Valuation of Stocks Fundamental theorem of valuation. Valuation of stock using dividend and earnings growth (one stage and two stage) models. Free cash flow to firm and free cash flow to equity models of valuation. Simple and relative P/E ratio models of valuation. Calculation of franchise P/E ratio. PEG ratio. Net net working capital model of stock valuation. Power law model of valuation. Market efficiency The concept of weak, semi-strong, strong market efficiency and their implication for fundamental and technical analysis. Stock market anomalies (size, January, weekend, momentum effects). Style of investing: Comparison of characteristics of value versus growth styles of investing. Economic analysis Why do economic analysis? What is recession? The various relationships between the macro economic variables and the stock prices. The method of economic forecasting (leading indicators, excess liquidity, credit default spread). What were the four basic structural changes in the 1990s economy (corporate productivity, inflation, budget deficit, and demography) and how did they help create economic and stock market boom? Kondratiev wave theory of long term stock market cycle. Technical analysis Definition of bull and bear markets. Technical indicators: breadth of market, most active list index, put/call option activity ratio, default spread, simple and exponential moving averages, stochastics, volume signals, blow offs and sell off climax. Buy and sell signals for these ind icat ors. Futures Forward and futures contract. When do you buy futures and sell futures? How do you speculate and hedge with futures? Calculation of number of contracts to buy or sell. Hedging stock market with SP 500 index futures. Hedging interest rate risk with T-bond futures. Options What are call and put options? How do options magnify gains and losses compared to stocks? Maximum possible gains and losses for call and put option buyers and sellers. What are the five determinants of price for call and put options, and how are they related to call option price? What are the upper bounds on call and put option price. How can you make arbitrage profit if the bound is violated. Industry analysis: The four stages of life cycle of an industry. At what stage should one buy and sell stocks in an industry? Ethical Issues Comparison of prudent man rule and prudent investor rule