Brailsford3eSM_Ch12

Brailsford3eSM_Ch12 - Chapter 12 Macro- and industry...

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Copyright © 2006 Nelson Australia Pty Limited Chapter 12 Macro- and industry analysis of share markets Learning objectives After the completion of this chapter, you should be able to: understand why there are interactions between the equity market and other financial markets explain why forecasts of market conditions are difficult to make apply basic valuation tools in forecasting market conditions explain the GICS approach to industry classification define the industry life cycle and show how it may be used to explain changes in industries over time use a pricing model to estimate an expected return for an industry Key points 1 A key step in the asset allocation approach is the macro or market analysis. This is the first step in the top-down approach. This is often performed by using leading indicators to obtain predictions of future economic performance in these markets. 2 The second step in the topi-down analysis is the industry approach. As outlined in the chapter, shares in the same industry often have similar characteristics. 3 The industry and market analyses are not independent, as some industries are classified as being either cyclical or non-cyclical. Chapter outline 12.1 Introduction 1 This chapter focuses on first two elements of the top down approach to investment analysis. These elements are the macro or market analysis and the industry analysis. 2 The final step in the top-down approach is the individual security analysis or micro analysis, which is covered in Chapter 13. 12.2 The role of the economy 1 The economy can be analysed as comprising two parts; supply side and demand side. 2 The demand side comprises fiscal and monetary policy designed to influence economic growth. The supply side comprises capital and labour. The interaction between supply and demand sides of the economy is the key to macro economic modelling. Economy is often viewed as either random or trending in nature. 3 Key variables of interest are economic growth, interest rates and expected inflation. 4 Also focus on so-called leading indicators, such as the stock market indices, money supply and housing activity, futures prices on share price indices and the slope of the yield curve.
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2 Investments: Concepts and Applications Solutions Manual Copyright © 2006 Nelson Australia Pty Limited 12.3 Market-level variations in risk 1 The international CAPM implies that a market’s beta can be used to identify high and low risk markets. 2 Application of the model, though, is difficult in practice due to the assumptions required. For example, ownership restrictions and identification of the world risk free rate. 12.4 Stock market analysis 1 Undertaken in practice using historical as well as expectations and forecasts. 2
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Brailsford3eSM_Ch12 - Chapter 12 Macro- and industry...

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