Equity Research

Equity research is mainly divided into three: Efficient market hypothesis (random walk hypothesis) Fundamental analysis Technical analysis

Efficient Market hypothesis

The word efficiency is quite difficult to attach with stock markets operations across the globe. The study of market efficiency has become a debatable issue since the last few years with mixed results. EMH was developed by Eugene Fama in 1960s

Concepts
According to EMH each security price always stays at its equilibrium, and it fully reflects all publicly available information and reacts swiftly to new information, in a perfect market. As the securities are perfectly priced, the investor does not waste time in finding out the mispriced securities.

Cont`d
In an efficient market, security price should equal the securities investment value, where investment value is the discounted value of the security`s future cash flows, as estimated by analysts. According to EMH, if there is a possibility to predict the future price of a share, that is the first sign of an INEFFICIENT market. The efficiency can be operational or informational.

Operational and Informational efficiency

Operational efficiency refers to the ability of the exchanges to execute the orders at the price demanded by the buyers and sellers immediately on placing the orders and such other operations. In modern times operational efficiency refers to the efficiency of the online trading systems, etc. Informational efficiency, refers to the adjustment of security prices rapidly to the infusion of the new information, thereby indicating that the current prices reflect all available information

For example, when the news about the earthquake in Japan on March 11,2011 reached the market, the indices across Asia including SENSEX and NIFTY fell.

Efficient market Hypothesis

In past Indian markets inefficient In a single day abrupt movements No concept of circuit breaker 1991-92 Harshad mehta manipulated market prices. His favorite script ACC Investors lost a lot Why did this happen: Lack of transparency, lack of automated systems, lack of protection for investors

Indian stock markets are moving towards market efficiency:

Changes: Automated/online trading system Depository system Changes in settlement system Ban on badla (buying stocks with borrowed money) Introduction of derivatives Provision of full disclosure and transparency Provisions to check insider trading Corporatization of stock exchanges

Efficient Market Hypothesis

By efficient market we mean a market where share prices follow an independent path. This happens due to: Large investors Free flow of information Every investor is able to interpret information Price-sensitive information is discounted in prices easily No one can influence the market unduly

Efficient Market Hypothesis

EMH Theory: Is based on the fundamentals that markets are efficient and prices make an independent movement in markets. The price of a share is independent of another sharethis movement is called as RANDOM WALK of prices and therefore this theory is also called as Random walk theory.

Forms of EMH
Assumes following three forms of efficiency: Weak form of efficiency Semi-strong form of efficiency Strong form of efficiency

Efficient Market Hypothesis

Weak form of efficiency: In a weak form of market efficiency, each subsequent price is independent of the previous price. The price always makes a random walk and get affected only by the demand and supply position. If a market reflects such form of efficiency, then Technical analysis can not benefit the investors in making decisions. Under technical analysis, it is presumed that the past price trends and traded volumes affect the prices trend in the future. The study of past trends can help in predicting the near future price trends.

Efficient Market Hypothesis

Semi-strong form of efficiency Implies full disclosure and transparency by companies, industrial houses and government Every kind of price sensitive information is made available in the market as soon as it is generated. Such information gets reflected in the prices immediately and influences the prices for a short span of time only. If a market is in this form of efficiency then Fundamental analysis cannot benefit, if full disclosure is not done.

Efficient Market Hypothesis

Strong form of efficiency Implies that even an insider can not gain from insider information A strong form of efficiency is achieved only when high level of disclosure standards and transparency is maintained at the end of the company Conclusion: according to EMH, it can be concluded that share prices follow an independent movement because of market inefficiency.

Market Inefficiencies
P/E ratio: is extensively used as a tool for valuation of stocks. Usually analysts consider companies having high P/E ratio as companies with higher market confidence and vice-versa. Hence the demand for stock fluctuates accordingly. Therefore P/E ratios can affect the efficiency of the markets. Week-end effect markets are closed on Saturday and Sunday. Traders normally wind up their positions on week ends. Hence it affects the efficiency of markets. Monday effect similar to week end effect, the market may witness an upside or downside opening on Monday when it opens after 2 holidays. Studies have found that the weekend effect mean return for Monday was significantly negative during the last five year period. January effect Stock market researchers have observed that in January, the market witnesses heavy buying pressure. According to them, this anomaly in the market behavior is the outcome of the performance of the last leg of the previous year. Investors in the western countries resort to selling in November and December to raise funds. They reenter in January, there by increasing the demand for such stocks.

