02-04-2016, 09:02 AM
(01-30-2016, 08:20 AM)benjamen Wrote: Assumption: people prefer less variance to more variance in their investments
1st Result: Bonds are seen as more stable than stocks, hence the finding that people pay more for bonds
2nd Result: Stocks with lower beta (less variance) are valued higher than stocks with higher beta
Why Kenbob may be seeing the total stock price being related to beta, average market p/e, and individual stock p/e:
Capital Asset pricing model tells us that:
Expected return of an asset = Risk free rate + beta * (average market rate - Risk free rate)
Translate into dividend stock...
(Div Yield + expect stock appreciation %) = yield of U.S. treasury bond + beta of stock * (average market return - yield of U.S. treasury bond
I think many DGI'ers don't equate beta with risk. You can't really come up with a number (i.e. 1.5) and say that's the risk. Beta measures price volatility against a benchmark, say the S&P 500. Price volatility doesn't equal risk.