Questions and Answers
What is the primary purpose of Fundamental Analysis (FA)?
Companies that deliver a high CAGR typically create wealth at a slow rate.
False
An investor who experiences a CAGR of _____ would double their money in approximately 3.5 years.
20%
What percentage of the corpus is suggested for long-term investment in fundamentally strong companies?
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The Core Satellite Strategy only involves long-term investments.
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The tools required for fundamental analysis are mainly found in the company's ______.
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Match the following portfolio portions with their expected returns:
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What is the expected return of the Satellite Portfolio on a yearly basis?
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Fundamental Analysis (FA) is more effective for short-term trading than Technical Analysis (TA).
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What portion of capital is allocated for active short-term trading?
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Active short-term trading using Technical Analysis can be applied to equity, futures, and ______.
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What is a key benefit of using a combination of Technical Analysis and Fundamental Analysis?
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Which of the following is a common trait of investment grade companies?
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Only professionals with a commerce background can be successful fundamental analysts.
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What does fundamental analysis help investors identify?
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The main objective of Technical Analysis (TA) is to gather quick short term _____ .
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Match the attribute with the correct type of analysis:
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Which arithmetic operations are necessary for fundamental analysis?
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Why should both Technical Analysis and Fundamental Analysis coexist in a market strategy?
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What mainly distinguishes a speculator from a trader?
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Investors usually take positions based on short-term market movements.
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How does an increase in interest rates generally affect corporate earnings?
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A __ focuses on making quick profits from market fluctuations.
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Match the type of market participant with their characteristics:
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Which of the following is NOT a type of market participant mentioned?
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Study Notes
Introduction to Fundamental Analysis
- Fundamental Analysis (FA) examines businesses comprehensively, crucial for long-term investors (3-5 years) to isolate stock price fluctuations from company performance.
- Companies like Infosys, TCS, and Bosch India show over 20% compounded annual growth rate (CAGR) over a decade, exemplifying the potential for wealth creation.
- At a 20% CAGR, investments can double in about 3.5 years, with exceptional companies like Bosch nearing 30% CAGR.
- Distinguishing between investment-grade companies that build wealth and wealth destructors is vital for investors.
- FA equips investors with insights into the attributes of companies that generate wealth.
Skills Required for Fundamental Analysts
- Anyone can become a fundamental analyst; a background in finance isn't mandatory.
- Essential skills include understanding basic financial statements and industry contexts.
- Basic arithmetic (addition, subtraction, multiplication, division) is also necessary.
Importance of Fundamental Analysis (vs. Technical Analysis)
- Technical Analysis (TA) focuses on short-term market timing, potentially yielding quick returns, but does not foster long-term wealth.
- Long-term investments through FA are critical for wealth accumulation.
- A balanced investment strategy can incorporate both FA and TA.
The Core Satellite Strategy
- This approach splits capital between long-term investments in fundamentally strong companies and short-term trading.
- Example allocation could be 60% of the capital for long-term holdings (core portfolio) and 40% for short-term trading (satellite portfolio).
- Core investments expect a growth rate of 12-15% CAGR; satellite investments aim for 10-12% absolute returns.
Tools for Fundamental Analysis
- Key tools are primarily accessible and include the company’s annual report, containing crucial data for analysis.
Mindset of an Investor
- Understanding whether to speculate, trade, or invest influences market participation and profit/loss outcomes.
- Speculators, traders, and investors respond differently to market scenarios, showcasing distinct mindsets:
- Speculators make decisions based on intuition or guesswork without rational backing.
- Traders create strategic plans, often based on market volatility and historical data, aiming to profit from market movements.
- Investors adopt a long-term perspective, focusing on maintaining their portfolio value amidst short-term market fluctuations.
- Identifying market actions based on the RBI's monetary policy announcement illustrates the varying approaches of each participant type.
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Description
This quiz covers the basics of Fundamental Analysis, focusing on the introduction to understanding a business from multiple perspectives. Ideal for investors looking to make long-term investment decisions, the content emphasizes the importance of a holistic investment approach. Test your knowledge on the key concepts and principles of FA.
