FIN3702 Assignment 1 Semester 1 2023 Questions and answer {Distinction level}

Why do we study security selection - -- Research has shown that performance of professionally managed portfolios is attributed to the mix of stocks, bonds and cash - Also, 60% of the differences of returns between funds has been attributed to security selection. 40% goes to asset allocation. -What form of EMH does fundamental analysis test? What about technical analysis? - -FA -- Tests semi-strong form of EMH. If it is true then FA is useless and cannot be used to predict future stock prices. Using accounting and economic public information cannot predict future prices and yield superior returns. TA -- Tests weak-form of EMH. If it is true then TA is useless. Using price and volume information cannot predict future prices. -What is the logic of fundamental analysis? - -The intrinsic value of the stock is based on the riskiness of its future cash flows/dividends. Therefore, the price of a stock would converge to its intrinsic value in the long-term if an investor would witness any deviations. Undervalued stocks should be bought while overvalued stocks should be sold. Prices tend to deviate in the short-term due to market irrationality. -How do you perform a top-down analysis - -To forecast the dividends or earnings expected from the firm the analyst must look at the economy and industry prospects (1) look are the trend of the broader economy -- good profits when the economy/industry