01-30-2016, 08:20 AM
KenBob's findings seem to follow along with base principles.
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
Valuing a company based on forward P/E:
The underlying value of a stock is the present value of the sum of expected future cash flows (dividend discount model)
This shows up in the denominator of the forward P/E = price / forward expected earnings
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
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
Valuing a company based on forward P/E:
The underlying value of a stock is the present value of the sum of expected future cash flows (dividend discount model)
This shows up in the denominator of the forward P/E = price / forward expected earnings
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