Statistical application
Market efficiency level can be tested with help of
quantitative methods RUNS test and Serial corelation test and qualitative test is through the method of observation about the disclosure and transparency measurements
Runs tests are carried as follows:

 This is used to test whether a market is in weak form of efficiency or not, if the price movement passes this test, then the market is considered to be efficient in weak form of efficiency.

RUNS tests

1.) share prices for particular time duration are collected for the scrips, which are considered to be representative 2.) A null hypothesis about the independence of prices is assumed. Ho hypothesis: Price change is random H1 hypothesis: Price change is NOT random
3.) Number of RUNS in the collected pre data are identified. 4.) Number of RUNS for each type of run are counted as N1 and N2 5.) Calculated mean RUNS are : ui = (2 x n1 x n2) + 1 (n1 + n2) 6.) standard deviations of RUNS= 2*n1*n2 (2*n1*n2 n1 n2) (n1 + n2)2 x (n1 + n2 -1)

 7.) If observed number of runs are between the upper and lower limit of calculated runs at a particular level of significance then NULL hypothesis is accepted; else rejected. Upper limit = + 1.28 and Lower Limit = - 1.28 Z value will be given in question. Here it is taken at z = 1.28.

Title of study: An empirical study on efficient markets hypothesis: a case study in India Objectives and hypothesis: To test whether successive price changes are independent or not during the short time period i.e. one year Ho hypothesis: Price change is random H1 hypothesis: Price change is NOT random Hypothesis was tested at 10 percent significance level at which Z value is 1.28 Research Methodology Type of study: Empirical Data source: stock market quotations Sample design: Judgemental type of data: secondary Sample size: Nine companies Tools used for analysis: RUNS test Sample size: Index- Nifty/Sensex Research plan: Judgemental sample design is taken, as the scrip`s are Brandex companies. Weekly closing prices are taken on BSE/NSE Scope of study The prices of the scrip are during the calendar year 2010, thus the result of the research is valid for the same period. Limtiations: a) The tests is based on NON-parametric tests b) Findings are applicable in the situtation, which preavailed during the year 2005; hence these should be read in the light of these facts

Cipla
Excel file ..\EMH 1.xlsx

..\PAPER_03.pdf
Class to download data for sensex companies sector wise and see whether the EMH is applicable to it.

Fundamental Analysis
Equity research is the act of making an ex-ante evaluation of different investment avenues, especially applicable for equity shares.

The purpose of the research is to evaluate investmentworthiness of the equity share and find out the appropriate timing of investment in such share.

3 parts
Equity research is mainly divided into three: Fundamental analysis Technical analysis Efficient market hypothesis (random walk hypothesis) For this information is necessary. We need to know where to get the data from.

Sources of Investment information

Internal : Economic survey containing facts about economic aggregates and a statement by government and the apex bank about the future scenario of the economy Budget announcement by central and state governments Planning document issued by planning commission, containing plan priorities and growth prospects of different sectors of the economy Publication by regulatory agencies like SEBI, RBI and others Industry report by FICCI and ASSOCHEM, Stock exchange Annual reports of corporate, News reports Independent advise of portfolio planners like sharekhan, icici and others Rating agencies in India Academic research work by scholars and academicians

 External: Report by international agencies like world bank, IMF, which contain independent review and opinion about growth, development and its direction in the economy and world markets as a whole. Report by rating agencies like Moody's, S&Pwhich contain sovereign ratings indicating investment environment in a country

Fundamental analysis
Is an analysis of various fundamental factors-economic aggregates, industrial indicators as well as facts related to companies. Fundamental analysis aims to arrive at the INTRINSIC value of shares. Intrinsic value is the value of the share, which is supported by assets, profitability, financial performance, future prospects, industry scenario, economy wide factors, etc. Intrinsic value helps in taking investment decisions. It is believed that shares are likely to command prices around the intrinsic value; therefore a comparison of intrinsic value and prevailing market price can help in deciding about the scripts to be purchased or sold. BUY if SELL if INTRINSIC VALUE > MARKET PRICE INTRINSIC VALUE < MARKET PRICE

