Hi, I'm looking through investment strategy and it says alternative methods are: Yield Norms Index levels and pice charts yield ratios What are these and do we really need to know about them? Thank you Glen
Hi Glen These are terms that were in Subject 301 but no longer in CA1. So no need to learn them in detail but the concepts are fairly general so here's an overview. Yield “norms” For some of the asset categories, there might be a normal level or range. When yields are below the normal range, it implies that the asset may be dear. Conversely, the asset is assumed to be cheap when the yields are above the normal range. The logic for relying upon normal ranges is that we expect history to repeat itself, so that being different from history implies an anomaly. Index levels and price charts Technical analysis is sometimes used to compare the value of asset groupings as well as individual assets. For example, an asset category might be considered cheap or dear by comparing the current index level with the past levels for that index. When the NASDAQ Index moves to record high levels, you might think that the market is too high, ie technology shares are dear. Yield ratios The yield ratio is sometimes used when assessing the relative price of equities and bonds. The ratio is defined as: GRY gov bonds / equity dividend yield Some practitioners believe, for example, that in the UK a yield ratio of less than 2 implies that equities are cheap, and that a ratio above 2 shows that equities are dear. However, the ratio has to be used with care. For example, the government bond/equity yield ratio will be a function of expected future inflation. In a low inflationary era, a lower ratio should be expected. Good luck for the exams Glen! Anna
