Wednesday, 14 January 2009

Discount Rate Determinations: Summary

Discount Rate Determinations

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VALUE INVESTING
Baseline:
Long-term U.S. Treasuries
Additional: Risk assessment (conscious judgment)


PORTFOLIO INVESTING
Baseline:
Long-term U.S. Treasuries
Additional: Market risk premium X beta (seemingly scientific)

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Value investing and portfolio theory determine discount rates by adding an amount to the risk-free rate ascertained from long-term U.S. Treasury securities.

Portfolio theory uses the product of the market risk premium and the target’s beta.

Value investing questions the seemingly scientific quality of this exercise in favour of more judgment-laden but conscious assessments of associated risk.

Conceptually, discount rate is,
= cost of capital
= rate of return you require on your allocated capital.



Also read:
  1. Understanding Discount Rates
  2. Risk-free rate
  3. Traditional Method: Discount rate or WACC (I)
  4. Traditional Method: Discount rate or WACC (II)
  5. Modern Portfolio Theory
  6. Portfolio Theory: Market Risk Premiums
  7. Portfolio Theory: Beta
  8. Is the market efficient, always?
  9. Discount Rate Determinations: Summary

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