xid-3120412_2 - 4/01/2012 Learning Objectives Chapter 7...

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4/01/2012 1 7-1 Chapter 7 Forecasting Share Price Movements 7-2 Learning Objectives • Evaluate and apply bottom-up and top-down approaches to fundamental analysis • Describe and apply technical analysis techniques • Examine the role of program trading • Explain the theoretical concepts and implications of the random walk and efficient market hypotheses when forecasting share price movements 7-3 Chapter Organisation 7.1 Fundamental Analysis: Top-down Approach 7.2 Fundamental Analysis: Bottom-up Approach 7.3 Technical Analysis 7.4 Program Trading 7.5 Random Walk and Efficient Market Hypotheses 7.6 Summary 7-4 7.1 Fundamental Analysis: Top-down Approach • Share price is determined by supply and demand of a company’s shares • Expectation of bad company performance causes investors to sell their shares, increasing supply and reducing the price • Expectation of good company performance increases demand and leads to an increase in share price 7-5 7.1 Fundamental Analysis: Top-down Approach (cont.) • What causes the shifts in demand and supply of a company’s securities on the secondary market? • Three approaches to answering this question 1. Fundamental analysis: top-down 2. Fundamental analysis: bottom-up 3. Technical analysis 7-6 7.1 Fundamental Analysis: Top-down Approach (cont.) • Fundamental analysis Considers macro and micro factors that impact upon cash flows and future share prices of various industry sectors and firms Macro factors include interest rates, economic growth, business investment Micro factors are firm-specific and relate to management’s impact on company performance
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4/01/2012 2 7-7 7.1 Fundamental Analysis: Top-down Approach (cont.) • Top-down approach considers macro factors Economic growth of international economies Exchange rates Interest rates Domestic economy Growth rate Balance of payments Inflation Wage and productivity growth Government responses to changes in the above factors 7-8 Top-down approach—international economies • The higher the growth rate in the rest of the world, the greater the demand for Australian exports • Sectors benefitting from international growth determined by source of the growth • Growth can be driven by: increased consumer demand increased business investment in equipment 7-9 Top-down approach—rate of growth of an economy • Generally, greater domestic growth leads to increased profitability of firms • But high growth can lead to any of the following factors that can reduce firm profitability: Deterioration in balance of payments Increase in inflationary pressures Pressure on wages Depreciation of the exchange rate Rise in interest rates 7-10 Top-down approach—exchange rates • Affect the domestic currency profit of exporters that quote their products in foreign currency prices A strengthening Australian dollar (AUD) makes these firms
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xid-3120412_2 - 4/01/2012 Learning Objectives Chapter 7...

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