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Author: Cornelis A. Los
Publisher:
ISBN:
Category :
Languages : en
Pages : 44
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Book Description
Modern investment theory takes it for granted that a Security Market Line (SML) is as certain as its quot;correspondingquot; Capital Market Line. (CML). However, it can be easily demonstrated that this is not the case. Knightian non-probabilistic, information gap uncertainty exists in the security markets, as the bivariate quot;Galton's Errorquot; and its concomitant information gap proves (Journal of Banking amp; Finance, 23, 1999, 1793-1829). In fact, an SML graph needs (at least) two parallel horizontal beta axes, implying that a particular mean security return corresponds with a limited Knightian uncertainty range of betas, although it does correspond with only one market portfolio risk volatility. This implies that a security' risk premium is uncertain and that a Knightian uncertainty range of SMLs and of fair pricing exists. This paper both updates the empirical evidence and graphically traces the financial market consequences of this model uncertainty for modern investment theory. First, any investment knowledge about the securities risk remains uncertain. Investment valuations carry with them epistemological (quot;modelingquot;) risk in addition to the Markowitz-Sharpe market risk. Second, since idiosyncratic, or firm-specific, risk is limited-uncertain, the real option value of a firm is also limited-uncertain This explains the simultaneous coexistence of different analyst valuations of investment projects, particular firms or industries, included a category quot;undecided.quot; Third, we can now distinguish between quot;buyquot;, quot;sellquot; and quot;holdquot; trading orders based on an empirically determined collection of SMLs, based this Knightian modeling risk. The coexistence of such simultaneous value signals for the same security is necessary for the existence of a market for that security! Without epistemological investment uncertainty, no ongoing markets for securities could exist. In the absence of transaction costs and other inefficiencies, Knightian uncertainty is the necessary energy for market trading, since it creates potential or perceived arbitrage (= trading) opportunities, but it is also necessary for investors to hold securities. Knightian uncertainty provides a possible reason why the SEC can't obtain consensus on what constitutes quot;fair pricing.quot; The paper also shows that Malkiel's recommended CML-based investments are extremely conservative and non-robust.
Author: Cornelis A. Los
Publisher:
ISBN:
Category :
Languages : en
Pages : 44
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Book Description
Modern investment theory takes it for granted that a Security Market Line (SML) is as certain as its quot;correspondingquot; Capital Market Line. (CML). However, it can be easily demonstrated that this is not the case. Knightian non-probabilistic, information gap uncertainty exists in the security markets, as the bivariate quot;Galton's Errorquot; and its concomitant information gap proves (Journal of Banking amp; Finance, 23, 1999, 1793-1829). In fact, an SML graph needs (at least) two parallel horizontal beta axes, implying that a particular mean security return corresponds with a limited Knightian uncertainty range of betas, although it does correspond with only one market portfolio risk volatility. This implies that a security' risk premium is uncertain and that a Knightian uncertainty range of SMLs and of fair pricing exists. This paper both updates the empirical evidence and graphically traces the financial market consequences of this model uncertainty for modern investment theory. First, any investment knowledge about the securities risk remains uncertain. Investment valuations carry with them epistemological (quot;modelingquot;) risk in addition to the Markowitz-Sharpe market risk. Second, since idiosyncratic, or firm-specific, risk is limited-uncertain, the real option value of a firm is also limited-uncertain This explains the simultaneous coexistence of different analyst valuations of investment projects, particular firms or industries, included a category quot;undecided.quot; Third, we can now distinguish between quot;buyquot;, quot;sellquot; and quot;holdquot; trading orders based on an empirically determined collection of SMLs, based this Knightian modeling risk. The coexistence of such simultaneous value signals for the same security is necessary for the existence of a market for that security! Without epistemological investment uncertainty, no ongoing markets for securities could exist. In the absence of transaction costs and other inefficiencies, Knightian uncertainty is the necessary energy for market trading, since it creates potential or perceived arbitrage (= trading) opportunities, but it is also necessary for investors to hold securities. Knightian uncertainty provides a possible reason why the SEC can't obtain consensus on what constitutes quot;fair pricing.quot; The paper also shows that Malkiel's recommended CML-based investments are extremely conservative and non-robust.
