Ch13: Valuation of investments

Question 1

Appropriate valuation method depends on: (4)

Answer 1

• Reason for valuation
• Type of asset / asset characteristics
• Valuation method characteristics
• Aims and objectives of investment

Question 2

Reasons for valuation of individual assets (3)

Answer 2

• Identify value for money investments
• Monitor experience of investment portfolio for various purposes
• Reporting requirements

Question 3

Criteria for assessing asset valuation methods (7)

Answer 3

• Readily available or not
• Subjective/objective
• Conservative/Realistic
• Simple/Complex to calculate
• How well understood
• Volatile asset or not (Stable over time)
• Consistency with liability valuation (Method and basis/assumptions)

Question 4

Valuation methods (8)

Answer 4

• Book value:
  * Historical
  * Written up/down
• Market value related
  * Market Value
  * Smoothed market value
  * Fair value
  * Arbitrage value
• Discounted cashflow
  * Deterministic
  * Stochastic modelling

Question 5

Market value Pros and Cons (3&3)

Answer 5

Pros:
* Generally fairly easily available
* Objective
* Well understood

Cons
* Volatility (May be subject to lots of fluctuations in the short term + may be different results from valuation depending on exact date)
* Achieving consistency (Volaitlity of market values makes it difficult to value liabilities in a consistent manner)
* No quoted price (Some assets may have no quoted price)

Question 6

Smoothed market value description

Answer 6

• Take some average over a specified period to remove daily fluctuations
• Say - moving average
• Not easily consistent with liability valuation - appropriate dicount rate requires judgement: 1. Length of smoothing period 2. whether average should be simple or weighted with more weight on recent values

Question 7

Fair value for assets description

Answer 7

• Amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties at arm’s length