How to Determine the Cost of Capital for a Commercial Forestry

This paper focuses on designing a methodological workflow to fill a knowledge gap for determining the cost of capital for commercial forestry projects. Upon reviewing the literature, a method to determine the cost of capital for profit-oriented forestry seems to be lacking. Accordingly, we selected and analyzed 42 companies that do businesses worldwide, are present on the stock exchange, and possess or lease forest land. Based on their business activities (growing forest, sawmilling, final production, paper production), these companies are classified into four subgroups. An algorithm has been devised using the concept of risk diversification and the capital asset pricing model for three groups of investors and four forestry subgroups. In doing so, the real risk-free rate (0.43%) is set as the difference between an average return on 10-year US government bonds (2.59% nominal) and the 10-year average US inflation rate (2.16%). The measure of forestry systematic risk (beta coefficient) varies between 0.83 and 1.41, while the equity (stock exchange market) risk premium is set to 6%. Unsystematic risk is determined using a process of mapping which takes into account all risk elements marked as relevant for the forestry sector. This approach provides results that reveal the cost of capital varying between 5.41% and 16.55% based on the current level of an investor's portfolio diversification and the risk characteristics of the forestry subgroup. Finally, the forestry companies meeting the investor's expectations are noted as preferable investment opportunities.

Market expectation shifts in option-implied volatilities in the US and UK stock markets during the Brexit vote

This paper investigates the effect of the Brexit vote on the connection between UK stock market expectations and US stock market returns. To gauge UK stock market expectations, the option-implied volatilities of the FTSE 100 index are calculated in the period starting five months before and ending four months after the Brexit referendum. To keep the analysis “clean”, it stops right before the 2016 US presidential elections. It uses an OLS regression to estimate the change in the relationship between US and UK stock market expectations.The main findings show that the US and UK stock markets became somewhat less integrated four months after the Brexit referendum compared to the five months before it. The S&P 500 Index returns have a statistically significant impact on implied volatilities of the FTSE 100 only before the Brexit referendum. However, the British risk-free rate (LIBOR) became a statistically significant factor affecting FTSE 100 implied volatilities only after Brexit. This analysis may be used by decision-makers in the money management industry to act appropriately during Black Swan events. When UK citizens unexpectedly voted in favor of Brexit, the risk-free rate dropped, making it cheaper to invest, increasing the Sharpe ratios of equity portfolios. Coupled with increased uncertainty, this caused portfolio reallocations. In turn, expected volatility measured by options-implied volatility increased. AcknowledgmentThe authors would like to thank Olesia Verchenko for critique, a KSE M.A., external defense reviewer for helpful comments.

Diversifiable and Non-diversifiable Risk and the Advanced Choice under Ambiguous or Uncertain Conditions

The objective of this paper is to revisit the concepts of diversifiable and non-diversifiable risk, expound the portfolio risk in two ways: mathematically first, and with practical examples, second It also explains lending and borrowing at the risk-free rate of return, in addition to juxtaposing the diversification method to measure the unsystematic risk against utilizing Beta to measure the systematic risk. Furthermore, it briefly examines the mathematical simulation and sensitivity analysis, and mathematically delineates the technique for choices under risk, ambiguity, and uncertainty. The practical implication of this conceptual paper is to offer a further clarification of theoretical terms, especially those which might be interchangeable in financial and economic literature, and further show, by examples, the terms’ applicability.

Diversifiable and Non-diversifiable Risk and the Advanced Choice under Ambiguous or Uncertain Conditions

The objective of this paper is to revisit the concepts of diversifiable and non-diversifiable risk, expound the portfolio risk in two ways: mathematically first, and with practical examples, second It also explains lending and borrowing at the risk-free rate of return, in addition to juxtaposing the diversification method to measure the unsystematic risk against utilizing Beta to measure the systematic risk. Furthermore, it briefly examines the mathematical simulation and sensitivity analysis, and mathematically delineates the technique for choices under risk, ambiguity, and uncertainty. The practical implication of this conceptual paper is to offer a further clarification of theoretical terms, especially those which might be interchangeable in financial and economic literature, and further show, by examples, the terms’ applicability.

When Uncertainty and Volatility Are Disconnected: Implications for Asset Pricing and Portfolio Performance

We analyze an environment where the uncertainty in the equity market return and its volatility are both stochastic and may be potentially disconnected. We solve a representative investor's optimal asset allocation and derive the resulting conditional equity premium and risk-free rate in equilibrium. Our empirical analysis shows that the equity premium appears to be earned for facing uncertainty, especially high uncertainty that is disconnected from lower volatility, rather than for facing volatility as traditionally assumed. Incorporating the possibility of a disconnect between volatility and uncertainty significantly improves portfolio performance, over and above the performance obtained by conditioning on volatility only.