Dimensions of Fundamental analysis

Fundamental analysis is carried in three phases: these phases are called three dimensions of this analysis: A) analysis of economy-wide factors B) analysis of Industry-wide factors C) analysis of company-wide factors A to C is top-down approach and C to A is bottom up approach. Global portfolio managers normally use A to C and Domestic portfolio managers normally use C to A

Analysis of economy-wide factors

Under this phase, national as well as international economic conditions and different economic aggregates are analyzed to answer the question of timing of investment. A thorough analysis of these indicators helps in predicting the future shape of the trends of economy and expected growth of different industrial sectors. Following steps are taken: 1. study of economic aggregates 2. classification of indicators 3. forecast about the economy

Cont`d.
1) Study of economic aggregates: they are indicators of the health of the economy and factors include: -- MACRO INDICATORS

GDP, Industrial production, Agricultural production, Money supply, Inflation, Unemployment, Savings and Investment, Balance of payment, Current account, Interest rate and Exchange rate. Economic reforms and government policies are important in forecasting economic fundamentals.

India Gross Domestic Product is worth 1729 billion dollars or 2.79% of the world economy, according to the World Bank. Historically, from 1960 until 2010, India's average Gross Domestic Product was 339.84 billion dollars reaching an historical high of 1729.01 billion dollars in December of 2010 and a record low of 36.61 billion dollars in December of 1960. The economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points. This page includes: India Gross Domestic Product (GDP) chart, historical data, forecasts and news.

Gross Domestic Product (GDP) in India expanded 7.80 percent in the first quarter of 2011 over the same quarter, previous year. Historically, from 2004 until 2011, India's average annual GDP Growth was 8.45 percent reaching an historical high of 10.10 percent in September of 2006 and a record low of 5.50 percent in December of 2004.

The inflation rate in India was last reported at 8.62 percent in June of 2011. From 1969 until 2010, the average inflation rate in India was 7.99 percent reaching an historical high of 34.68 percent in September of 1974 and a record low of -11.31 percent in May of 1976

India Current Account India reported a current account deficit equivalent to 5.4 Billion USD in the first quarter of 2011. India is leading exporter of gems and jewellery, textiles, engineering goods, chemicals, leather manufactures and services. India is poor in oil resources and is currently heavily dependent on coal and foreign oil imports for its energy needs

The Indian Rupee exchange rate appreciated 1.46 percent against the US Dollar during the last 12 months. Historically, from 1973 until 2011 the USDINR exchange averaged 30.13 reaching an historical high of 51.97 in March of 2009 and a record low of 7.19 in March of 1973.

India's main stock market index, the SENSEX, declined 2260 points or 12.28 percent during the last 12 months. From 1979 until 2011 the SENSEX market value averaged 4919.96 points reaching an historical high of 21004.96 points in November of 2010 and a record low of 113.28 points in December of 1979.

Classification of indicators :
2) Various economic aggregates and general facts about the economy can be classified into indicators, indicating the future outcomes and status of the economy. These indicators can be used to forecast the trends of economy.

Classification may be as follows: Advance moving/ Leading indicators coinciding indicators Lagging indicators

Advance moving indicators make movement well in advance before an incidence of actual development takes place in the economy. For a factor to qualify as advance moving indicator, it must fulfill the following conditions: It should move smoothly It should give enough time gap for action In majority of the times, it should give fruitful results It has low default rate With the help of these indicators probable future development in the economy can be predicted. Movement of these factors helps in identifying probable industries, in which investment can be made for earning better returns. Advance moving indicators are as follows: A) monsoon b) infrastructural development c) industrial growth d) per capita income e) government polices f) inflation g) interest rates. These advance moving indicators help in identifying those industries, which are likely to perform better in the future. One way of selecting promising industries is to compare the growth of an industry with the overall industrial growth.
Stock market

value

GDP

time

Few Leading indicators

Index of stock prices of 30/50 common stocks New contracts of plant and machinery Money supply Average weekly hours of manufacturing workers engaged in production New orders for consumer goods and materials Corporate profits after taxes Changes in prices of sensitive materials

Coinciding indicators
are indicators that show movement along with the growth in the economy. For example: increasing consumption, improved living standards, personal income
GDP

Employees on non-agricultural payrolls

Coinciding indicators
Employees on non-agricultural payrolls Personal income Manufacturing and trade sales Sales of retail stores

