Fis/240 Stock Analysis

chapter 11

Common Stocks: Analysis and Strategy

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iven your new $1 million portfolio, you will need to manage it. You now realize that the market has a substantial impact on individual stocks and portfolios, and therefore you realize you need to better understand the impact of the overall market on individual stocks. Also, you now appreciate the role the required rate of return plays when evaluating stocks, another issue you decide warrants additional analysis. Both issues are considered here. One of the most important decisions each investor must make is whether to take an active approach or a passive approach to investing. A passive approach will save costs and will often produce as good or better results as an active approach. Or, if you choose an active approach, you will need to give some thought to whether you want to select stocks or try to time the market. These issues will be covered here.

AFTER READING THIS CHAPTER YOU WILL BE ABLE TO: Recognize the overallimpact of the market on stocks and understand the importance of the required rate of return. Analyze the pros and cons of a passive approach to building a stock portfolio. Evaluate critically the well-known active strategies for stocks used by investors.

Analyzing Some Important Issues Involving Common Stocks

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hapter 10 discussed the valuation of stocks based on procedures used by investors. Chapter 11 covers the analysis and strategy for selecting and managing common stocks. Common stock investors need to carefully consider whether they will follow an active approach, a passive approach, or a combination of the two. Using a passive approach, investors can follow a buy-and-hold strategy, or buy index funds that mimic some market index. Under the active approach, we analyze the primary alternatives of stock selection, sector rotation, and market timing. The implications of the efficient market hypothesis should be considered when deciding on a strategy. We will do so in Chapter...