14_Equity - Introduction to Security Valuation: Part 1 - A...

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Introduction to Security Valuation: Part 1 - A 3-step top down valuation process o Examine the influence of the general economy on all firms: Fiscal and monetary policies. o Analyze the prospect of various global industries o Turn to the analysis of individual firms Industry Analysis - Demographics, lifestyles, technology, politics and regulations Equity Concepts and Techniques - Five stages of Business cycle: o Recovery: Attractive investments include cyclicals, commodities, and commodity-linked equities o Early Expansion: Attractive investments include stocks in general and real estate o Late Expansion: Attractive investments include bonds and interest- sensitive stocks o Slowing, entering recession: Attractive investments include bonds and interest sensitive stocks o Recession: Attractive investments include commodities and stocks - Global Industry Analysis o Country Analysis: A high long-term sustainable growth rate in GDP is favorable, because this translates into high long-term profits and stock returns. In creating GDP and productivity growth rate expectations, the analyst will undoubtedly examine the country’s saving rate, investment rate, and total factor productivity (TFP). TFP measures the efficiency with which the economy converts capital and labor into goods and services. o Business Cycle Synchronization: Although national economies are becoming increasingly integrated with the world economy, there are so many economic variables involved that the chances of full synchronization are extremely remote. o Growth Theory: Neoclassical growth theory assumes that the marginal productivity of capital declines as more capital is added. Endogenous growth theory assumes that the marginal productivity of capital does not necessarily decline as capital is added. Technological advances and improved education of the labor force can lead to efficiency gains. Neoclassical theory predicts that the long-term level of GDP depends on the country’s saving rate, but the long term growth rate in GDP does not depend on the savings rate. The endogenous growth theory predicts that the long-term growth in GDP depends on the savings rate. -
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14_Equity - Introduction to Security Valuation: Part 1 - A...

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