Scholarly Research Journal for Interdisciplinary Studies, Online ISSN 2278-8808, SJIF 2016 = 6.17, www.srjis.com UGC Approved Sr. No.49366, NOV-DEC 2017, VOL- 4/37 CRITICAL APPRAISAL OF FINANCIAL MODELS IN INVESTMENT DECISIONS & SECURITY TRADING Ayushi Mundra Student, Management. Faculty of Management Studies, MLSU, Udaipur, India
The current research aims to appraise financial models and analyse their usefulness in security trading. One of the main issues considered in this paper is the Capital Asset Pricing Model and the Arbitrage Pricing Theory, their major differences and implication in portfolio management. The results showed that these two theories, despite common ground, differ in terms of systematic risk measurement. However, both theories are used as a fundamental for portfolio management. The second issue analysed in the research is the logic of theBehavioural Finance Theory. The theory is a background for the application of technical analysis which is used to maximise investor’s profit and make decisions for buying and selling. Finally, the third part of the study investigates the application of the yield curve in trading securities. As results demonstrated, the yield curve is applied not only in investment decision making processes, but in forecasting economic situations. Itprovides information on future inflation and interest rates and helps to determine if the fixed-interest security is under-priced or overpriced. Keywords – CAPM; AP; Behavioural Finance Theory; Yield Curve
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1. Introduction Taking the decision for investing in different assets and contracting the portfolio investors and managers are guided by two major variables, expected return and risk that they can bear. However, there are also a number of financial theories and models which can be used in the investment decision making and the security trading process. The Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT), as well as behavioural finance and yield curve models are the main ones which are applied in trading securities. Both the CAPM and the APT are used for portfolio construction, while behavioural finance studies the biases in human behaviour and serves as a background for the technical analysis in the investment decision making processes. The yield curve construction, in its turn, helps not only to make strategic investment decisions but also predict future economic conditions in general. Thus, the objective of the current study is to critically investigate the above mentioned theories and analyse their usefulness in security trading. Copyright © 2017, Scholarly Research Journal for Interdisciplinary Studies