P1. Valuation - Study Notes P26‏

[LMFRM]

Hi,

On page 26 of the P1. Valuations - Study Notes - could you explain me how the Hybrid Weight of 8.16% is found, because the below calculation don't give the mentioned result:

Weight (7 periods prior) = 90%^(7-1)*(1-90%)/(1-90%^10) = 8.16%

Best regards,
LM

 

[David Harper CFA FRM]

Hi LM,

I do get 8.16%. I think the note needs a better explanation (I have tasked us, on revision) but please note this assumes n = 10 returns and lambda of 0.90 such that

• If it were an infinite exponential series, the weight(7) = (1-λ)*λ^(7-1); in this case, 10%*90%^6 = 5.346%;
• However this is a short series n = 10, such that we can multiply each weight by 1/(1-λ^10); in this case, 1/(1-90%^10) = 1.53533 which "levers up" the weights proportionally so the truncated weights sum to 100%. So, we have an unadjusted weight of 5.346% an and adjusted weight of 5.346%*1.53533 = ~8.16%
• So, for the 7th weight when n = 10, we've got the above weight(7) = (1-λ)*λ^(7-1)/(1-λ^10) which looks to me to be the same as the above's weight (t) = 90%^(7-1)*(1-90%)/(1-90%^10) = 8.16%
  (although the notes should explain it, sorry if lack of the explain is the reason .... )

Thanks,