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The purpose of this paper is to revise the imprecise formulae of the risk build-up method widely used in the practice of property valuation, in particular, in unstable economies.

This paper’s approach is the selection of the risk-free rate in the capitalization rate in the absence of exchange statistics. The equation of returns by analogy with Fisher (1907) and Fisher (1930) is used as a methodological instrument for this.

This study presents exact formulae for build-up method and proposes a set of risk premiums independent of each other. Cases of investments in foreign and local currencies are considered.

To determine the values of risk premiums and the asset risk amendment with acceptable accuracy, a sufficient amount of statistical data about the market of the valuated property is required.

The application of the build-up method in the revised form will allow for more accurate property valuation, especially in countries where the market is opaque or where there is not a lot of activity.

The departure from the original version of the build-up method with empirical “justification,” which after more than 30 years of application has become almost universally accepted, indicates a certain maturity of the valuation theory and will allow more effective appraisal of property, such as capital real estate or business.

This paper is an original study based on the application of the equation of return to clarify the structure of the capitalization rate. When determining the proposed set of risk premiums, one of the principles of real estate valuation was used – the principle of dependency.

This chapter analyses the ability of some structural models to predict corporate bankruptcy. The study extends the existing empirical work on default risk in two ways. First, it estimates the expected default probabilities (EDPs) for a sample of bankrupt companies in the USA as a function of volatility, debt ratio, and other company variables. Second, it computes default correlations using a copula function and extracts common or latent factors that drive companies’ default correlations using a factor-analytical technique. Idiosyncratic risk is observed to change significantly prior to bankruptcy and its impact on EDPs is found to be more important than that of total volatility. Information-related tests corroborate the results of prediction-orientated tests reported by other studies in the literature; however, only a weak explanatory power is found in the widely used market-to-book assets and book-to-market equity ratio. The results indicate that common factors, which capture the overall state of the economy, explain default correlations quite well.

This study aims to compare the risk‐return characteristics and performance of real estate investment trust (REIT) hotel companies (hotel REITs hereafter) with those of C‐corporation hotel companies (hotel C‐corps hereafter).

The risk‐return characteristics and performance of hotel REITs and C‐corps were examined by estimating single‐factor and Fama‐French three‐factor asset pricing models for each portfolio. Differences between the hotel REIT and C‐corp estimations were tested using Wald test statistics.

Little evidence was found that hotel REITs have significantly different risk‐return characteristics and performance than hotel C‐corps, which suggests that hotel REITs and C‐corps are not significantly different in terms of market risk‐return characteristics and performance. The market portfolio had a significantly positive effect on the returns of both hotel REITs and C‐corps. The size and book‐to‐market factors of common stock also had a significant explanatory power for the returns of hotel REITs and C‐corps. Both hotel REITs and C‐corps performed similarly to the market portfolio, on a risk‐adjusted basis, during the 2000s.

Despite the fact that the three‐factor asset pricing model explains a significantly greater proportion of the variation in the hotel firms' returns than the single‐factor asset pricing model, approximately 30 percent of the total variation still remains unexplained.

The risk‐return characteristics and performance of hotel REITs and C‐corps revealed by this study will render hotel investors' decisions between the two organizational structures less complicated. In addition, the findings can be used by portfolio managers to construct a well‐diversified portfolio.

A multifactor asset pricing model was used for the first time in this article to examine the risk‐return characteristics and performance of hotel companies. In addition, the importance of understanding differences between REIT and C‐corp structures in the lodging industry is emphasized.

This case serves as a foundation for student discussion of the estimation of required rates of return (ROR) on investments in emerging markets. An associate in J.P. Morgan's Latin America M&A department (mergers and acquisitions) is assigned the task of valuing the telephone directory operations (“paginas amarelas” means “yellow pages”) of a large Brazilian conglomerate. All cash flows have been converted to U.S. dollars, and present values computed for various discount rates. The remaining step is to determine the appropriate target rate of returns for dollar flows originating in Argentina, Brazil, and Chile. The capital asset pricing model (CAPM) is used along with a political risk premium and country beta. The necessary figure work is comparatively light, leaving the student time to reflect on the need for various adjustments in estimating crossborder rates of return.

