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:
Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
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