Lagging indicators
Are the one which show signals after an activity takes place. They are of academic interest, but they can help in predicting the future trends.
GDP

Prime lending rate charged by banks

Lagging Indicators
Average duration of unemployment Average prime lending rate charged by banks Ratio of manufacturing & trade inventories Labour cost per unit of manufacturing output Ratio of consumer installment credit to personal income Business expenditure on plant and equipment

Economic factors
These affect the performance of the different sectors in the Indian economy: Agricultural output (monsoon, forward and backward linkages with industry- if agric increases, dd for industrial goods increases) Population growth (for consumption), Interest rates (cost of money) Natural resources (raw material cost), Government policies/spending (GDP) Foreign trade, Balance of payments and exchange rate (GDP), Inflation (cost of living and savings) Demographic factors (products/commodities consumed demand) Infrastructural facilities (GDP), R & D, Stability of government Level of savings

Economic forecasting
Short range forecasting: A) Anticipatory surveys B) Barometric approach/Indicator forecasting (leading and lagging indicators) C) Econometric Forecasting: Single equation Regression model of say 4 factors affecting GDP where A,B,C,D are economic variables of GDP. GDP = a0 + a1*A + a2*B + a3*C + a4*D {linear equation analysis} D) Opportunistic forecasting {predicting based on past and multiple models are used e.g. forecast demand, etc.} Long term Forecasting {include subjective variables like changes in cultural trends, political trends, etc. 3 to 5 years}

Industry analysis
Classification of industries: SME (P&Mach investment less than 5 crores) Medium Manufacturing enterprises (5-10 cr.) Large Manufacturing enterprises (> 10cr) Micro Manufacturing Enterprises (<25 lakhs)

Classification
Based on activities Primary sector agriculture and allied industries Secondary sector Manufacturing Tertiary sector services such as transport, communication, financial services and like Based on ownership: Public sector, Private sector and Joint

Based on products and services

Agriculture and allied industries: A) Agricultural products like rice, wheat, etc. B) agricultural equipments like tractors, power tillers, harvesting machines, etc. C) transportation heavy motor vehicles like trucks, light motor vehicles, etc. D) Finance agriculture finance, micro finance, etc.

Cont`d
SME khaki and village industries, handlooms, handicraft, coir fibre, etc. Manufacturing industries wood products, jute textiles, rubber, chemicals, etc. Cyclical industries automobiles, washing machines, other durable goods. Defensive industries food producers and processors, pharmaceutical companies, public utilities ,etc.

Analysis of Industry wide factors:

This is the second phase of fundamental analysis, industries selected in the previous phase are scanned individually at length in this phase. In this, a micro study of each and every industry selected is carried out. The following steps are taken for industry analysis: A) study of industry life cycle B) study of qualitative and quantitative factors

Study of industry life cycle

By industry life cycle, we mean different stages of development of an industry. This helps in making investment decision. Life cycle of an industry has the following stages:

Development stage

Decay stage

Expansion

Stagnation stage

List 5 examples Of Industries in Different stages ?

Pioneering stage:
is the start up stage of an industry Few beginners set up their companies. Risk is very high due to gestation period effect. Examples: Wine Industry, Multiplex industry Medical tourism industry, Space tourism, LED TV set industry, Education sector, etc.

Rapid growth stage

Demand for the product in the industry increases at a fast pace and every day new participants/companies enter the industry. This stage witnesses mushroom growth of companies in the industry. Fly by night operators also enter the market at this stage. Due to competition, the market share keeps fluctuating Telecom, Pharmaceutical industry, Automobile industry, Mutual Fund industry, etc.

Maturity and stabilization

Demand stabilizes at a particular level Product differentiation takes place and companies start competing on product features. This phase is also of consolidation-companies consolidate their position by focusing during this stage Satellite TV industry, Beverage industry, etc.

