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Investment Returns,Equity Value,and Financial StatementsPART IUnderstanding investment returns and how analysts styles are determined by their approach to forecasting returnsChapter 3Understanding valuation models that value forecasted returnsChapter 4Understanding how earnings are related to returns and how valuations based on forecasted earnings work(or dont work)Chapter 5Understanding how forecasts of income statements and balance sheets produce a valuationChapter 6With this understanding proceed to Analysis of information(Part II)Forecasting and Valuation(Part III)Gaining the Understanding to do Fundamental AnalysisChapter 3Investment ReturnsInvestment ReturnsChapter 1 established that forecasting returns is at the heart of fundamental analysisLink to Previous ChapterThis chapter explains what returns are,distinguishes normal and abnormal returns,and explains how analysts specialize in forecasting normal and abnormal returnsThis ChapterChapter 4 will show how valuation models are constructed to measure the value of forecasted returnsLink to Next ChapterLink to Web PageHow are returns calculated?What is a normal return and an abnormal return?How might an analyst gain an advantage in forecasting normal or abnormal returns?What has been the historical experience in equity investing?What you will learn in this chapterHow investment returns are calculatedThe difference between normal and abnormal returnsWhat an efficient market price meansWhat an arbitrage opportunity isThe difference between active and passive investmentThe difference between an alpha and a betaHow asset pricing models work(in outline)How screening strategies work(and dont work)What a contrarian strategy isHow fundamental analysis differs from screening and contrarian analysisHow various stock selection strategies have worked in the pastFor a terminal investment:For an investment in equity:For a one-year equity investment4Payoff:4Return:4Rate-of-Return:4Expected Return:4Expected Rate-of-Return:4Required Payoff per dollar:4Required Rate-of-Return:The required return is also called the normal return or the cost of capitalThe Structure of Investment Returnsd1d2d3dT-1123T-10TP0 Investment Horizon:When stock is soldPT+dTDividend at TSelling Price(if sold at T)+Dividends Initial PriceHewlett-Packard:Returns for 1991If the price paid for a stock is (expected payoff discounted at the required payoff per dollar,r),the stock is appropriately priced:the market price is efficientOr,price is efficient if it equals the expected return capitalized at the required rate-of-return:Or,todays price(P0)must be such that the required rate-of-return,r-1,will equal the(expected)rate-of-return:The No Arbitrage Condition(NA)RequiredRate-of-ReturnExpectedRate-of-ReturnArbitrage Trading StrategiesIf NA holds,the market is efficient in that stock:there is no arbitrage opportunityAny discrepancy between expected and required rate-of-return,is an arbitrage opportunity that,if exploited,will profit the arbitrage traderAn arbitrage opportunity arises ifIf then BUYIf SELLThe difference is called the expected abnormal return and the rule can be restated as:BUY if the expected abnormal return is positive,and SELL if negative.If it is zero,do nothing(HOLD)Types of ArbitrageRisk1.Pure(Risk-Free)ArbitrageYou get something for nothing,for sure2.Expectational ArbitrageYou have a better chance of an abnormal return than notLocation of prices1.Cross-sectional Arbitrage Different prices for the same commodity at the same point in time2.Intertemporal Arbitrage Different prices for the same commodity at different points in timeThese concepts apply to an investment for more than one period with two modifications:4The multiperiod rate-of-return will be the compounded annual rate.For a T-year period and a flat term structure,the required payoff is:For a changing term