115 CFA
File: Portfolio Management - Reading 56 - 1. Definition and Scope

1. Definition and Scope

a. explain principles of technical analysis, its applications, and its underlying assumptions;

What is technical analysis?
Technical analysis involves the examination of past market data, such as prices and volume of trading, that leads to an estimate of future price trends and, therefore, investment decisions.

What is fundamental analysis?
Fundamental analysis involves making investment decisions based on examination of the economy, an industry, and company variables that lead to an estimate of value for an investment, which is then compared to the prevailing market price of the investment.

What is the difference in how technical vs fundamental analysts make investment decisions?
- Technical analysts make investment decisions by examining past market data to estimate future price trends. They identify new trends and take appropriate actions.
- Fundamental analysts make investment decisions by examining the economy, the industry, and the company to estimate the intrinsic value of a stock. They then compare the intrinsic value to the prevailing market price and take actions.

What data do technical vs fundamental analysts use to make their decision?
- Technical analysts use market data and nonquantifiable variables such as psychological factors.
- Fundamental analysts use economic data (including accounting data, which is subject to management manipulation).

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