Author: Andrew B. Abel
Publisher:
ISBN:
Category : Capital investments
Languages : en
Pages : 25
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Book Description
This paper extends the theory of investment under uncertainty to incorporate fixed costs of investment, a wedge between the purchase price and sale price of capital, and potential irreversibility of investment. In this extended framework, investment is a non-decreasing function of q, the shadow price of installed capital. There are potentially three investment regimes, which depend on the value of q relative to two critical values. For values of q above the upper critical value, investment is positive and is an increasing function of q, as is standard in the theory branch of the adjustment cost literature. For intermediate values of q, between two critical values, investment is zero. Although this regime features prominently in the irreversibility literature, it is largely ignored in the adjustment cost literature. Finally, if q is below the lower critical value, gross investment is negative, a possibility that is ruled out by assumption in the irreversibility of literature. In general, however, the shadow price q is not directly observable, so we present two examples relating q to observable varieties.
Author: Neil J. Beaton
Publisher: John Wiley & Sons
ISBN: 0470436298
Category : Business & Economics
Languages : en
Pages : 229
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Book Description
Valuing Early Stage and Venture-Backed Companies Unique in the overall sphere of business valuation, the valuing of early stage and venture-backed companies lacks the traditional metrics of cash flow, earnings, or even revenue at times. But without these metrics, traditional discounted cash flow models and comparison to public markets or private transactions take on less relevance, calling for a more "experiential" valuation approach. In a straightforward, no-nonsense manner, the mystique surrounding the valuation of early stage and venture-backed companies is now unveiled. With an emphasis on applications and models, Valuing Early Stage and Venture-Backed Companies shows the most effective way for your company to prepare and present its valuations. Featuring contributed chapters by a panel of top valuation experts, this book dispels improper valuation techniques promulgated by unknowing business appraisers and answers your key questions about valuation theory and which tools you need to successfully apply in your specific situation. Here, you'll find out more about various valuation techniques, including: "Back solving" valuation Modified cost approach Option pricing model Probability-weighted expected returns model Asian puts New data on discounts for lack of marketability Detailed and hands-on, Valuing Early Stage and Venture-Backed Companies equips you with broad foundational data on the venture capital industry, as well as in-depth analyses of distinct early stage company valuation approaches. Performing valuations for your early stage company requires an understanding of the special circumstances faced by your organization. With ample examples of generally accepted allocation models with complex capital structures common to early stage companies, Valuing Early Stage and Venture-Backed Companies mixes real-life experience with deep technical expertise to equip you with the complete, user-friendly resource you'll turn to often in valuing your early stage or venture-backed company.
Author: Eliska A. Pazner
Publisher:
ISBN:
Category :
Languages : en
Pages : 13
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Book Description
Author: Sara Maioli
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Author: Robert Novy-Marx
Publisher:
ISBN:
Category : Asset pricing
Languages : en
Pages : 39
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Book Description
Author: Patrick Casabona
Publisher: Wiley
ISBN: 0471229482
Category : Business & Economics
Languages : en
Pages : 384
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Book Description
Practical, expert coverage of investment pricing methods for financial professionals This book on investment pricing methods offers accounting and financial practitioners and academics a solid understanding of the techniques and methods investment analysts use to price common financial investment instruments, such as commercial mortgages, private placement-bonds, mortgage-backed securities, private and public equities, derivatives, and joint ventures. Clarification of important terminology and an overview of fundamental concepts are provided for less experienced professionals, while in-depth and up-to-date discussion of technical matters offers experienced professionals expert dissection of more complex material. This authoritative and reliable guide features: PowerPoint(TM) presentation for teaching purposes available online at www.wiley.com/go/investmentpricing In-depth and up-to-date pricing models Verbal and formula explanations for all mathematical equations Tips on reviewing investment prices for accuracy or flaws Investment type characteristics such as contractual provisions, cash flows, and risks for applying Statement 133 hedge effectiveness guidelines Basic building blocks of investment pricing methodologies including present value methodologies used for pricing and evaluating common investment types Coverage of complex issues including term structure of interest rates, determinants of bond yields and stock risk premiums, estimation of free cash flows for valuing a business entity, and more
