Page 115 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes Objectives

After studying this unit, you will be able to:
Discuss the concept of Economic Analysis

Explain Current State of Economy and Indicators
Describe tools for economic analysis
Explain the concept of Industry Analysis
Discuss Standard Industry Classification
Analyze Industry Growth Cycle

Understand tools for Industry Analysis
Discuss Quantitative Industry Analysis
Explain concept of company analysis

Understand the concept of estimation of future price
Discuss Quantitative Company Analysis
Explain forecasting earning per share
Describe traditional and modern methods of forecasting EPS
Explain tools for Company Analysis

Introduction

In the fundamental approach, an attempt is made to analyze various fundamental or basic
factors that affect the risk-return of the securities. The effort here is to identify those securities
that one perceives as mispriced in the stock market. The assumption in this case is that the
'market price' of security and the price as justified by its fundamental factors called 'intrinsic
value' are different and the marketplace provides an opportunity for a discerning investor to
detect such discrepancy. The moment such a description is identified, a decision to invest or
disinvest is made. The decision rule under this approach is like this:
If the price of a security at the market place is higher than the one, which is justified by the
security fundamentals, sell that security. This is because, it is expected that the market will
sooner or later realize its mistake and price the security properly. A deal to sell this security
should be based on its fundamentals; it should be both before the market correct its mistake by
increasing the price of security in question. The price prevailing in market is called "market
price' (MP) and the one justified by its fundamentals is called 'intrinsic value' (IV) session rules/
recommendations.
1. If IV > MP, buy the security

2. If IV < MP, sell the security
3. If IV > MP, no action
The fundamental factors mentioned above may relate to the economy or industry or company
or all some of this. Thus, economy fundamentals, industry fundamentals and company
fundamentals are considered while prizing the securities for taking investment decision. In fact,
the economy-industry-company framework forms integral part of this approach. This framework
can be properly utilized by making suitable adjustments in a regular context. A world of caution,

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