Valuation: Relative vs. Intrinsic Relative valuation is an approach where an asset’s price attractiveness is evaluated in comparison to the valuation of like securities. For example, an analyst may calculate the justified P/E ratios for stocks in a specific industry to determine which companies are relatively “cheap” and which are relatively “expensive” based on the […]
Equity Analysis Part 1
Equity Return Measures
Holding Period Return (HPR) r = ((Dividend + Share Price Change)/Share Price Paid)-1 Expected vs. Realized Holding Period Return Expected HPR is based on investor expectations for share price appreciation and dividend payments; different investors may have different expectations for the same stock and would therefore have different expected HPRs. Realized HPR is based on […]
Equity Risk Premium (ERP) and Required Return on Equity
The ERP is the amount of return required by an investor above and beyond the risk free rate, where the risk free rate is commonly the rate of return from a sovereign government bond with a maturity comparable to the investor’s time horizon. Historical Estimates for ERP: this approach calculates the ERP based on historical […]