Decline/diversification
poor performers start winding up their business and this phase witness the survival of only the fittest. Only strong companies survive during this stage Few companies take up diversification path to overcome this phase If companies diversify, then they enter into a new industry life cycle

Study of qualitative and quantitative factors

Qualitative factors: A) level of competition B)Entry barriers C) product differentiation D) substitution effect E) demand type F) supply of inputs G) technological changes H) Government support An in depth study of these factors indicate the profit earning capacity of the industry as well as its chances of survival and growth

Additional factors
Demand and supply gap for example power generation and power distribution sector is one of the fastest growing industry in India, because there is a demand and supply gap of 14%. India has only 1.62 lakhs MW installed in 2010 Supply of raw material: Shortage of raw material can cause immense losses to manufacturers. In case of power generation, there is coal. A lot of Indian companies are acquiring coal mines or importing coal from Australia, the largest producer of coal in the world. In January 2011, Australia faced huge floods and it was not possible to import coal for thermal power generation. This led to increase in coal prices. This in turn increased the share prices of Coal companies in INDIA. Example: Coal India has increased from Rs. 292 to 390+ in recent months, post the floods. Another classic example is natural rubber, Is used in tyre manufacturing, it hit an all time high due to floods in rubber producing countries like Indonesia, Thailand, etc.

Cont`d.
Gestation period some industries require more time to generate profits power companies. Permanence if a particular industry does not accept or adopt changes, it will phase out. Camera companies face stiff competition from mobile companies. Pagers got outdates due to mobiles.

IIP nos.
x

20 15 10 5

0
-5 -10 -15 -20

In percent based on IIP1993-94 = 100. It can be observed that 8 sectors belong to high growth sectors. Investment in high growth brings high returns by way of capital appreciation and profits.

Quantitative factors:
these indicate the profit earning capacity of the industry as a whole. How assets are being used in the industry is also reflected through these factors. These may be: A) trends of turnover/sales B) trends of profitability C) trends of cost structure D) trends about margins Conclusion: a through study of industry life cycle and qualitative and quantitative factors helps in filtering those industries, which are selected date the earlier phase. The main aim is to identify such industries in which there are : a) chances of growth b) chance of high profits c) low risk is there, if investment is made.

Scope of SWOT
Lastly analyze the industry from : Michael porters five forces perspective.

Analysis of company wide factors

Every industry has more than one company, this phase scans the best company in each of the industry, which have selected in the second phase. The purpose of this phase is to identify the best company in each industry selected because all do not perform alike. This is done with the help of following factors:

A) financial performance analysis B) analysis of qualitative parameters

 Financial performance analysis through financial statements: Financial performance analysis Analysis of qualitative parameters
Analysis and interpretation of financial statements therefore, refers to such a treatment of information contained in the income statement and the balance sheet in order to carry out full diagnosis of the profitability and financial soundness of the business.

Company analysis
The investor should know the health of the company and earning power of the company. Project analysis in case the company is raising funds through an IPO for a specific project, the investor should assess the project potential, success stories, promoters and their background, who have appraised the project and legal clearances. Project Potential demand and supply condition, capacity utilization, consumers taste, etc. According to SEBI guidelines, every project for which funds are mobilized through a public issue of shares should be mandatorily appraised by a merchant banker/financial institution which should have at least 10 percent participation in the issue. Product analysis the company may be issuing shares for commencing production of a new product or expanding the existing capacity. Hence products analysis of the products and types of product, market and marketing arrangements, competition, quality certification, R&D initiatives, etc. are essential. Other factors technology, market, sales growth, sales forecast, comparative advantage, market share, quality, cost and profit structure, etc.


Project analysis
Project Potential Success stories Promoters quality Appraisal Environmental clearances

Company Analysis Product analysis Product/s Technology Market Competition Quality R&D initiatives Management Analysis
Mgt team Key personnel Capital structure Promoters share Legal issues

Financial Health Economic analysis

Economic condition: Internal External
Environment analysis

Financial Analysis

Stock Market conditions Historic Price movements Current price

Ratio Analysis Liquidity Leverage Activity Operating efficiency Profitability Valuation

Financial Statement analysis

Balance sheet analysis Income and expense analysis Earnings analysis Cash and Fund flow analysis

Techniques of financial analysis

Financial Analysis techniques

Comparative analysis

Common Size analysis

Trend analysis

Funds and Cash flow analysis

CVP analysis

Ratio analysis

Practice Assign: plz take any 1: - A group company & write a report based on: (i) above 6 points, ii) compare with Immediate competitor, c) Market share and product analysis d) contribution to sector and compare with sector performance e) comment on holding pattern & changes if any f) Give a brief write up about the government policy relating to this sector/industry.

