When you are valuing a portfolio, there are many different portfolio appraisal techniques you can utilize. Each of these techniques works in different ways. Portfolio appraisal is an assessment of the quality of your properties and your investments. It evaluates the purchase price versus the potential profit of your portfolio. It also assesses how much money you may make when selling your properties.
The portfolio appraisal techniques and methods below will vary in their specific uses. Some are easy to implement for a basic idea of your portfolio value. Others are more complex and difficult to understand. So make sure to carefully research the method you want to use before fully committing to one. We will also give you a short example of this method in action to give you an insight into what to expect from the process.
Benchmark and Style Portfolio Appraisal Techniques
These methods are the simplest ways to gauge the quality of your portfolio. The first compares it against the market index to provide a basic insight into its value. For example, you could assess the value of the property in your portfolio against the value of the similar real estate in your area. Comparing it in this way gives you a very simple understanding of where you stand.
Style comparison takes a look at the growth style of specific elements in your portfolio. For example, if you own four residential, two commercial, and three industrial properties, you would compare the basic growth index of these property values to their actual growth. In this way, you get an idea of how well your property values are increasing versus typical expectations.
How you use each of these methods will vary depending on the properties. For example, residential property has a much different set of evaluations than industrial properties. Residential properties have stricter environmental valuation methods than industrial, as people must live there. Breaking these property values down usually requires a professional assessment.
Risk Assessment Appraisal
Whenever you invest in a property, you are taking a serious risk. For example, when you buy a large industrial complex, you are risking never selling it if the right buyer doesn’t come into town. Other risks include investing in low-cost houses that might need repairs. You can also measure risk versus the market value of buildings of their type. There are various ways to assess this level of that risk.
Each of these portfolio appraisal techniques has their advantages. Some are easier to understand than others. Some require the use of complex ratios and an understanding of mathematical formulas. We will break down one of the easier methods of risk evaluation for you below. This will give you a better idea of what to expect from this sometimes difficult and even exasperating technique.
A Look at the Sharpe Ratio Method of Portfolio Appraisal
Developed in 1966, the Sharpe Ratio is a way of evaluating a portfolio’s risk. It calculates the return of the portfolio versus its amount of risk-free capital. It involves assessing the amount of risky property of investments you own as well as the risk-free property and investments. Then, you plug the numbers into a ratio to gauge the risk. You also must find the standard deviation of returns from the portfolio.
What does all this mean? You subtract your risk-free property values from your risky property values. Then you divide this result by the deviation of returns. Calculating the deviation requires finding the lowest level of returns and the percentage difference from the highest level. Once you have this rate and the Sharpe Ratio performed, you get an idea of the basic risk value of your portfolio.
Other methods, such as the Treynor Ratio, Jensen’s Alpha, and the Modigliani and Modigliani Measure offer a similar risk assessment. They are too difficult to explain here, but understanding the basic risk assessment process helps you get a better idea of the property value of your portfolio.
Using These Portfolio Appraisal Techniques Together
Once you use benchmark, style, and risk portfolio appraisal techniques, you put them together to calculate the value of your portfolio. How do you do this? By taking a look at the value decided on by the benchmark and style assessments and comparing that to the risk level. For example, let’s say your benchmark came up with a value of $100,000, while your style came up with $80,000.
For the sake of simplicity, you can average them together to get $90,000. Let’s say your risk factor is about 30 percent. This means that 30 percent of your properties are a risky investment. As a result, your portfolio is probably worth less than $90,000. The exact amount will vary, depending on the riskiness of individual properties, but finding that out typically requires a truly professional approach.
Final Thoughts on Portfolio Appraisal Techniques
While any of these methods are useful as a way of gauging the value of your property, you must understand them before implementing them. Only then can you assess the value of your property and your financial portfolios in a positive way. This is particularly true when assessing property you purchased or received as a donation.
Have more questions about valuing donated property? Contact our team of experts at Global Valuation today. Just visit us online or call (770) 988-4498. We can help you get the portfolio appraisal techniques you need to best understand the value of your property or your financial portfolio.