relative value

[zapped]

can someone explain exactly what relative value is, how it is measured, etc.?

[chucky almendinger]

Relative value is value expressed in the terms of the value of another security. for example, sec A should be worth 1.15 sec b, based on expected cash flow, credit risk, etc. If B is trading at $100, and you assume this is a fair price, A should be trading at $115. If it's trading at $110, sell B short and buy A, and laugh all the way to the bank.

[zapped]

so in the case of auto ABSs & why investors prefer them, one reason is that they have strong relative value. in that case, it means that on average, compared to other securities with similar risk, auto ABSs are a good buy. right / wrong? it sounds like "relative strength" ratios used by chartists to contradict EMH. right / wrong?

[chucky almendinger]

Relative value would identify "cheap" opportunities. OAS would too, but what are the pitfalls of this?

I think there might be some arbitrage opportunities in bonds - not sure. Also, the "arbitrage opportunity" in auto loan backed security might be a liquidity/marketability premium - I suspect some invesment policies prohibit or strongly limit positions in Auto backed securities, making them less demanded than other issues.

I did notice in Ch 8 of managing investment portfolios that active management is alive and well in the fixed income world. In the international section, he said something along the lines of "there's just too much money to be made in actively managing international to ignore it" in light of what others might view as currency risk, liquidity risk and incomplete information driving returns. And they have all those strategies that make you rich after you correctly anticipate the timing, direction and magnitude of interest rate shifts.

I feel EMH has limits in small caps too. but like they said in Investments, it's not "are markets efficient?" it's "how efficient are they?"