VI. ANALYSIS OF EQUITY INVESTMENTS

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A. Organization and Functioning of Securities Markets

1. Primary capital markets

2. Secondary financial markets

a. Exchange markets

b. Over-the-counter (OTC) market

c. Electronic markets/exchanges

3. Types of orders

B. Security Market Indexes and Benchmarks

1. Broad market versus specialized indexes

2. Stock market indicator series

a. Price-weighted series

b. Value-weighted series

c. Unweighted price indicator series

d. Global equity indexes

C. Equity Risk Definition (e.g., statistical, economic, downside, relative, absolute, political)

and Measurement

1. Single factor models (e.g., capital asset pricing model (CAPM))

a. Measurement of the risk premium

b. Variants on the risk-free rate of return

c. Estimating the CAPM parameters

2. Multi-factor models

a. Fundamental multi-factor model

b. Arbitrage pricing theory (APT)

(1) Nature and estimation of risk parameters

(2) Applying the APT

c. Practical limitations of risk measurement for the equity analyst

d. International equity investing (e.g., emerging market equities)

D. Fundamental Analysis

1. Theory of valuation

a. Stream of expected returns

(1) Cash flows

(2) Dividends

(3) Earnings

b. Discount rate determination

(1) Required rate of return

(2) Real risk-free rate of return

(3) Expected rate of inflation

(4) Risk premium

c. Investment decision process

(1) Comparing estimated values and market prices to uncover misvaluation

d. Role of market efficiency

(1) Assumptions for informationally efficient market

(2) Alternative Efficient Market Hypotheses: weak form, semi-strong form,

strong form

(3) Violations of assumptions in real capital markets

(4) Implications of capital market efficiency for financial analysis and valuation

2. Analysis of world security markets

a. Inflation and exchange rates

b. Correlations among stock index returns

c. Global sector indexes

d. Individual country macro-economic analysis

e. Individual country cross-sector analysis

3. Valuation of stock market series (e.g., S&P 500, FT100)

a. Variables for estimation of future earnings per share (e.g., nominal GDP,

operating profit margin, depreciation, interest, tax rate)

b. Variables for estimation of future earnings multiplier (e.g., required rate of return,

dividend growth rate, dividend payout, real risk free rate, risk premium for

common stock, earnings retention rate, equity return)

c. Methodology for estimating market series earnings multiplier

(1) Direction of change approach

(2) Specific estimate approach

(3) Historical trends in multiples

d. Expected rate of return on common stocks

4. Industry analysis

a. Business cycle analysis

b. Effect of structural economic conditions on various industries (e.g.,

demographics, technology, politics, regulatory environment)

c. Analysis of competitive environment (e.g., Porter framework: competitor rivalry,

new entrants, substitute products, bargaining power of buyers and suppliers)

(1) Industry rates of return

(2) Relative company returns

d. Global industry analysis

5. Company analysis

a. Company characteristics

b. Growth analysis and measurement

(1) Approaches to estimating growth rates

(2) Distinguishing sustainable and non-sustainable growth

(3) Growth duration analysis

(4) Franchise value and the growth process

c. Disaggregation of return on assets (ROA) and return on equity (ROE) (i.e.,

DuPont analysis)

d. Competitive strategy analysis for companies (e.g., low cost, product

differentiation)

e. Approaches to equity valuation

(1) Dividend discount models (e.g., one period model, single stage (Gordon

growth) model, two-stage model, H-model, three-stage model)

(2) Measures of relative value

(a) Earnings multiplier (P/E)

(b) Price-to-book value ratio (P/B)

(d) Price-to-sales ratio (P/S)

(3) Free cash flow-to-equity and free cash flow-to-the firm approaches

(4) Measures of value added

(a) Economic value added (EVA®)

(b) Market value added (MVA™)

(5) Effect of inflation on the valuation process

E. Special Applications of Fundamental Analysis

1. Analysis of corporate restructuring events

a. Rationales for mergers, leveraged buyouts (LBOs), divestitures, strategic

alliances, tracking stocks, joint ventures, spin-offs, and holding company

formation

b. Valuation of corporate restructuring events

2. Valuation of preferred stock and convertible securities

F. Technical Analysis

1. Definition and assumptions

a. Supply and demand

b. Persistent price trends

c. Turning points

2. Indicators, rules, and theories

a. Indicators (e.g., expectational, flow of funds, market structure)

b. Rules (e.g., contrary opinion)

c. Theories (e.g., Dow, Elliot Wave)