In the investment industry, performance evaluation refers to the measurement, attribution, and appraisal of investment results. In particular, performance evaluation provides information about the return and risk of investment portfolios over specified investment period(s). By providing accurate data and analysis on investment decisions and their consequences, performance evaluation allows portfolio managers to take corrective measures to improve…
Some specific sources of alpha are the manager skills in specific stock selection and utilising higher-return strategies that minimise risks. The performance of hedge funds can be attributed to three distinct sources: Hedge Fund Investment Risks and Returns
Source of Returns The return on real estate investments comes from income or asset appreciation or a combination of both. Income-producing real estate generates income primarily from the collection of rental or lease payments, including lease renewals. Expenses include direct and indirect management expenses, such as maintenance and improvement costs. Income-producing real estate investment is…
Credit derivative contracts are based on a credit underlying, or the default risk of a single debt issuer or a group of debt issuers in an index. The most common credit derivative contract is a credit default swap. CDS contracts allow an investor to manage the risk of loss from issuer default separately from a…
Matrix Pricing Process Unlike listed equity securities, most bonds are not actively traded, so there is often no current market price available to calculate yield-to-maturity. Matrix pricing also is used in underwriting new bonds to get an estimate of the required yield spread over the benchmark rate, or the difference in yield-to-maturity between the bond and…
Bond Pricing with a Market Discount Rate Bond pricing is an application of discounted cash flow analysis that depends on a bond’s cash flow features and the rate (or rates) used for discounting. The market discount rate is used in the time-value-of-money calculation to obtain the present value. The market discount rate is the rate…
A contingency provision is a clause in a legal agreement that allows for an action if an event or circumstance occurs. The most common contingency provisions for bonds involve the right—but not the obligation—for an issuer or the bondholders to take an action specified in an indenture. Callable Bonds An issuer of a callable bond has…
The Gordon growth model is particularly appropriate for valuing the equity of dividend-paying companies that are relatively insensitive to the business cycle and in a mature growth phase. where g is the constant growth rate. If required return r is assumed to be strictly greater than growth rate g, then the square-bracketed term is an infinite geometric series and sums…
What to Forecast? Analysts may focus on different forecast objects related to issuers’ financial statements. Below are four common forecast objects. Focus on Objects That Are Regularly Disclosed Information that is not disclosed regularly (such as the size of a market from a third-party consultancy’s report) is suitable for informing forecasts but can be problematic for direct use because forecasts…
