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Relative Valuation/Pricing

In discounted cash flow valuation, the objective is to find the value of an asset given its cash flow, growth, and risk characteristics. In relative valuation or pricing, the objective is to price an asset or investment based on how much investors are paying for similar assets or investments. Consequently, relative valuation has two components. The first is that to price assets on a relative basis, prices have to be standardized, usually by converting prices into multiples of some common variable. While this common variable varies across investments, it usually takes the form of earnings, book value, or revenues for publicly traded stocks. The second component is to find similar investments. This is difficult to do ...

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