Financial analysis
Comparative financial statements: are those, which have been designed in a way so as to provide time perspective to the consideration of various elements of financial statement Common size: converted to percentages to some common base, normally sales and total assets Trend percentages: are immensely helpful in making comparative studies of financial statements of several years. Cost volume profit analysis: Is an important tool for profit planning. It studies the relationship between cost, volume of production, sales and profit. It reflects break even point, strategies, etc. Ratio analysis: understanding the relationship between two or more variables/figures in a financial statement. Types of ratios: Liquidity ratios, Solvency ratios. Profitability ratios, Activity ratios debtors and creditors turnover, fixed assets turnover ratio. Prominent ratios: Operating profit ratio, ROI, EPS, ROE, Leverage ratios, P/e ratio

Example
Computation of Current ratio of WWIL 2006 2007 2008 2009 2010 total CA 6334 9521 13018 16646 18237 total CL 934 1800 1852 1800 3250 C.R. 6.781585 5.289444 7.029158 9.247778 5.611385 The ideal current ratio is 2:1 (or 1.33:1 banking norms). The ratio is flucutating indicating short term liquidity is not steady Further analysis indicates volatile closing stock volumes

Financial analysis: potential inputs into a financial analysis:

Accounts Payable Accounts Receivable Acid Ratio Amortization Assets - Current Assets - Fixed Book Value Brand Business Cycle Business Idea Business Model Business Plan Capital Expenses Cash Flow Cash on hand Current Ratio Gross Profit Margin Gross Profit Margin Growth Industry Interest Cover International Investment Liabilities - Current Liabilities - Long-term Management Market Growth Market Share Net Profit Margin Pageview Growth Pageviews Patents
Customer Relationships Days Payable Days Receivable Debt Debt Structure Debt:Equity Ratio Depreciation Derivatives-Hedging Discounted Cash Flow Dividend Dividend Cover Earnings EBITDA Economic Growth Equity Equity Risk Premium Expenses Price/Book Value Price/Earnings PEG Price/Sales Product Product Re-Placement Regulations R&D Revenues Sector Stock Options Strategy Subscriber Growth Subscribers Supplier Relationships Taxes Trademarks

Analysis of qualitative parameters

These are as follows: Technological advancement in the company Marketing and distribution network R and D efforts Diversification Disputes/ claims against the company Ownership structure

Estimation of Intrinsic value

Steps: Estimation of expected EPS of company Expected risk in the company Estimation of P/e multiplier based on past performance, expectation about future, goodwill and diversification and modernization. Estimation of intrinsic value = expected EPS x P/e multiplier Decision-making: Intrinsic value > current market price = buy Intrinsic value < current market price = sell

Alternate approach is DCF.

There are many different valuation metrics and much depends on the industry and stage of the economic cycle. A complete financial model can be built to forecast future revenues, expenses and profits or an investor can rely on the forecast of other analysts and apply various multiples to arrive at a valuation. Some of the more popular ratios are found by dividing the stock price by a key value driver

Ratio Price/Book Value Price/Earnings Price/Earnings/Growth Price/Sales Price/Subscribers Price/Lines Price/Page views

Company Type Oil Retail Networking B2B ISP or cable company Telecom Web site Biotech

 With Fundamental analysis the following two are identified: The company in which to invest The right time to invest (supported by technical's for short term trading)

Weakness of fundamental analysis

Time constraints: Time-consuming models often produce valuations that are contradictory to the current price prevailing on Wall Street/Sensex. When this happens, the analyst basically claims that the whole street has got it wrong. Industry/Company Specific: Valuation techniques vary depending on the industry group and specifics of each company. For this reason, a different technique and model is required for different industries and different companies. A subscription-based model may work great for an Internet Service Provider (ISP), but is not likely to be the best model to value an oil company. Subjectivity: Fair value is based on assumptions. Any changes to growth or multiplier assumptions can greatly alter the ultimate valuation. Analyst Bias: The majority of the information that goes into the analysis comes from the company itself. Companies employ investor relations managers specifically to handle the analyst community and release information. When it comes to massaging the data or spinning the announcement, CFOs and investor relations managers are professionals.

Thank you

Data types that can be analyzed with z-tests data points should be independent from each other z-test is preferable when n is greater than 30. the distributions should be normal if n is low, if however n>30 the distribution of the data does not have to be normal the variances of the samples should be the same (F-test) all individuals must be selected at random from the population all individuals must have equal chance of being selected sample sizes should be as equal as possible but some differences are allowed