Finance

1. Meaning of efficient market assumption:

In a legal and orderly stock market, various factors and characteristics of the stock trend are clearly displayed, such as the current situation and future development trend of enterprise investment, without considering the influence of market manipulation and illegal market behavior.

How to influence my research:

In today's fierce market competition and the ever-changing stock market, the efficient market hypothesis cannot be perfectly matched with the reality. However, through the efficient market hypothesis theory, we can predict some opportunities to face and risks to avoid with theory. Combining them with the reality, it is helpful for us to make a relatively correct judgment on the market.

2. In view of the concept of efficient market, the definition of rational investor:

You can judge your investment behavior based on various factors of the market, have rational judgment, and will not speculate without thinking.

Impact on our research:

In the stock market, the results of rational judgment and irrational judgment are quite different. However, even if rationality follows the efficient market hypothesis, various factors of the reality will also lead to irrational factors. Our research will let these rational factors play a leading role and try to avoid irrational factors.

3. Take stock as an example, the intrinsic value of securities

Generally speaking, analysts judge the true value and return of stocks through various comprehensive factors. Intrinsic value is a subjective concept, which varies from person to person, and its calculation methods are diverse, mainly based on the future income converted into the present value (i.e. the present value of future payments).

4. In view of the concept of intrinsic value or fair value

describe how rational investors seek to identify wrongly priced securities, and once identified, how to make profits by betting on rising or falling prices?

Through the past fair value and intrinsic value, we can analyze its laws and implicit assumptions as a case, and make investment judgments based on the actual situation.

5.Fundamental Analysis:

Fundamental analysis, also known as fundamental analysis, is an analysis method for securities forecasting in the financial industry. The theoretical basis of fundamental analysis is that "the real or intrinsic value of any financial asset is equal to the present value of all expected returns on that asset". Based on this theoretical basis, the basic analysis method starts from the three sensitive factors that affect the price changes of securities, analyzes and studies the general laws of price changes in the securities market, and provides investors with certain scientific analysis and guidance.

Fundamental analysis includes three factors: macroeconomic factors, industry factors and company factors. To study these three factors, we need to carry out macroeconomic analysis, industry economic status analysis and company (enterprise) microanalysis. Fundamental analysis is mainly suitable for analysis in three situations: First, it is a long-term securities. Second, it is suitable for relatively mature securities markets. Finally, the fundamental analysis method is only suitable for securities forecasting where the forecast accuracy is not high. It can be seen that the limitation of fundamental analysis is that the accuracy of the analysis and prediction results is not high, and the limitations of application are relatively large.

When conducting a fundamental analysis of the company I choose, I will start from the four aspects of strength, opportunity, weakness, and threat, and conduct a comprehensive analysis combining internal and external factors (as shown in the figure below)

6.Modern Portfolio Theory:

Modern Portfolio Theory (MPT), also known as Modern Portfolio Theory, Portfolio Theory or Investment Diversification Theory, was proposed by Markowitz, a professor of economics at Baruch College, City University of New York. The theoretical principles are: First, the principle of dispersion. In the securities market, investors integrate different investment products optimally by weighing the relationship between expected income and expected risk, so that the risk is the least under the same expected income or the expected income is the highest under the same risk. Second, the relative coefficient. Coefficient used to describe the correlation between the expected returns of each two groups of securities. These two theoretical principles are often explained colloquially as "don't put all your eggs in the same basket". In practical application, modern portfolio theory is not limited to the securities market, and diversified investment can still be dispersed into stocks, bonds, real estate, futures and other aspects.

Similarly, the modern portfolio theory also has certain limitations, such as: First, the theory can only be applied to reduce individual risks, that is, the risk of a security has nothing to do with other securities. When systematic risk comes, its Investment risk cannot be mitigated by current portfolio theory. Second, due to limited funds, not every investor may be able to diversify, so modern portfolio theory may not be effective in practice.

Now the help of portfolio theory in our analysis of the selected companies is as follows: First, investment choice is not a multiple-choice question. When making investment choices, risk coefficient analysis can be used to analyze two companies with different amounts of money. invest. In fact, when making investment choices, we can not only invest in quantity, but also in time. For example, you can choose to invest during a security's dividend period.

7.Two Valuation Models

7.1 Discounted Cash Flow Model

Discounted cash flow models are used to estimate future cash flows. The DCF valuation method is suitable for companies with unstable dividends but relatively stable cash flow growth. Those companies whose cash flow can better reflect the company's profitability. where V is the intrinsic value of each stock, Dt is the expected value of cash flow per stock in year t, and k is the expected return on the stock. The formula states that the intrinsic value of a stock is the sum of the present value of its expected cash flows from year to year. DCF is an absolute valuation method, which is to discount the free cash flow (usually forecasted for 15-30 years) that an asset can generate in the future according to a reasonable discount rate (WACC) to obtain the value of the asset. If If the discounted value is higher than the current price of the asset, it is profitable and can be bought. If it is lower than the current price, it means that the current price is overvalued and needs to be avoided or sold.

Limitations of the discounted cash flow model: DCF is a theoretically impeccable valuation model, especially suitable for those industries with highly predictable cash flow, such as utilities, telecommunications, etc., but for frequent and unstable cash flow fluctuations. In industries such as the technology industry, the accuracy and credibility of the DCF valuation will be reduced.

7.2Dividend Discount Model

The dividend discount model is a model for stock valuation and is a model used in the analysis of the value of common stocks by the income capitalization method. Discount the stock's expected future dividends to present value at an appropriate discount rate to assess the stock's value. P0 represents the present value of a company's equity (current stock price), Dn represents the current forecasted dividends to be issued in the nth period in the future, r represents the discount rate of dividends, that is, the cost of equity, which is also the expected rate of return of investors, and H represents the expected rate of return of investors. There is stock time.

Limitations of the dividend discount model: Due to the fact that stock dividends are difficult to guarantee and the future price of stocks is difficult to accurately predict, there will be deviations when using the dividend discount model to make predictions.

8.reference

[1] Richardson, S. et al. (2010) Accounting anomalies and fundamental analysis: A review of recent research advances. Journal of accounting & economics. [Online] 50 (2), 410–454.

[2] Merli, M. et al. (2021) Portfolio advice before modern portfolio theory: The Belle Epoque of French analyst Alfred Neymarck. Business history. [Online] 63 (7), 1197–1221.

[3] Mellichamp, D. A. (2018) Exo-parametric (‘inside-out’) model of discounted cash flow calculations using NPV%: Macro calculation of coefficients for an exact, collapsed financial model. Computers & chemical engineering. [Online] 119309–314.

[4] Hiebert, P. & Sydow, M. (2011) What drives returns to euro area housing? Evidence from a dynamic dividend–discount model. Journal of urban economics. [Online] 70 (2), 88–98.