Asset Valuation Model

admin's picture
October 16, 2008 by admin

Asset Value Definition

Asset valuation is the process of determining the market value of a financial asset or liability.  Asset valuation is a key component of fundamental analysis.  This analysis technique can be performed on a number of financial vehicles (stocks, bonds, and options). 

Asset Valuation Models

Asset valuations are broken out into three basic models:

  1. Relative Model - specify an asset's value by comparing it to similar assets.  A common relative model comparison tool is a security's P/E ratio.
  2. Absolute Value Model - compares the futures earning potential against the security's current market value.
  3. Option Pricing Model - is a complex asset valuation model which attempts to determine the value of a security by combining but volatility and time.  The most common option pricing model is the Black Scholes model.

Utilizing Asset Valuation when Trading

Asset valuation is a powerful tool in for value investors, because it can give insight into whether a security is under or over valued.  Many investors find themselves chasing securities based on the latest news headline or new product announcement.  Asset valuation forces an investor to look beyond their emotions and focus on the reality of the company's cash flow statement and balance sheet.