Investment Analysis and Valuation
Equity analysis
Fundamental analysis can be top-down (economy, sector, company) or bottom-up (company first). Key ratios: earnings per share, price/earnings (mind trailing versus forward), dividend yield, dividend cover, price/book, return on equity, gearing, interest cover and current ratio. Valuation approaches include comparables, discounted cash flow, and the dividend discount/Gordon growth model: P = D₁ ÷ (r − g), valid only when the growth rate is below the required return.
Fixed income analysis
Bond prices and yields move inversely. Yield to maturity captures coupon plus capital gain or loss if held to redemption. Duration measures sensitivity to yield change, and the approximation is: % price change ≈ − modified duration × change in yield. Convexity refines this for larger moves. Credit spreads compensate for default and liquidity risk; the yield curve may be normal, flat or inverted.
Risk and market efficiency
Standard deviation measures total volatility; beta measures sensitivity to the market. The efficient market hypothesis has weak, semi-strong and strong forms, each with different implications for active management. Technical analysis uses price patterns and momentum rather than fundamentals.
Trap: a high dividend yield may signal a falling share price, not value. Duration quoted in years is not modified duration. Nominal returns overstate purchasing power.
Rule of thumb: for small yield changes, modified duration is a good enough estimate of price sensitivity.
Example: a bond with modified duration 5.0 and yield rising from 4.0% to 5.0% falls roughly 5% in price (5.0 × 1.0%).