BA 7000-093 (Moore)
Chapter 9
Chapter 9 – Equity Security Analysis
(Homework: 9-2; 9-7; 9.9)
Key Learning Outcomes

Becoming familiar with the different types of investment funds available to
the public and distinguishing the objectives of these funds

Being able to link the benefits and types of equity valuation analysis with
market efficiency concept

Linking investment management styles and benefits with market efficiency

Finalizing a comprehensive equity valuation analysis and report
A. Basic investment fund types (mutual funds)
1. Bond (debt) funds: interest rate sensitive; receive P & I
a.
b.
c.
d.
e.
Hi Yield (junk bonds) funds
Corporate Bond funds (investment grade)
Mortgage Backed Securities Funds
REIT’s
Municipal Funds (city and state debt)
2. Equity Based Funds (dividends and growth)
a.
b.
c.
d.
e.
f.
g.
h.
Income Funds (dividends)
Growth Funds (long-term capital gains)
Income and Growth Funds (Balance Funds)
Value Funds (undervalued shares – we hope) ***
Short Funds (overvalued shares – we hope) ***
Index Funds (market return)
Sector Funds – (industry and product group based) ***
“Regional” Funds – other capital markets
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BA 7000-093 (Moore)
Chapter 9
B. Market Efficiency and Equity Analysis
1. Efficient Markets Hypothesis (EMH)
a. Investors compensated for market risk and should just diversify portfolio
(1)
Implies you don’t need to find mis-priced securities (no fsa)
(2)
However; markets are efficient IFF information is there
(3)
Where else will information come from?
b. Security prices (on average) are correct. There still exists mis-pricing
opportunities. Therefore, analyst function is appropriate
c. There exists evidence (research) suggesting market is not fully efficient
with respect to many types of information. This leads to valuable
fundamental information analysis.
C. Fund (Investment) Management Styles
1. Passive Management
a. Price takers – little research; (EMH)
b. Set Portfolio risk tolerances and rebalance accordingly
2. Active Management
a. Research intensive
b. Search for mis-priced securities
c. Take advantage of market anomalies
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BA 7000-093 (Moore)
Chapter 9
D. The Process of Comprehensive Security Analysis
1. “Candidate” firm selection – Industry specialists
2. Assess Market (the relevant market) expectations (segmentation)
a. Implied cost of capital and growth rates
3. Prepare Sensitivity Analysis (what-if analysis)
a. Scenarios (Good, average, bad)
b. Cost of Capital, earnings growth, etc (Hi, Medium, Low)
E. Analyst and Fund Manager Performance/Behavior
1. Security Analysts
a. Herding, Optimism/Over-confidence, Conflicts of Interest
2. Fund Managers
b. Churning of Funds; Window Dressing; Survivorship Bias
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