Book description
A radical, definitive explanation of the link between loss aversion theory, the equity risk premium and stock price, and how to profit from it
The Risk Premium Factor presents and proves a radical new theory that explains the stock market, offering a quantitative explanation for all the booms, busts, bubbles, and multiple expansions and contractions of the market we have experienced over the past half-century.
Written by Stephen D. Hassett, a corporate development executive, author and specialist in value management, mergers and acquisitions, new venture strategy, development, and execution for high technology, SaaS, web, and mobile businesses, the book convincingly demonstrates that the equity risk premium is proportional to long-term Treasury yields, establishing a connection to loss aversion theory.
Explains stock prices from 1960 through the present including the 2008/09 "market meltdown"
Shows how the S&P 500 has consistently reverted to values predicted by the model
Solves the equity premium puzzle by showing that it is consistent with findings on loss aversion
Demonstrates that three factors drive valuation and stock price: earnings, long term growth, and interest rates
Understanding the stock market is simple. By grasping the simplicity, business leaders, corporate decision makers, private equity, venture capital, professional, and individual investors will fully understand the system under which they operate, and find themselves empowered to make better decisions managing their businesses and investment portfolios.
Note: The ebook version does not provide access to the companion files.
Table of contents
- Cover
- Series
- Title Page
- Copyright
- Dedication
- List of Figures
- List of Tables
- Preface
- Acknowledgments
- About the Author
-
Chapter 1: Understanding the Simplicity of Valuation
- RATES, COMPOUNDING, AND TIME VALUE
- WHY TIME VALUE MATTERS FOR THE STOCK MARKET
- VALUING A PERPETUITY
- CONSTANT GROWTH EQUATION: THE KEY TO UNDERSTANDING THE STOCK MARKET
- NOT THE FIRST TO TRY THIS
- WHY GROWTH RATE AND COST OF CAPITAL MATTER
- P/E RATIO EXPANSION AND CONTRACTION
- CAPM, RISK PREMIUM, AND VALUATION
- EQUITY RISK PREMIUM
- IMPACT OF RISK PREMIUM ON VALUATION
- CHAPTER RECAP
-
Part One: Exploring the Risk Premium Factor Valuation Model
- Chapter 2: The Risk Premium Factor Valuation Model
- Chapter 3: Solving the Equity Premium Puzzle
-
Chapter 4: The RPF Model and Major Market Events from 1981 to 2009
- EFFICIENT MARKET HYPOTHESIS
- HOW THE RPF VALUATION MODEL EXPLAINS BLACK MONDAY
- 2000 “DOT-COM” BUBBLE: RPF MODEL SUGGESTS SIGNIFICANT BUBBLE FOR THE S&P 500
- HOW THE RPF VALUATION MODEL EXPLAINS THE 2008 TO 2009 MELTDOWN AND RECOVERY
- MARKETS MOSTLY EFFICIENT AND RATIONAL, BUT PRONE TO MISTAKES
- CHAPTER RECAP
-
Part Two: Applying the Risk Premium Factor Valuation Model
- Chapter 5: Application to Market Valuation
- Chapter 6: Risk-Adjusted Real Implied Growth Rate (RIGR)
- Chapter 7: Valuing an Acquisition or Project
- Chapter 8: Case Study 1
- Chapter 9: Case Study 2
- Chapter 10: Using the RPF Model to Translate Punditry
-
Chapter 11: Using the RPF Model for Investment and Business Strategy
- ESTIMATING FAIR VALUE: HOW TO IDENTIFY AND EXPLOIT BUBBLES
- BEWARE OF RPF SHIFTS
- INVESTING IN INDIVIDUAL COMPANIES
- REPORTED EARNINGS CAN BE MISLEADING
- HOW TO APPLY THE RPF MODEL TO DAY-TO-DAY BUSINESS DECISIONS
- CAPITAL STRUCTURE AND RISK IMPACT COST OF CAPITAL
- OPPORTUNISTIC ADJUSTMENTS TO CORPORATE CAPITAL STRUCTURE
- CREATING A SENSE OF URGENCY
- AVOIDING VALUE DESTRUCTION
- VALUE CREATION
- KEY MERGER-AND-ACQUISITION VALUATION CONCEPTS
- INFLATION IS THE ENEMY OF VALUE
- FINAL THOUGHTS
- Appendix A: Mobile Apps: The Wave of the Past
- Appendix B: Technology on the Horizon: What if Moore's Law Continues for Another 40 Years?
- Appendix C: A Simple and Powerful Model Suggests the S&P 500 Is Greatly Underpriced
- Appendix D: S&P Index Still Undervalued
- Appendix E: 30 Percent Value Gap in S&P 500 Closed by Rise in Treasury Yields, Price
- Appendix F: Making a Case for Salesforce.com Valuation
- Glossary
- Notes
- PREFACE
- About the Companion Web Site
- Index
Product information
- Title: The Risk Premium Factor: A New Model for Understanding the Volatile Forces that Drive Stock Prices
- Author(s):
- Release date: October 2011
- Publisher(s): Wiley
- ISBN: 9781118099056
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