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Unformatted text preview: CH.9
ANALYSIS Equity Security Analysis
Equity Equity security analysis is the evaluation of a firm and its prospects from the perspective of a current or potential investor in the firm’s stock
Security analysis is the foundation for the second step of investment process, projecting future returns and assessing risk. Equity Security Analysis and Market
Efficiency Efficient market hypothesis: information would be reflected in security prices fully and immediately upon its release.
Under this condition it would be impossible to identify mispriced securities on the basis of public information
Efficient market hypothesis cannot represent an equilibrium in a strict sense Market Efficiency and the Role of
Financial Statement Analysis
Financial Market agents could profit from digesting financial statement information: • The information would be useful to the select few who receive newly announced financial data, interpret it quickly, and trade on it within minutes
• The information would be useful for gaining understanding of the firm, so as to place analyst in a better position to interpret other news as it arrives
• Create trading strategies designed to exploit any systematic ways in which the publicly available data are ignored or discounted in the pricesetting process Approaches to Fund Management and
Security Active versus Passive Management • Active: relies heavily on security analysis to identify mispriced securities
• Passive: serves as a price taker, avoiding the costs of security analysis and turnover while seeking to hold a portfolio designed to match some overall market index or sector performance Approaches to Fund Management and
Security Quantitative versus Traditional Fundamental Analysis: • Technical analysis: attempts to predict stock price movements on the basis of market indicators
• Fundamental analysis: attempts to evaluate the current market prices relative to projections of the firm’s future earnings and cashflow generating potential. Supplemented traditional fundamental analysis with more quantitative approaches Approaches to Fund Management and
Security Formal versus Informal Valuation
• Formal method: described in ch.7
Informal method: compare earnings projection with consensus forecast Recommend a stock because his or her earnings forecast appears relatively high in comparison to the current price “Marginalist” Performance of Security Analysts
and Fund Managers
and Performance of Security Analysts • Analyst earnings forecasts are more accurate than those produced by time series models that use past earnings to predict future earnings
• Stock prices tend to respond positively to upward revisions in analysts earnings forecasts and recommendations, and negatively to downward revisions
• Analysts play a valuable role in improving market efficiency Performance of Security Analysts
and Fund Managers
and Performance of Fund Manager • No consistent evidence that actively managed mutual funds generate superior returns for investors ...
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This note was uploaded on 01/19/2012 for the course ACCT 4115 taught by Professor Jin during the Spring '11 term at UCM.
- Spring '11