis using 3 cases: 

  • Bearish: This is where you are assuming the worst case scenario possible. Interest rates are high, inflation is rampant, company loses market share, etc.
  • Base Case: This is when the economy is in a steady state and the company grows in line with the market.
  • Bullish: This is where you assume the best. Consumer spending is high, company gains market share, profit margins expand, etc.

Here is a quick example of a company that puts into effect everything that was discussed above. 

September 2023, OpenAI, the company behind ChatGPTwas growing rapidly and it seemed like their growth was only going up. Their CEO, Sam Altman was the face of the company and pioneering the AI boom. The future is looking bright. This would be a bullish scenario.   Move to November, you see an article informing you that Sam Altman has now been fired from the company. Now, there is uncertainty throughout the market and you are unsure about the trajectory of the business. This is what you would categorize as a bearish scenario.

In regards to environmental investing, potential scenario examples could be:

  • Bearish: Company decides not to spend any money in compliance with ESG norms. This could potentially lead to fines, customers boycotting products, etc.
  • Base case: A company meets the base level ESG standards.
  • Bullish: A company goes aggressive on spending for ESG. The thought process here is to see whether the cost will provide you with enough gains in terms of brand loyalty and recognition to justify the costs. 

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Session 10: Portfolio Management

Portfolio management involves selecting and overseeing a group of investments that meet a client’s long-term financial objectives and risk tolerance. Common portfolio management strategies include diversification, asset allocation, and risk management. Modern Portfolio Theory (MPT) is a key concept in portfolio management, which emphasizes diversification to optimize returns for a given level of risk. Risk-adjusted performance measures such as the Sharpe ratio and Sortino ratio are used to evaluate the performance of investment portfolios.

Modern Portfolio Theory (MPT): Modern Portfolio Theory is a framework developed by Harry Markowitz in the 1950s that focuses on the relationship between risk and return in an investment portfolio. It suggests that by diversifying a portfolio across different asset classes (such as stocks, bonds, and cash), an investor can achieve the maximum possible return for a given level of risk or minimize risk for a given level of return. It asserts that the key to successful investing is not only the individual assets within a portfolio but also their combination.

The Efficient Frontier: Is a critical concept in Modern Portfolio Theory. It represents a set of optimal portfolios that offer the highest expected return for a given level of risk or the lowest risk for a specified level of return. The Efficient Frontier graphically illustrates the trade-off between risk and return. Investors seek to identify portfolio combinations that lie on or near the Efficient Frontier to achieve their desired risk-return objectives. This concept helps investors make informed decisions about how to allocate assets in their portfolios to strike the right balance between risk and reward.

Risk-Adjusted Performance Measures: These are metrics used to evaluate the performance of an investment portfolio while considering the level of risk taken. A few examples of the Risk-Adjusted Performance Measures are Sharpe Ratio, Sortino Ratio, Treynor Ratio and Jensen’s Alpha.

  • Sharpe Ratio: The Sharpe Ratio is a widely used risk-adjusted measure that calculates the excess return of an investment portfolio (returns above the risk-free rate) per unit of risk (usually standard deviation). A higher Sharpe Ratio indicates better risk-adjusted performance, as it demonstrates that the portfolio has generated more return for the same level of risk.
  • Sortino Ratio: The Sortino Ratio is similar to the Sharpe Ratio, but it focuses on downside risk. It measures the excess return of a portfolio relative to the downside deviation (volatility of negative returns) rather than the overall volatility. The Sortino Ratio is particularly useful for assessing how well a portfolio manages the risk of losses.
  • Treynor Ratio: The Treynor Ratio is another risk-adjusted performance measure that considers the excess return of a portfolio relative to systematic risk (measured by beta). It evaluates how well a portfolio compensates investors for bearing systematic risk. A higher Treynor Ratio suggests better risk-adjusted performance for portfolios with lower systematic risk.
  • Jensen’s Alpha (Alpha): Jensen’s Alpha is a measure of a portfolio’s risk-adjusted return that takes into account its sensitivity to market movements (beta). It assesses whether a portfolio has outperformed or underperformed its expected return, considering the risk-free rate and its beta. A positive alpha indicates outperformance.

Constructing and Optimizing a Diversified Investment Portfolio: Constructing a diversified investment portfolio involves selecting a mix of assets, such as stocks, bonds, real estate, and more, to spread risk and enhance returns. Investors need to consider their financial goals, risk tolerance, and time horizon. They must determine the right asset allocation strategy that aligns with their objectives. Examples of this can be a 60/40 portfolio, 25/25/25/25 Portfolio, a Value Portfolio, and a Dividend portfolio.

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