Chapter 6: Fundamental Analysis Flashcards
Fundamental Analysis
Process of analysing the macroeconomic, industry and company-specific factors influencing the risk and return characteristics of an investment.
Main Asset Classes:
- Equity investments
- Bonds
- Real estate
- Cash
3 Step Valuation Process
- Analysis of the macroeconomic prospects
- Industry analysis
- Company analysis
3 Methods of economic forecasting:
- An index of leading economic indicators
- Economic forecasting models
- Market signals
• An index of leading economic indicators
Provides composite statistic comprised of a number of variables that have historically changed prior to similar moves in the general business cycle.
• Economic forecasting models
Employ the relationships among variables that are theoretically valid and whose parameters can be determined using various forms of regression analysis.
• Market signals
Provide clues about upcoming economic events from real-time market data.
Macroeconomic analysis
Involves various measures used to assess the condition of the macroeconomic environment in which companies are operating.
Measures used in macroeconomic analysis
- GDP
- Interest Rates
- Inflation
- Budget Deficits
- Balance of payments
- Exchange Rates
- Unemployment rates
Fixed Exchange Rate:
An exchange rate that is set at a fixed rate by government policy.
Floating Exchange rate:
Currency value is determined by market forces (supply & demand).
Factors that cause a change in a floating exchange rate
- Differences in the growth of income of countries.
- Differences in rates of inflation.
- Changes in real interest rates.
Industry Analysis
Involves assessment of the risk and return characteristics of various industries as part of fundamental analysis.
effects have to be forecasted and evaluated in industry analysis
- Growth/Decline in population figures
- Government regulation
- Taxes and Subsidies
- Employment patterns
- Income distribution
