Arbitrage Pricing Theory (APT), Its Assumptions and Relation to Multifactor Models
Arbitrage Pricing Theory (APT) Arbitrage pricing theory (APT) is a theory of asset pricing. It asserts that the expected return of an asset can be expressed as a linear function of multiple systematic risk factors priced by the market. APT…
Study Notes for CFA® Level II – Portfolio Management – offered by AnalystPrep
Reading 39: Exchange-Traded Funds: Mechanics and Applications -a. Explain the creation/redemption process of ETFs and the function of authorized participants; -b. Describe how ETFs are traded in secondary markets; -c. Describe sources of tracking error for ETFs; -d. Describe factors…
Study Notes for CFA® Level II – Derivatives – offered by AnalystPrep
Reading 33: Pricing and Valuation of Forward Commitments -a. Describe the carry arbitrage model without underlying cashflows and with underlying cashflows; -b. Describe how equity forwards and futures are priced, and calculate and interpret their no-arbitrage value; -c. Describe how…
Study Notes for CFA® Level II – Fixed Income – offered by AnalystPrep
Reading 28: The Term Structure and Interest Rate Dynamics -a. Describe relationships among spot rates, forward rates, yield to maturity, expected and realized returns on bonds, and the shape of the yield curve; -b. Describe how zero-coupon rates (spot rates)…
Financial Ratios Used to Analyze Real Estate Investments
Debt financiers often prefer debt service coverage ratio (DSCR) and loan to value (LTV) when arriving at the maximum loan on a definite property. $$ \text{DSCR} = \frac {\text{Year one NOI}}{\text{Debt service}} $$ Where: $$ \text{Debt service} = (\text{Interest}…
Portfolio Roles and Economic Value Determinants of Real Estate Investment
Economic Drivers The following economic factors affect the demand for major property types: GDP: This is by far the most important economic factor as it affects all property types. As the GDP grows, the demand for real estate investment…
Real Estate Investment Indexes
Private equity real estate investment indexes allow investors to analyze property investment performance using either appraisal-based or transaction-based index methods. To determine the best index method to employ, the investor needs to clearly understand the modalities of how the…
Due Diligence in Real Estate Investments
Real estate investment requires more extensive due diligence compared to public debt or equities due to its lack of transparency, standardization, and the significant impact of a property’s physical characteristics and location. Unlike other assets where investment decisions rely…
Direct Capitalization and Discounted Cash Flow Valuation Methods
Direct capitalization method, the stabilized net operating income (NOI) is divided by the market capitalization rate. In contrast, for the DCF method, the NOI for each year during the holding period plus the salvage value at the end of…
Value of a Property
The direct capitalization method estimates the value of a property by capitalizing the first-year NOI at a market-derived cap rate. The discounted cash flow method projects income after the first year and discounts the income at a yield rate…
