What does "fundamental analysis" involve?

Fundamental analysis is a method used to evaluate securities by examining their underlying economic and financial factors. This approach focuses on assessing various aspects such as a company's financial health, management effectiveness, competitive advantages, market conditions, and overall industry dynamics. By analyzing income statements, balance sheets, cash flow statements, and other financial data, investors can determine the intrinsic value of a security, which helps inform investment decisions.

This contrasts with methods focused on price movements or market trends, as those approaches do not delve into the financial health or fundamentals of the company itself. Additionally, while understanding emotional responses and testing strategies are important in their own right, they do not encompass the comprehensive evaluation of a security based on financial metrics and economic conditions that fundamental analysis does. Therefore, option B accurately captures the essence of what fundamental analysis entails.