Government uses government policy to balance
- Level of inflation
- Exchange rate
- Economic growth
Main factors affecting bond yields
- Inflation
- Short term interest rates
- Fiscal deficit
- Exchange rate
- Institutional cashflow
- Alternative investments
Factors affecting equity levels
- Expectations of real interest rates and inflation
- Investors’ perceptions of the riskiness of equity investments
- The real level of economic growth in the economy
- Expectations of currency movements
- Supply factors
- Political climate
- Overseas equity markets
- Institutional cashflow
- Taxation
- Alternative investments
Factors affection the property market
- Occupation market (economic growth, structural changes)
- Development cycles (planning permissions, development time lags)
- Investment market (inflation, real interest rates)
Inelastic supply of property is caused by
- Time required to develop new properties
- Planning permission rules and limited physical space in some areas
- Fixity of location
- High transaction costs
- Segmented markets
Demand for an asset will change if:
- Its characteristics change (risk and return)
* External factors change (investors’ income, investors’ preferences, alternative investments)
Investors’ preferences will change as a result of
- A change in their liabilities
- A change in the regulatory regime
- A change in the tax regime
- Uncertainty in the political climate
- Sentiment or fashion altering
- Marketing
- Education
Methods of valuing assets
- Historical value
- Written up or written down historical value
- Market value
- Smoothed market value
- Fair value
- Discounted cashflow method
- Stochastic models
- Arbitrage pricing theories
Bond risk premium compensates for
- Inflation risk
- Marketability
- Risk of default
Equity risk premium compensates for
- Marketability
- Risk of default
- Volatility of share prices and dividends
Property risk premium compensates for
- Risk of default and voids
- Large, indivisible unit size
- Marketability
- Possible deterioration and obsolescence
- High dealing and management expenses
Ways of assessing cheapness/dearness of asset classes
- Yield norms
- Index levels and price charts
- Yield ratios
Main sources of variability of asset values in a portfolio
- Short-term market movements
* A change in asset mix
Advantages of notional portfolio valuation
- Speed of calculation
- Valuation result not influenced by strategic investment strategy
- Investment strategy not influenced by valuation result
- Stability of valuation results
- Consistency with method used to value liabilities
Disadvantages of notional valuation
- Lack of realism
* Difficult to communicate why assets aren’t valued using market value
