Asset Valuation Allocation Models

Powerful Essays
Topics: 1918, 1920, 1916
R e s e a r c h
July 30, 2002

Asset Valuation & Allocation Models

Dr. Edward Yardeni (212) 778-2646 ed_yardeni@prusec.com Amalia F. Quintana (212) 778-3201 mali_quintana@prusec.com

- Introduction I. Fed’s Stock Valuation Model How can we judge whether stock prices are too high, too low, or just right? The purpose of this weekly report is to track a stock valuation model that attempts to answer this question. While the model is very simple, it has been quite accurate and can also be used as a stocks-versus-bonds asset allocation tool. I started to study the model in 1997, after reading that the folks at the Federal Reserve have been using it. If it is good enough for them, it’s good enough for me. I dubbed it the Fed’s Stock Valuation Model (FSVM), though no one at the Fed ever officially endorsed it. On December 5, 1996, Alan Greenspan, Chairman of the Federal Reserve Board, famously worried out loud for the first time about “irrational exuberance” in the stock market. He didn’t actually say that stock prices were too high. Rather he asked the question: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions….”1 He did it again on February 26, 1997.2 2 He probably instructed his staff to devise a stock market valuation model to help him evaluate the extent of the market’s exuberance. Apparently, they did so and it was made public, though buried, in the Fed’s Monetary Policy Report to the Congress, which accompanied Mr. Greenspan’s Humphrey-Hawkins testimony on July 22, 1997. 3 The Fed model was summed up in one paragraph and one chart on page 24 of the 25page document (see following table). The chart shows a strong correlation between the S&P 500 forward earnings yield (FEY)—i.e., the ratio of expected operating earnings (E) to the price index for the S&P 500 companies (P), using 12- month-ahead consensus earnings estimates compiled by Thomson Financial First

You May Also Find These Documents Helpful

  • Good Essays

    Asset Allocation and Retirement: Do You Need to Make a Change? Many investors who are approaching retirement are wondering if they will need to change their asset allocation when they are no longer collecting a paycheck. The information available from the popular press and many advisors is to generally guide retirees to change their allocation to one that is more conservative. This is usually interpreted to mean that the investor should lighten up on stocks and put more of their investments into…

    • 713 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Note on Pe Asset Allocation

    • 6708 Words
    • 27 Pages

    Note on Private Equity Asset Allocation Over the past 20 years, managers of institutional capital have increasingly allocated more funds to private equity. During that time period, private equity has been an asset class with relatively high returns compared to public stock market indices. However, the recent economic downturn has made it clear that this asset class also has significant risks. This note describes the characteristics and challenges of private equity as an asset class. The table below…

    • 6708 Words
    • 27 Pages
    Powerful Essays
  • Powerful Essays

    Using EXCEL for Asset Allocation and Performing Market Efficiency Studies 1. Introduction There are several features in EXCEL that are very useful for asset allocation and performing market efficiency studies. These features used in conjunction with live or historical data allows one to apply the sophisticated techniques discussed in this class in practical situations. This write-up will introduce students to the various mathematical and statistical functions available in EXCEL and explain…

    • 1954 Words
    • 8 Pages
    Powerful Essays
  • Satisfactory Essays

    Financial Asset Valuation

    • 1897 Words
    • 8 Pages

    Amount of Investment 7 Investment Selection 7 Scenario Analysis 9 Estimation of magnitude of interest rate increase 10 Part I [pic] Calculation of overall Macaulay Duration for i) The bank’s assets Duration A=10.00% * 3.00 + 30.00% * 10.00 + 20.00% * 3.50 = 4.00 ii) The bank’s liabilities Duration L = 82.35% * 2.00 + 17.65% * 3.00 = 2.18 iii) The bank’s net worth Duration net worth =) * A / E…

    • 1897 Words
    • 8 Pages
    Satisfactory Essays
  • Satisfactory Essays

    they are subject to taxes - Target rate of return: 5%+inflation - Change allocation policy when capital markets change or if there are new investment opportunities, law changes, or risk aversion changes. - Investment committee: 3 board members and 3 non board members - New asset allocation policy: o Reduction in exposure to of the investment portfolio to domestic public equity (31% to 20%) o Increase in allocation to absolute-return strategies (hedge funds-make profit whether market goes…

    • 410 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Group 2 Questions for Individual Asset Allocation Exercise: 1. Allocate your fictional $1,000,000 among the following three asset categories: Asset U.S. Equities U.S. 30-Year Treasury Bonds Cash Total Allocation 45% 35% 20% 100% Justify your allocation based on your outlook for systematic risk in the U.S. economy over the next year. Based on GDP, there is an expected growth in rates for the following quarter, though it may…

    • 525 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Calculating Inputs We chose assets from the 1990s, which was one of the most prolific decades in market history thanks in large part to the tech bubble. We chose to calculate average returns as 12x the monthly average return. This annualizes our return, which provides a better representation of returns by including more data points to perform analysis. The arithmetic calculation provides an impartial estimate of future return because it is always more than the geometric. All assets classes reported positive…

    • 452 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    equity valuation models

    • 731 Words
    • 3 Pages

    EQUITY VALUATION MODELS Equity Valuation -Determining the total value of a company involves more than reviewing assets and revenue figures. An equity valuation takes several financial indicators into account; these include both tangible and intangible assets, and provide prospective investors, creditors or shareholders with an accurate perspective of the true value of a company at any given time Significance of Equity Valuation Model -Equity valuations are conducted to measure the value of…

    • 731 Words
    • 3 Pages
    Satisfactory Essays
  • Better Essays

    2 MODELS FOR THE VALUATION OF SHARES. 2.1 The concept of a cost of equity The cost of equity is the cost to the company of providing equity holders with the return they require on their investment. The primary financial objective is to maximize the return to equity shareholders. This return is as the future dividend yield and capital growth. Until new shareholders become members of the company, the objective above is concerned with existing shareholders. Company management will need to offer…

    • 1393 Words
    • 6 Pages
    Better Essays
  • Satisfactory Essays

    HNWI Asset Allocation in Argentina 2014 Published on 04th April 2014 Summary This report provides the latest asset allocations of Argentina HNWIs across 13 asset classes. The report also includes projections of the volume, wealth and asset allocations of Argentina HNWIs to 2018 and a comprehensive and robust background of the local economy. Scope Independent market sizing of Argentina HNWIs across five wealth bands HNWI volume and wealth trends from 2009 to 2013 HNWI volume and wealth forecasts…

    • 396 Words
    • 2 Pages
    Satisfactory Essays