What is the main criterion for determining fair value in an investment context?

The main criterion for determining fair value in an investment context is the price at which an asset would trade in a competitive and open market. This definition is grounded in the concept of market efficiency, where the fair value represents the price that willing buyers and sellers would agree upon in an orderly transaction. In such a market, all available information is reflected in the price, ensuring that it represents the true economic value of the asset at a given point in time.

This approach emphasizes the importance of market dynamics and conditions, as fair value seeks to represent the amount that an informed investor would be willing to pay or accept for the asset under normal circumstances. It encapsulates the idea that fair value is not merely a theoretical concept but rather a practical measurement based on current market behavior and willingness to transact.

Other methods, such as historical cost, may provide insight into what was paid for an asset but do not account for changes in market conditions or asset value over time. Similarly, average prices over a period may not reflect the current market demand or supply dynamics. Estimates made by financial analysts, while potentially informed, are still subjective and dependent on individual judgments rather than actual market transactions. Thus, the competitive market price is the most accurate reflection of fair value in investment contexts.