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Wilfrid Laurier University
Ning Tang

Bottom-up approach: firm-specific, work upwards Put Option: rgt to Sell Cum Wealth Ind CWIn= WI 0 (1  TR1 )( 1  T2 )...( 1  Tn) CWI Top-down approach: analyze economy, then industry, then firm TRn = (CWIn/CWIn-1) - 1 CPC   End Val. of For.Curr.  YI CAPM: Rf = real RoR + inf…. k = Rf + Rp Fisher eq’n: 1+i = (1+r)(1+inf) Int’l Rtrns: TR in domestic currency = RR  CI 1 effct mkt  take passive approach b/c no active strat beat it on risk-adjusted TR, RR, CWI only good for single time period… Begin Val. of For.YIrr.  CPC value of analyst report depends on: amt of recent info, # of anlyts follwng stock, For several periods use arithmeti1/nr geometric means 2 2 degree of consensus, quality of analysts. Geo = (1 TR1)(1 TR2)...(1TRn) 1 diff b/w geo & arith1  G   1  X   s 2 Defensive stocks unhurt by bus. cycle downside…TAA: tactical asset allocation Adjust for inf: TRia = [(1+TR)/(1+CPI)] – 1 OR CWIia = CWI/CIinf takes advantage of mkt timing skills (ST dev from LT asst mixes) CI = (1 + GM of inflation rate)^n Technical Analysis: unconcerned w/ underlying econ vars affting firms/mkt Sources of Risk: Int, Mkt, Inf, Busi, Finan, Liq, Xchg, Country GDP = G+C + I + (X – M) = Gov’t Spnd + Consmr Spend + bus Invst + (Cdn Ex– Im) Std Dev 2 1/2 “Equity Risk Prem” and “Bond Default Prem”   X  X  Normal unemplymt frictional; structural unemp  natural umemp rate; cyclical s   n  1  ERP=[(1+TR)/(1+RF)] – 1 Bus Cyc: expansion = durabls, peak=nat resurce+energy, contrctin=defensive ind,  m 2 2 trough=cap gds…”soft landing”=econ growth slows but not neg…leading ind: Variance:    [(R i E(R)) pr ] i stocks,money supp, wrk week, sales of consumer durables…extreme times, econ i1 lead mkt, otrwise,mkt lead n m m  2  w w  Coincident + lagging indicators…interest rate determinants: inf rate, xchg rate, n-asset case: E(R ) p  w i(R ) i P   i j ij gov’t deficits, BoC, default risk of the borrower… i1 i 1 j 1 CERI =Cdn effect. xchg rte index is trade-weighted msre of xchg rte m m m 2-asset case: E(R )w E(R )w E(R ) 2 2 P/E tends to b high whn inf and int rates are low p A A B B   w i i    w wi j ij NAICS=NA Indust Classif Syst, SIC=Std Indus clas11divs, lgr digits, more spfc  w  w  2w w  2 i 1 i 1 j 1 P A A B B A B A,B i  j Pionerng stg(most risk), expns stg (hi invmt funds, strt divs), stablztn (avd if desire m cap gains), dclng (new prds, low ror) Covariance:   [R E(R )][R E(R )]pr i 4 crucial factors asing ind: Historicals, compttin, gov’t, strctl chng A,B  A,i A B,i B i
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