Equity Valuation, Fundamental and Technical Analysis, and Investment Risk
Scope
This domain tests valuation and risk analysis for equity recommendations: fundamental ratios, simple DCF logic, technical indicators, and the risk factors that affect suitability.
Core rules
- Fundamental analysis uses earnings, margins, cash flow, leverage, ROE, and growth. Common multiples include P/E (price ÷ EPS), P/B (price ÷ book value per share), and dividend yield (annual dividend ÷ price).
- A DCF values expected cash flows discounted at a rate reflecting risk; small changes in growth or discount rate can change value sharply.
- Technical analysis studies price, volume, trend, support and resistance, and indicators such as moving averages and RSI. It describes probabilities, not certainties.
- Risks include market, credit, liquidity, concentration, currency, interest-rate, and operational risk. Beta measures sensitivity to the market; diversification reduces unsystematic risk.
Worked example
A stock earns PHP 5 per share, pays a PHP 2 dividend, and trades at PHP 75. Its P/E is 15× and dividend yield is 2.67%. If peers trade at 18× and the company’s growth and balance sheet are comparable, it may look inexpensive; if its earnings are cyclical or accounting quality is weak, the discount may be justified. A technical breakout above PHP 80 on heavy volume would be a separate timing signal, not proof of value.
Traps
A low P/E can signal risk, not bargains. A high dividend yield can reflect a falling price or unsustainable payout. Technical signals can fail, and past price patterns do not guarantee future results. Match valuation and risk to the client’s horizon.