Management Issues of Tea Planting and Tea Crops in Vietnam in the Concept of Sustainable Agricultural Development - and Recommendations on Marketing 4P

Thai Nguyen and Lam Dong provinces are two biggest ares of Vietnam to have tea crops planting. Farmers produce various tea products and among them, Green tea contains polyphenols and catechins as well as caffeine, but green tea has less caffeine than coffee, and many extracts are decaffeinated. Our research goal is to find out real situation of tea planting in Vietnam in the concept of sustainable agricultural development in Vietnam and recommendations and marketing 4P solutions for agriculture and tea products, with the using of both qualitative analysis and regression -quantitative model in order to identify barriers for tea crops and planting as well as management issues of agricultural value chain. Research results show us that CPI and R (lending rate) and Risk free rate (Rfj have negative correlation with tea export price, while GDP growth has positive impacts. Next, the State plays an important role in supporting and promoting contractual linkages. Government policies must hold farmers and businesses accountable for the performance of the contract. In Vietnam, with a still agricultural fragmented, backward, the link between farmers and businesses is still loose, the determination of The right direction and support of the Government will create a great impetus to promote development economic links between businesses and farmers. Our research limitation is that we can expand for other crops, industries and markets as well.

METHODICAL APPROACH TO FORECASTING THE REAL RETURN ON INVESTMENT IN NON-STATE PENSION FUNDS

In the article the methodical approach to determining the projected real return on investment related to a private pension funds (PPFs) is proposed. The technique involves variant calculations and allows maximization the real return of investor based on the variation of input parameters. The first stage involves building the model for forecast investments in PPF, taking into account compound interest. At the second stage, the calculation of periodic pension benefits is based on the forecast rate of return. At the third stage, an investor, based on the model, can perform the inverse operation – to determine the return on investment without taking into account inflation, using the money-weighted rate of return, based on NPF’s proposal for payments. At the fourth stage, the real return on investment is calculated taking into account the inflation rate. The criterion for the choice of investment conditions is the maximum real return on investment. The capitalization rate is compared with the risk-free rate.

Business performance assessment of small and medium-sized enterprises: Evidence from the Czech Republic

Business performance assessment is one of the basic tasks of management. Business performance can be assessed using a number of methods. The basic ones include financial analysis, Balanced Scorecard or Economic Value Added (EVA). The paper is focused on SME business performance assessment based on Economic Value Added, calculated using the INFA build-up model. According to this method, companies were divided into four categories. The first category included companies with a positive EVA value. The second category included companies with negative EVA, but with the economic result above the risk-free rate. The third category included companies with a positive economic result above the risk-free rate. The fourth category included companies with a negative economic result. The model did not include companies with negative equity. The input represented 15 predictors based on their financial statements. The data were normalized and all extreme values, likely caused by a data rewriting error, were removed. Company performance is visualized by comparing Principal Component Analysis and Kohonen neural networks. Compared to similar research, the methods are compared using the data that analyzes the performance of companies. Both methods made it possible to visualize the given task. With regard to the purpose of facilitating the interpretation of the results, for the given case, the use of PC seems to be more appropriate. AcknowledgmentThis study has been supported by the Technology Agency of the Czech Republic under project No TL01000349.

Consumption, aggregate wealth and expected stock returns: a quantile cointegration approach

This paper empirically examines the long-run relationship between consumption, asset wealth and labor income (i.e., cay) in the United States through the lens of a quantile cointegration approach. The advantage of using this approach is that it allows for a nonlinear relationship between these variables depending on the level of consumption. We estimate the coefficients using a Phillips–Hansen type fully modified quantile estimator to correct for the presence of endogeneity in the cointegrating relationship. To test for the null of cointegration at each quantile, we apply a quantile CUSUM test. Results show that: (i) consumption is more sensitive to changes in labor income than to changes in asset wealth for the entire distribution of consumption, (ii) the elasticity of consumption with respect to labor income (asset wealth) is larger at the right (left) tail of the consumption distribution than at the left (right) tail, (iii) the series are cointegrated around the median, but not in the tails of the distribution of consumption, (iv) using the estimated cay obtained for the right (left) tail of the distribution of consumption improves the long-run (short-run) forecast ability on real excess stock returns over a risk-free rate.