Wednesday, March 14, 2012

>Do the "fundamentals" really exist? The case of equities

Investors like to refer to the "fundamental value" of a financial asset. We shall take the example of equities. The fundamental value of a share is the discounted sum of the company's future earnings. But can it be calculated?

- There is of course uncertainty regarding future growth and future profitability, but this uncertainty is natural.
- The fundamental value of equities is calculated applying a risk premium; however, the equity risk premium has varied significantly over time. Does it have a standard value, or else does it have a conventional value which
may be different at each period?
- What discount rate should be used for future earnings? The current longterm interest rate could be built on the basis of irrational expectations of future interest rates, or it could be distorted by central bank intervention
and by risk aversion.

Perhaps the concept of fundamental value (in this case of a share) is so vague that it is unusable.

A distinction is generally made between "fundamental" investors and others ("chartists", etc.). Fundamental investors refer to the "fundamental value" of the asset they buy.

In this Flash we shall consider the case of equities.

To read full report: Do the "fundamentals" really exist?