#1 The most widely accepted methodology to employ in fundamental analysis of sec
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Question
#1
The most widely accepted methodology to employ in fundamental analysis of securities (bonds and stocks) is to start with the economy, then move to industries that should fare well in the predicted economy and finally turn attention to individual companies. Using current economic conditions as an example, factors that are important in economic analysis can be identified and analyzed. 1. You are asked to identify key factors that will drive economic activities in the near term. What do you view / think as the positive and negative factors? 2. Interest rates are unlikely to be lowered any further. If rates are to move up, how would this affect the securities prices / valuations overall?
#2
1). What assumptions underlie the development of the CAPM? Which assumption do you think / suggest as being the most significant deviation from real markets?
2). How do you define value versus growth stocks? What relevance do your findings have on investing?
Explanation / Answer
#1.
1. Key economic factors that will drive economic activities in the near term:
The factors mentioned above have their own pros and cons.As an example, the lower oild prices could help emerging economies which are consumers to lower their oil import costs resulting in economic growth. At the same time, oil producing economies dependent primarily on oil revenues would be going through a challenging situation.
Similarly, urbanization in emerging economies could drive aggregate demand, but at the same time put pressure on the available resources.
2. Interest rates would have varying effect on the values of different securities. Asan example, overall debt / bonds would see a decrease in their prices due to an increase in interest rate. For quities, higher interest rates means higher inflation leading to investors expecting higher risk premia. This owuld result in lower stock prices as the discount rate for future cash flow would be higher.
#2. 1) Assumptions underlying development of CAPM:
Most significant deviation from real markets:
2) Value stock: Value stock is a stock which has a market price lower than the actual price indicated by the performance of the company.
Growth stock: It is the stock of a company which is expected to have future earnings at a rate significantly higher than the overall market rate.
Investors expecting higher returns via stock price appreciation and having more apetite for risk would be interested in growth stocks whereas investors expecting returns by investing in mature companies with good dividend yields would be interested in value stocks.
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