Three Tools of Investment Analysis Essay examples

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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 …show more content…
Due to its setback of using single/static factor to determine the expected returns, the Fama and French three-factor model were developed and it questioned the practical application and ability of Capital Asset Pricing Model to explain the returns on stock and value premium in the larger market of the United States. Fama and French three-factor model therefore proved to be more practical and applicable than the Capital Asset Pricing Model which is somehow wholly theoretical (R.Garcia ‘et al’, 1994). From the theories Capital Asset Pricing Model states that beta is constant while the three-factor model contradicts this arguing that the beta can vary due to the movement in the economic activities such as economic crisis which are somehow unpredictable. The three-factor model was derived from the Capital Asset Pricing Model after addressing some factors that are not generally applicable in the normal business world. The split of Capital Asset Pricing Model led to the creation of the three-factor model. The split took advances in several stages each testing various aspects of the theory and their validity and application in the operations of businesses to determine expected returns. There were several aspects of Capital Asset Pricing Model that were looked into, addressed hence leading to the development of the three-factor model (Aarhus school of business, 2004). The

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