Three Tools of Investment Analysis

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Recommended: Capital asset pricing model

Purchasing of a product or an item with an aim of profit generation via the purchased item can be viewed as investing and the item, an investment. Before purchase, an estimate of the potential market value of a financial asset or liability has to be determined, that is, analyzing the investment. The analysis has to take into consideration various issues such as the overall state of the economy, interest rates, competitive advantage and many others. The analysis can be technically or fundamentally carried out but financial forecast has to be considered (Tutor 2 U, 2011).

Since investments’ main aim is profit maximization, cost, output and returns are factors of value. To determine these factors and verify the profit, a market research on the investment has to be conducted. This is mainly to avoid losses. The main factor that has to be determined is the balance between the product’s supply and the demand at a certain price that is, market equilibrium (Aarhus school of business, 2004).

Market equilibrium enables an investor to determine the type of investment to engage in based on the returns, set prices and determine the level of demand hence establish the supply required. It also enables the investor to know when to supply more or less depending on the market price prevailing (Aarhus school of business, 2004).

Most of the investments are always mainly on assets. There are several models of equilibrium asset pricing among them Capital Asset Pricing Model (CAPM), Fama and French three-factor model. Both though may have setbacks, Fama and French three-factor model is preferred than the Capital Asset Pricing Model (Jonathan burton, 1998).

Capital Asset Pricing Model is believed to be the first equilibrium asset pricing model t...

... middle of paper ...

...odels (MJ Brennan, 2008).

References

Aarhus School of Business, (2004). Fama And French Behavioralists.Test for the CAPM and the

Three-Factor Model for the Spanish Stock Market. Retrieved From:

http://pure.au.dk/portal-asb-student/files/2311/000130199-130199.pdf

Jonathan Burton, (1998).Revisiting The Capital Asset Pricing Model. Retrieved From:

http://www.stanford.edu/~wfsharpe/art/djam/djam.htm

M.Bonomo, R. Garcia, (1994).Can A Well Fitted Equilibrium Asset-Pricing Model Produce

Mean Reversion. Retrieved From:

http://onlinelibrary.wiley.com/doi/10.1002/jae.3950090103/pdf.

MJ. Brennan, (2008).Equilibrium Asset Pricing. Retrieved From:

http://www.efmaefm.org/.../equilibrium%20Asset%20Pricing%20%5B1%5D.ppt

Tutor 2 U, (2011). Equilibrium Market Pricing. Retrieved From:

http://www.tutor2u.net/economics/revision-notes/as-markets-equilibrium-price.html.

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