High levels of turnover in financial markets are consistent with the notion that trading, like gambling, yields direct utility to some agents. The purpose of this paper is to show that the presence of these agents attenuates covariance risk pricing and volatility, and implies a negative relation between volume and future returns. Since psychological literature indicates that the desirability of a gamble arises from the ex ante volatility of the outcome, the authors propose that agents derive greater utility from trading more volatile stocks. These stocks earn lower average returns in equilibrium, although the risk premium on the market portfolio is positive. The authors then consider a dynamic setting where agents’ utility from trading increases when they make positive profits in earlier rounds (e.g. due to an endowment effect). This leads to “bubbles,” i.e. disproportionate jumps in asset returns as a function of past prices, higher volume in up markets relative to down markets, as well as a leverage effect, wherein down markets are followed by higher volatility than up markets.

Analytical.

The presence of gamblers attenuates covariance risk pricing and volatility, and implies a negative relation between volume and future returns. If gamblers prefer more volatile stocks, these stocks earn lower average returns in equilibrium. If agents’ utility from trading increases when they make positive profits in earlier rounds (e.g. to an endowment effect), this leads to higher volume and lower volatility in up markets relative to down markets.

No paper has previously modeled agents who derive direct utility from trading.

The purpose of this paper is is to identify the main determinants of insurance profitability on life and non-life segments to obtain which variables affect in each market of the Ecuadorian insurance sector.

The authors use a large panel data set with financial information from 2001 to 2017 and estimate the determinants through a panel corrected standard errors regression.

The authors found that net premiums, technical reserves, capital ratio and score efficiency are micro-determinants in the life insurance sector, whereas in the non-life sector, the micro-determinants include also claim level and liquidity ratio; moreover, the authors found that HHI is a determinant of profitability only in the life insurance. Among the macro determinants set, the authors found that the interest rate has also a significant impact both in the life and non-life insurance.

The authors analyze a dollarized emerging country, which is the first time in this kind of studies. The authors also include the structure-conduct-performance and relative market power paradigm as well as the ES hypothesis, calculated through the data envelopment analysis, as determinants of insurance profitability. Finally, this is the first research to examine the determinants of profitability in Latin American and Caribbean insurers.

This paper studies whether individual stocks provide higher returns than government bond in the Chinese market.

The authors compare individual stock returns and government bond returns in the Chinese market.

The authors find that more than half of individual stocks underperform government bonds over the same period in China, which highlights the important role of positive skewness in the distribution of individual stock returns. The high return of a few stocks is the reason why the stock market return is higher than that of government bond in China.

The results of this paper emphasize that portfolio diversification plays an important role in the Chinese market.

This case was a real-life situation faced by the author. Names were changed, so students would not know that the author was the protagonist. The case had been developed over several years as a capstone to the capital budgeting section of an MBA finance course and an advanced undergraduate course.

Trey and Lauren Gallo were considering the purchase of a vacation condo that also generated rental income. The current owners were willing to sell at a lowball offer of $605,000 as the pandemic entered its 13th month. The Gallos felt they needed to act fast to get this deal. However, the risks were extraordinary, as the pandemic had reduced rental income by 50% and borders had just recently closed. The case provides all data needed to compute rental revenues, capital expenditure, operational expenditures and financing costs. Students are expected to compute the NPV and IRR of free cashflows. Students will compute and evaluate the cost of capital using the condo’s projected debt structure, a choice of several proxy betas and a project risk premium. The case also uses extensive sensitivity analysis. This case differs from corporate capital budgeting problems because it evaluates both levered and unlevered cashflows, and the cashflows include savings from personal use. The case has been successfully used in MBA finance courses and advanced undergraduate finance courses. The case can be used as a capstone case for capital budgeting or a comprehensive exam in undergraduate, MBA and executive programs. The case questions can also be spread throughout a course to cover the topics of financial statement forecasting, free cash flows, capital budgeting, cost of capital and sensitivity analysis.

Earlier versions of this case have been used in an advanced undergraduate corporate finance course and MBA finance courses. The case is generally used as a capstone to the material on capital budgeting. Students should have already covered material on financial statements, loan cashflows, levered and unlevered cashflows, CAPM, proxy betas, weighted average cost of capital, NPV and IRR. This case is also appropriate for courses in real estate finance and personal finance.

In this series of extracts from the concluding chapter of Acharya’s book, Asset Management: Equities Demystified, the author argues that the major factor in future developments will be legislation and regulation. But she suggests that ultimately knowledge management will be the crucial competitive advantage. “As knowledge is power”, she says, “knowledge is more powerful today than ever before”.