Documente Academic
Documente Profesional
Documente Cultură
Standard approach
Question: Should we invest, buy asset or company? Standard answer: Value = Expected Profit / Expected Return (Really, multiperiod version) ER? Use CAPM, ER = Rf + E(Rm-Rf) Spend a lot of time on , use 6% for E(Rm-Rf)
Risk
Expected Expected Risk
Risk
Time
Time
Warning 2: Valuation is very sensitive to growth, return assumptions. The cost of capital matters! P/D = 1/(r-g)
T Years 5 20 50
/T 8% 4% 2.5%
Returns are forecastable. Dividend (cashflow) growth is not forecastable. All variation in price / x is due to time-varying discount rate E(Rm-Rf). Your discount rate (cost of capital) should vary too; low cost when p/x is high!
Old answers:
1. CAPM gives better measure. is lower (1/2) so T is better. (Industry return may have been luck.) 2. Need to make adjustments. This project may be low though industry (comparable) is high . 3. CAPM is right model.
Comparables?
New answers:
1. We dont know (yet) that multifactor models give better predictions for ER going forward.
2. Challenge for MF is now to explain patterns already well described by characteristics (size, book/market, momentum, industry etc.) 3. Possible to be low project with high ER characteristics, but how often does this really happen?
4. Much less confidence that MF models are True vs. Descriptive. Who really cares about covariance with SMB?