Worth and price Flashcards
Market Price
Sum of money actually paid for an investment
Valuation
An estimate of the most likely selling price
Individual worth
Maximum bid price of an individual purchaser who takes account all available information in an efficient manner
Market worth
The price at which an investment would trade in a market where buyers and sellers were using all available information in an efficient manner
Specific inputs (individual worth)
- holding period
- cost of capital
- tax rate
- return requirement
Market efficiency
Only in markets where inefficient participants operate, there is potential for superior returns
Weak form efficiency
Prices accurately reflect everything that can be learned from past prices
Semi-strong form efficiency
Prices reflect all publicly available information
Strong form efficiency
Prices reflect all information
How efficient is the property market?
Evidence suggests weak form efficiency (opportunities for investors to exploit pricing inefficiencies)
What is the rationale for acquiring mispriced assets?
- Superior profits will be made when (or if) the market corrects itself
- Correction takes place when a market forecast is brought into line with that of investors
- But timescale for correction is unknown - market responds differently to an array of complex interactions which occur over time.
What is the basic NPV decision rule ?
- If NPV worth > price, then buy
- If NPV worth < price, then sell