Author: Iris Ginzburg
Publisher:
ISBN:
Category :
Languages : en
Pages : 56
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Book Description
Author: Juan Ramirez
Publisher: John Wiley & Sons
ISBN: 1119330823
Category : Business & Economics
Languages : en
Pages : 563
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Book Description
A deeper examination of Basel III for more effective capital enhancement The Handbook of Basel III Capital – Enhancing Bank Capital in Practice delves deep into the principles underpinning the capital dimension of Basel III to provide a more advanced understanding of real-world implementation. Going beyond the simple overview or model, this book merges theory with practice to help practitioners work more effectively within the regulatory framework, and utilise the complex rules to more effectively allocate and enhance capital. A European perspective covers the CRD IV directive and associated guidance, but practitioners across all jurisdictions will find value in the strategic approach to decisions surrounding business lines and assets; an emphasis on analysis urges banks to shed unattractive positions and channel capital toward opportunities that actually fit their risk and return profile. Real-world cases demonstrate successful capital initiatives as models for implementation, and in-depth guidance on Basel III rules equips practitioners to more effectively utilise this complex regulatory treatment. The specifics of Basel III implementation vary, but the underlying principles are effective around the world. This book expands upon existing guidance to provide a deeper working knowledge of Basel III utility, and the insight to use it effectively. Improve asset quality and risk and return profiles Adopt a strategic approach to capital allocation Compare Basel III implementation varies across jurisdictions Examine successful capital enhancement initiatives from around the world There is a popular misconception about Basel III being extremely conservative and a deterrent to investors seeking attractive returns. In reality, Basel III presents both the opportunity and a framework for banks to improve their assets and enhance overall capital – the key factor is a true, comprehensive understanding of the regulatory mechanisms. The Handbook of Basel III Capital – Enhancing Bank Capital in Practice provides advanced guidance for advanced practitioners, and real-world implementation insight.
Author: Yakov Ben-Haim
Publisher: Elsevier
ISBN: 0080465706
Category : Computers
Languages : en
Pages : 385
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Book Description
Everyone makes decisions, but not everyone is a decision analyst. A decision analyst uses quantitative models and computational methods to formulate decision algorithms, assess decision performance, identify and evaluate options, determine trade-offs and risks, evaluate strategies for investigation, and so on. Info-Gap Decision Theory is written for decision analysts. The term "decision analyst" covers an extremely broad range of practitioners. Virtually all engineers involved in design (of buildings, machines, processes, etc.) or analysis (of safety, reliability, feasibility, etc.) are decision analysts, usually without calling themselves by this name. In addition to engineers, decision analysts work in planning offices for public agencies, in project management consultancies, they are engaged in manufacturing process planning and control, in financial planning and economic analysis, in decision support for medical or technological diagnosis, and so on and on. Decision analysts provide quantitative support for the decision-making process in all areas where systematic decisions are made. This second edition entails changes of several sorts. First, info-gap theory has found application in several new areas - especially biological conservation, economic policy formulation, preparedness against terrorism, and medical decision-making. Pertinent new examples have been included. Second, the combination of info-gap analysis with probabilistic decision algorithms has found wide application. Consequently "hybrid" models of uncertainty, which were treated exclusively in a separate chapter in the previous edition, now appear throughout the book as well as in a separate chapter. Finally, info-gap explanations of robust-satisficing behavior, and especially the Ellsberg and Allais "paradoxes", are discussed in a new chapter together with a theorem indicating when robust-satisficing will have greater probability of success than direct optimizing with uncertain models. - New theory developed systematically - Many examples from diverse disciplines - Realistic representation of severe uncertainty - Multi-faceted approach to risk - Quantitative model-based decision theory
