Advanced Investment Analysis Flashcards

What is 'technical analysis' in investment management?

Answer: The study of historical price and volume data to identify patterns and predict future price movements

Technical analysis uses charts of historical price and trading volume data to identify patterns, trends, and signals that analysts believe can predict future price movements. It contrasts with fundamental analysis, which focuses on intrinsic value.

What is the 'enterprise value' (EV) of a company?

Answer: The total value of a company, including equity market capitalisation plus net debt (or minus net cash), representing the theoretical takeover price

Enterprise value = market capitalisation + debt - cash. It represents the total value of the business regardless of its capital structure, making it useful for comparing companies with different debt levels. It is often used in the EV/EBITDA valuation multiple.

What does the 'price-to-book' (P/B) ratio measure?

Answer: The ratio of a company's market capitalisation to the book value (net assets) of its equity — indicating how much investors are willing to pay over the net asset value

The P/B ratio compares the market's valuation (share price) to the accounting book value of equity (assets minus liabilities per share). A P/B below 1 may indicate an undervalued company; a high P/B implies investors expect high future returns on equity.

What is a 'free cash flow' (FCF) yield?

Answer: Free cash flow (operating cash flow minus capex) divided by the market capitalisation, expressed as a percentage

FCF yield = free cash flow / market capitalisation. Free cash flow is the cash generated after capital expenditure — it is the cash available to return to shareholders via dividends or buybacks. A high FCF yield may indicate an undervalued company generating strong cash returns.

What is 'quantitative easing' (QE) and how does it affect financial markets?

Answer: A central bank policy of purchasing financial assets (typically government bonds) to inject liquidity into the financial system, typically depressing bond yields and supporting asset prices

QE involves the central bank (e.g., Bank of England) creating money electronically to buy assets — primarily government bonds. This pushes up bond prices (depressing yields) and encourages investors to move into higher-risk assets, supporting equity and property prices.

What is the 'Efficient Market Hypothesis' (EMH) and its three forms?

Answer: A hypothesis that asset prices fully reflect all available information; three forms: weak (historical prices), semi-strong (all public information), and strong (all information including insider)

EMH states that markets are informationally efficient — prices reflect available information. Weak form: prices reflect all historical price data. Semi-strong: prices reflect all publicly available information. Strong: prices reflect all information including private/insider information.