Valuation Of Investments Flashcards
Advantages and disadvantages of market value approach and discounted cashflow approach towards valuing assets
Market value ad:
Easily available
Objective
Universally understood
Market value disadvantage:
Volatile in the short term relative to value of liabilities
Valuation result could change significantly from day to day
Intention of the fund and valuation is to maintain over longer term
No consistency with the long-term ongoing value of the liabilities
May not receive this value in reality
May not quote prices available for certain assets
Will not consider dealing costs
Discounted income model advantages:
Reflects value of the assets over long term
Easily consistent with value of liabilities
Can take account of expenses
Can adjust discount rate to allow for level of riskiness
Discounted income model disadvantages :
Requires assumptions for discount rates and income projected
In case of equities assumptions will be needed for dividend growth
Involve judgement and may incorporate bias
Different actuaries would place different values on the assets
Valuation methods for investments
Historic book value
Written up or written down book value
Market value
Smoothed market value
Fair value
Discounted cashflow
Stochastic modeling
Arbitrage value
