Chapter 13 - Investment valuations

What are common methods of valuing assets?

Common methods include: historic book value, written up or written down book value, market value, smoothed market value, fair value, discounted cashflow, stochastic modelling, and arbitrage value.

What is fair value?

Fair value is the amount an asset could be exchanged for, or a liability settled, between knowledgeable, willing parties at arm's length.

List the advantages of market values.

Advantages include: objective, realistic as realizable value on sale, easy calculations, well understood, and good for comparison with other valuation methods.

List the disadvantages of market values.

Disadvantages include: may not be readily obtainable, volatile, may not reflect future proceeds, decision on bid/mid/offer prices needed, challenges ensuring consistency with liability valuation, reflects marginal investor's position, and may not be realizable on sale.

How are bonds valued?

Bonds are valued by calculating the discounted value of cashflows, specifically the coupon and redemption payments.

What is the discounted dividend model?

It derives the value of a share as the discounted value of the estimated future dividend stream, represented as V = sum from t=1 to inf of D_t * v(t).

What is the simplified discounted dividend model?

The simplified model is expressed as V = D / (i - g), where D is the prospective dividend, g is growth rate, and i is the required rate of return.

What factors should be consistent in the discounted dividend model?

Factors include that i > g, both rates must be defined consistently, dividend proceeds can be reinvested at rate i, and tax and expenses are ignored.

How can property be valued?

Property can be valued using a discounted cashflow approach that accounts for net cashflows and the expected rate of increase in rental income.

What method is widely used for the actuarial valuation of investments?

The most widely used method for actuarial purposes is market value.

What is the impact of volatile asset prices on valuation?

Volatility of asset prices can reflect underlying reality, but comparing volatile asset values with stable liability values can be misleading.