Flashcards in Equity #28: Return Concepts Deck (14):
FORMULA: Holding period return
r = [(P1 +CF1)/P0]-1
What is the assets' required return?
min. expected return an investor requires
Asset is overvalued or undervalued when Expected return > Required return?
Required return > Expected return, asset value is over or under valued?
discount rate is used to find the future or present value of the investment?
What is the IRR for?
Internal rate of return (IRR) is rate that = discounted cash flows to the current price
What is the equity risk premium?
return over the rfr that investors require for holding the securities
FORMULA: CAPM Required return for stock
= rfr + (Beta)(ERP) where ERP is equity risk premium
What are 3 types of fwd looking estimates for ERP (equity risk premium)?
Gordon growth, Macroeconomics models. survey estimates
FORMULA: Multifactor model required return
rr = RF + (risk prem)1 +(risk prem)2
Difference btwn Pastor-Stambaugh model and Fama-French model
Pastor-Stambaugh adds liquidity factor
FORMULA: adjusted beta
When dealing with emerging market and adding premium, what is diff btwn country spread model and country risk rating model?
country spread model uses corresponding developed markets and adds EM premium (bond yields). country risk rating estimates ERP for developed and replaced inputs for EM