Relative value is a mathematical tool used to asses the worth of an asset or investment when compared to another of similar kinds, it presents buyers and investors with a solid framework for making better apples-to-apples comparisons between investments, allowing them to weigh and measure the value of financial assets against each other based on criteria such as market risk, correlation to other assets, return on investment, and other factors. As investors and analysts look to diversify their portfolios, they often turn to relative value strategies that reduce, or even eliminate, the need to search outside of their market, ultimately helping them to reach a final decision on the right investments.

When using a relative value approach, the analyst looks to compare two similar assets side-by-side and determine which gives the greatest return. These comparisons provide insight into the risk/return profile of the investments, and allow the decision maker to input assumptions and measure how things may change under different conditions. For example, they can input different interest rates and inflation levels, and get an idea of how these impacts the expected value of an asset, or measure the relative attractiveness of one market versus another.

However, a word of caution should be taken when using relative value tools, as the technique tends to lock analysts and investors into a narrow search and may lead them to the best of a group of sub-par investments. In other words, relative value may place limits on investors' creativity and focus too much attention on only a handful of investments within a very narrow field. For example, use of relative value analysis among dividend-paying stocks could cause investors to overlook high-yield stocks in other industries or asset classes altogether. While the technique can be beneficial for investors who are looking to evaluate potential investments quickly, it is important to remember that the tool comes with potential limitations.

Although relative value is often the go-to method for arriving at a final decision on what investment to pursue, it may not always be the best option. Analyzing the underlying fundamental factors of individual assets can actually provide deeper insights into a company's valuation, and identify more profitable investments. Many investors take a more comprehensive approach that employs a combination of techniques, such as fundamental research, technical analysis, and risk/return analysis, in order to make a more informed investment decision.