In pg 7 of valuation of individual investments: The counter argument is that using another valuation method in an attempt to identify the intrinsic worth of an asset involves an investment call as to the direction the market in that asset (or class of asset) will move. What is the investment call they are referring to here? I dont understand the valuing portfolios of shares in page 10 Typically the valuation of a portfolio of ordinary shares would be carried out by assuming the shares were swapped for a holding in an index. Here the details of the actual portfolio are ignored. The market value of the total actual portfolio is assumed to be invested in a notional portfolio consisting solely of a holding in a specified index. It is the value of this notional portfolio that is calculated. Does the specified index that is being used help have the same investment mixture as the portfolio that needs to be valued? Kindly help! Regards Amarnath
On page 7, "investment call" means "making a judgement", ie if we do not use market value then we need instead to make a judgement as to whether the asset is worth more or less, ie a judgement as to the direction the market will move in. On page 10, this paragraph relates to valuing a range of shares using a discounted cashflow (DCF) approach. To carry out a DCF calculation for each type of share in the portfolio would be timeconsuming, so instead we notionally reinvest our portfolio in an index which we think gives a fair representation of our shares (but is not the same investment mix as our portfolio). I'm giving you a bit more detail here than I would expect you will need to know for CA1, but just for completeness ... ... we might for example assume that our portfolio of shares can be represented by the FTSE 100 index, even though we have not invested across the FTSE 100. We then use the simplified discounted dividend model to value our portfolio, the formula is D/(i-g) where D is next year's dividend which we calculate as market value of our portfolio * prospective dividend yield of the index. The i and g are long-term assumptions we make as to an appropriate discount rate and dividend growth for our portfolio. We have then reduced the valuation of the portfolio down to one equation, much quicker!
