Tag Archives | return

Setting Prices

When we start working with a new client, one of the first conversations we have is about setting prices.  A company’s pricing strategy (and whether they have articulated it) tells me a lot about the culture of the organization and how they make money.   Here’s a video that discusses different pricing strategies as well as which strategy will yield the greatest return.

Discover 3 Things You Should Know About Setting Prices

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We developed a Pricing for Profit Inspection Guide that you can access here for free.

setting prices

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Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

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Core Satellite Portfolio

See Also:
Financial Instruments
Investment Risk
Common Stock Definition
Prepare an Investor Package
Fixed Income Securities
Treasury Stock
Venture Capitalists Definition

Core Satellite Portfolio Definition

Core Satellite asset allocation is an investment strategy that consists of two parts the “core” and the “satellite.” The first part is known as the core portfolio. It invests in traditional fixed income securities like index funds, mutual funds, and other passive strategy investments. The second is known as the satellite portfolio. It invests a percentage of the available funds in individual stocks and other actively traded investment.

Core Satellite Portfolio Explained

The core-satellite strategy has been around for a while. It has been useful to many investors who take full advantage of the core satellite approach. It allows investors to reduce their risk in a passive well diversified portfolio, while allowing these investors to seek out higher expected returns. The core satellite investment strategy is beneficial because the investor takes on little extra risk but can normally expect higher returns in the market.

Core Satellite Portfolio Example

Jacob has some extra cash that is sitting in a savings account at a bank. He has recently decided that he wants to invest this amount in the market. Jacob has also decided that he will use the core satellite investment approach. Jacob has thus decided that he will invest 80% of the cash in a passive mutual fund, and the other 20% in individual stocks that he believes will perform above the market. By doing this Jacob is safe from any huge downfalls in the market because he has a well diversified portfolio in the mutual funds, but he also expects a higher return from the individual stocks.

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Arbitrage Pricing Theory

See Also:
Cost of Capital
Cost of Capital Funding
Capital Asset Pricing Model
APV Valuation
Capital Budgeting Methods
Discount Rates NPV
Required Rate of Return

Arbitrage Pricing Theory Definition

The arbitrage pricing theory (APT) is a multifactor mathematical model used to describe the relation between the risk and expected return of securities in financial markets. It computes the expected return on a security based on the security’s sensitivity to movements in macroeconomic factors. Then use the resultant expected return to price the security.

The arbitrage pricing theory is based on three assumptions. First, that a factor model can be used to describe the relation between the risk and return of a security. Then, idiosyncratic risk can be diversified away. Finally, efficient financial markets do not allow for persisting arbitrage opportunities.

In addition, the arbitrage pricing theory calculates the expected return for a security based on the security’s sensitivity to movements in multiple macroeconomic factors. Whereas the standard capital asset pricing model (CAPM) is a single factor model, incorporating the systematic and firm specific risk related to the overall market return, the arbitrage pricing theory is a multifactor model.

Then, set up the arbitrage pricing theory to consider several risk factors, such as the business cycle, interest rates, inflation rates, and energy prices. The model distinguishes between both systematic risk and firm-specific risk. It also incorporates both types of risk into the model for each given factor.

Arbitrage Pricing Theory Formula

The formula includes a variable for each factor, and then a factor beta for each factor, representing the security’s sensitivity to movements in that factor. Because it includes more factors, consider the arbitrage pricing theory more nuanced – if not more accurate, than the capital asset pricing model.

A two-factor version of the arbitrage pricing theory formula is as follows:

r = E(r) + B1F1 + B2F2 + e 

r = return on the security
E(r) = expected return on the security
F1 = the first factor
B1 = the security’s sensitivity to movements in the first factor
F2 = the second factor
B2 = the security’s sensitivity to movements in the second factor
e = the idiosyncratic component of the security’s return

If you want to improve your pricing and your profits, then download the free Pricing for Profit Inspection Guide.

arbitrage pricing theory

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

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