Question

Advantages and disadvantages of historical method(compare with variance-covariance method )?please use your own words to explain,thanks.

Answer 1

Advantages

• There is no scope for human intervention.
• The method gives relatively fixed value
• Uniformity across sectors
• Rule based
• Predefined
• Easy to comply

Disadvantages

• No scope for current trend
• Time value of money not considered
• Static method
• No factoring for any future growth or de-growth

Variance and co-variance is used to calculate any investment in relation to the spread between mean/expected value and standard deviation.

When historical method is clubbed with variance, covariance method, any standard deviations arising out of current trends are factored in. This way the impact change in trend is considered for valuation and hence a better and more appropriate valuation can be achieved.