Value-added, also called active return, is the difference between the managed portfolio return and the benchmark portfolio return. It is calculated using the following equation: $$ R_A=R_P-R_B $$ Where: \(R_A\) is the value-added. \(R_P\) is the investor’s return. \(R_B\) is…

Rental Income Rental income includes the cash flows that investors in commercial real estate hope to receive. The credit quality of the underlying tenants influences the credit quality of a commercial property portfolio. The higher the credit quality of the…

Cyclical equities are very volatile since they follow such economic cycles as recession, expansion, and peak. Growth in the economy implies a subsequent growth in cyclical stocks and vice versa. On the other hand, non-cyclical equities are issued by companies…

Valuation multiples include the price-to-earnings ratio (P/E) and the price-to-book ratio (P/B). A high P/E ratio implies an expected high growth of a company’s earnings in the future. Therefore, investors will be more willing to pay a higher price for…

Equity refers to a security with an indefinite size and timing of dividends. Moreover, these dividends may stop in the event of bankruptcy. This makes equities riskier than debt. Equities, therefore, require an additional risk premium. More precisely, investors who…

Earnings and business cycles have a very close relationship. Investors should, therefore, have a good understanding of the business cycle to make projections of earnings. Even then, it is worth noting that the effect of the business cycle on the…

Credit spreads vary across industrial sectors. When credit spreads are narrowing relative to government bonds, the spreads between higher- and lower-rated corporate bond categories also narrow. During these times, although corporate bonds generally outperform government bonds, lower-rated corporate bonds tend…

A credit spread is the difference in yield between a corporate bond and a government bond of equal maturity. Investors require the spread as a modality to compensate for the additional credit risk relative to that of government bonds. Besides…

The current value of a real default-free bond (inflation-adjusted) is given by: $$ P_0=\sum_{t=1}^{n}\frac{CF_t}{\left[1+R\right]^t} $$ For a default-free nominal coupon-paying bond (non-inflation adjusted), we have: $$ P_0=\sum_{t=1}^{n}\frac{CF_t}{\left[1+R+\theta+\pi\right]^t} $$ The difference between the yield on non-inflation adjusted (nominal) and inflation-indexed bonds…

Short-term Interest Rates and the Business Cycle Short-dated nominal zero-coupon government bonds have yields closely related to the central bank’s policy rate. Additionally, the uncertainty of inflation over the very short-term investment horizon, typically three months, is negligible. Therefore, the…