finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

, relative value is the attractiveness measured in terms of

risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environ ...

liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quic ...

, and

return Return may refer to: In business, economics, and finance * Return on investment (ROI), the financial gain after an expense. * Rate of return, the financial term for the profit or loss derived from an investment * Tax return, a blank document or t ...

of one financial asset relative to another, or for a given instrument, of one maturity relative to another. The concept arises in

economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...

business Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for ...

and

investment Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

In hedge funds

The use of relative value is a method of determining an asset's value that takes into account the value of similar assets. In contrast, absolute value looks only at an asset's intrinsic value and does not compare it to other assets. Calculations that are used to measure the relative value of stocks include the enterprise ratio and price-to-earnings ratio.

Prices

Prices of valued items undergo questionable fluctuations. For example, even though housing provides the same utility to the individual over time, and the housing stock is relatively constant or stable, the relative price of housing fluctuates. This holds even more so with

stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...

s, oil and

gold Gold is a chemical element; it has chemical symbol Au (from Latin ) and atomic number 79. In its pure form, it is a brightness, bright, slightly orange-yellow, dense, soft, malleable, and ductile metal. Chemically, gold is a transition metal ...

. This price volatility appears to occur in cycles and is caused by a myriad of factors. The chart to the right is an attempt to overlay the prices of

housing Housing refers to a property containing one or more Shelter (building), shelter as a living space. Housing spaces are inhabited either by individuals or a collective group of people. Housing is also referred to as a human need and right to ...

, stocks, oil and gold by normalizing the price streams. Normalizing is achieved by applying a discounting formula which converts a price to the price it would be at a certain date, given a certain discount rate. This would normally be used to cancel the effects of inflation, in which case the inflation rate would be used. In this case the rate is derived as follows: A trend was calculated for the resulting discounted price curve using the method of "least squares". The discount rate was then derived by seeking the goal of a trend of 1, i.e. flat. For housing this normalization rate was 6.06% considering the data from 1940 to 2010 relative to the year 1990. Using this as a baseline rate, the normalized price curves were calculated for the other commodities. Oil and gold had similar normalization rates, but Stocks tended to beat this trend, while rents tended to lose against this trend in the period observed. Gold was the most volatile along with Oil in close second. Stocks were highly volatile. Housing and rents were the least volatile of the commodities studied.

References

{{DEFAULTSORT:Relative Value (Economics) Investment management

In hedge funds

Prices

See also

References