Q&A: List some of the assumptions fundamental analysis makes....

...in regard to the notion of efficient markets.

  • At any time, there is a basic intrinsic value for the aggregate stock market, various industries, or individual securities.
  • These values depend on underlying economic factors such as cash flows and risk variables.
  • Though market price and the intrinsic value may differ across time, the discrepancy will get corrected as new information arrives.

Bonus Points

  • Fundamental Analysis can generate abnormal returns by accurately estimating the intrinsic value and making superior market timing decisions (ie. predict earnings surprises) or acquiring undervalued securities.
  • Aggregates market analysis, industry analysis, company analysis and portfolio management, uses historical data to estimate the relevant variables
    • Market analysis: estimate the relevant variables that cause long-run trends of market movements.
    • Industry and company analysis: estimate future values for variables that influence rates of return and predict future earnings surprises. Pay more attention to areas where the market is inefficient, such as stocks that are neglected by other analysts, stocks with high book value/market value ratios, and stocks with small market capitalization.

Category: C++ Quant > Financial Markets

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