Chapter 13 Valuation of asset classes and portfolios

Question 1

bonds risk premium CLAIM R

Answer 1

Inflation risk
Default risk
marketability
Liquidity

Question 2

Equity risk premium

Answer 2

Default risk
Low ranking on wind up
Marketability issues
Volatile share prices and dividends

Question 3

Property risk premium

U VOLD + CALL STUD

Answer 3

Unit size/ Uniqueness / Usage 
Prospects of future growth 
Refurbishment
Void risks
Obsolescence
Liquidity
Dealing and management costs

Question 4

Methods to compare returns on different asset classes/ categories of tests to determine if an asset class is overvalued:
GRaNTR

Answer 4

yield Gap
yield Ratios
yield Norms
Technical analysis
Reverse yield gap

Question 5

Ways to value assets:

SHAM FADS

Answer 5

Smoothed market value
Historic (book) value
Adjusted book value
Market value
Fair value
Arbitrage
Discounted cashflow model
Stochastic model

Question 6

Issues with valuing equities with the discounted dividend model TURA/ TULA

Answer 6

Tax ignored
Unknown dividend(g) and required return(i) rate and assumed fixed
Lack of Rigor in results
Annual dividend assumed

Question 7

Valuation of A and L with MARKET VALUE, Issues CAMV:

Answer 7

Consistency with L difficult
Assets usually valued with MV
Market based discount rate hard to find
Volatile

Question 8

Valuation of A and L DISCOUNTED CASHFLOW merits SASH/CASH:

Answer 8

Stable and consistent valuation of L
Assumptions about valuations consider both A and L
Subjective
Hard to explain

Question 9

Merits of valuing assets with the market price

PARCOE FFARBB

Answer 9

Proxy for asset/liability valuation 
Accepted and understood widely
Reliable
Comparable with other valuation methods to determine anomalies
Objective
Easy

Fluctuates over time
Future value not reflected
Availability lacks
Not realistic value for sale
Bid/Offer conflict
Basis inconsistency between A and L

Question 10

Factors affecting a change in the inflation risk premium:

PIGSE

Answer 10

A change in political stability
Inflation levels increasing. Higher inflation = Higher uncertainy of future inflation
A change in Govs commitment to inflation control
A change in the supply of index linked bonds relative to fixed interest bonds
A change in the pace of economic growth

Question 11

Written up book value

Answer 11

The historic value for which the asset was bought which has been adjusted to allow for periodic changes in the value

Question 12

Market value

Answer 12

The market value is the value determined by some market mechanism. The market value of an asset caries constantly and can only be known with certainty once a transaction in the asset has been made. Even in an open market it can be quoted with more than one value.

Question 13

The fair value

Answer 13

The fair value is the value for which an asset could be exchanged or a liability settled between two willing and knowledgeable parties at an arms length