Three Approaches to Security Selection

1
Three Approaches to Security Selection

• Technical Analysis
• Fundamental Analysis
• Economic Analysis
• Industry Analysis
• Company Analysis
• Efficient Markets

2
Technical Analysis

• Basic Philosophy and assumptions
• Market value determined by supply and demand
• Supply and demand are governed by rational and
  irrational factors
• Prices move in trends that persist
• Trends can be detected by analysis of the market
• Dow Theory
• Primary moves (tides)
• Intermediate moves (waves)
• Minor changes (ripples)

3
Technical Trading Rules

• Contrary Opinion Rules
• The odd-lot theory
• Short sales theory
• Mutual Fund cash position
• Investment Advisory Opinions
• Follow the Smart Money
• The Confidence Index
• Short sales by specialists

4
Other Market Sentiment Techniques

• The advance-decline line
• Moving Averages
• Support and Resistance Levels
• Bar Charting
• Point and Figure Charts

5
Efficient Markets Hypothesis

• A market in which prices fully reflect all known
  information is called efficient.
• Four conditions
• homogeneous expectations
• frictionless markets
• Investors are price takers
• Maximize expected utility
• A perfectly efficient market
• Economically Efficient Market

6
Efficient Markets (Cond)

• Types of tests of EMT
• Weak form tests
• Semistrong form test
• Strong form test
• EMT and asset pricing models
• For CAPM and APT to be true, markets have to be
  efficient
• Problem of joint test6s

7
Return Predictability

• Early Tests
• Random walk tests
• Filter trading rule tests
• More recent tests
• Random walk tests of LoMcKinley
• Long Horizon results
• Schiller Debondt and Thaler (bubles)
• Return Patterns
• Calendar effects
• Size, P/E, BMV/ D/P effects

8
Event Studies

• Stock Splits
• Earnings Announcements
• Initial Public Offerings
• Tests for Private Information
• Trading by Insiders
• Performance of Professional portfolio managers