structure it would be 4Dividends for the intermediate years can be reinvested at r.The accumulated value at year T of reinvested dividends is called terminal value of dividends at T4Adding the selling price will give the cum dividend payoff or cum-dividend terminal price:4And the T-period cum dividend return will beMultiyear Equity InvestmentsHewlett-Packard 1990-95:Payoffs199419951993199219911990d4=0.55P5=84d3=0.45d2=0.36d1=0.24d5=0.90P0=13Terminal Value of Dividends 012345d1d2d3d4d5 d2 x r-2 d3 x r-3 d4 x r-4 d5 x r-5 d1r-1 d2r-2 d3r-3 d4r-4 d5r-5(Year 0 value)(Year 5 value)12345d1d2d3d4d5 d4 x r3 d x r2 d2x r3 d1 x r4 d5 d4r1 d3r2 d2r3 d1r4(Year 5 value)(Year 0 value)0()r-5()r5 dtr-tt=15HP 1990-95:Terminal Dividend Payoff199019911992199319941995d92=0.36(1995 value)(1990 value)d91=0.24d93=0.45d94=0.55d95=0.700.24 x 1.1240.55 x 1.120.45x 1.1220.36 x 1.1230.700.620.560.510.382.76=2.76x 1.12-5=1.57199019911992199319941995(1990 value)(1995 value)d92=0.36d91=0.24d93=0.45d94=0.55d95=0.700.210.290.320.350.400.70 x 1.12-50.55 x 1.12-40.45 x 1.12-30.36 x 1.12-2=1.571.57x 1.1252.76=HP 1990-95:Five-Year ReturnTerminal value of dividends in 19952.76Price payoff in 1995(PT)84.00Total Payoff 86.76Purchase price in 1990(P0)13.00Five-year return 73.76Five-year-rate-of-return 567.38%*Normal rate of return(12%p.a.)76.23%Abnormal rate of return 491.15%*Normal rate of return=(1.125-1)=76.23%The NA condition for a multiyear investment is nowOr OrMultiyear Equity Investment:NAExpected rate-of-returnRequired rate-of-returnDividends and Capital GainsT-period return components:For one period:Capital Gain ComponentDividend Component+-101dPPCapital Gain ComponentDividend ComponentIntrinsic ValuesIntrinsic value is calculated by forecasting payoffs from the information about them and applying the discount rateTwo ways to calculate intrinsic values(V0):1.Present value of the expected payoffV0=Expected payoff/rT2.Capitalized expected returnsV0=Expected returns/(rT-1)Always two ingredients:Expected payoffs and discount ratesIntrinsic values at different points in time always obey the no arbitrage condition(NA):=Beta technologies:4Calculates the normal return4Ignores any arbitrage opportunitiesThis is the denominator issue in valuationAlpha technologies:4Tries to gain abnormal returns by exploiting arbitrage opportunitiesThis involves the numerator issue in valuationPassive investment needs a beta technology(except for index investing)Active investing needs a beta and an alpha technologyInvestment Advising:Alphas and BetasBeta Technologies:“Asset Pricing Models”Required return=Risk-free return+Premium for riskPremium for risk=Risk premium on risk factors x sensitivity to risk factors Some technologies:4The Capital Asset Pricing Model(CAPM)One single risk factor:Excess market return over RFOnly“beta”risk requires a premium.4Multifactor pricing modelsIdentify risk factors and sensitivities to them:()iFactorRisktoysensitiviti Factor Risk to turnReRRRRRRRRreturn NormaliiFkkF22F11F=b=-b+-b+-b+=,LKFMFRRRreturn=Normal-b+Anticipates that a stock may be mispricedScenario A:Todays price deviates from its intrinsic value ,but this will be corrected in the future().Scenario B:Todays price is correct ,but in the future it will deviate from its intrinsic value().To discover these opportunities,a technology for calculating intrinsic values is neededActive strategies:Alpha technologiesV0P0PTC=VTC1234T0Normal return,PTC-V0Abnormal return,V0-P0Actual return,PTC-P0TimeCum-dividendValueVTCP0=V0PTC1234T0Abnormal return,PTC-VTCNormal return,VTC-V0Actual return,PTC-P0TimeCum-dividendValueA Cheap Analysis:ScreeningTechnical screens:identify positions based on trading indicators.Some of them:4Price screens4Small stock screens4Neglected stocks screens4Seasonal screens4Momentum screens4Insider trading screensFundamental screens:identify positions based on fundamental indicators of the firms operations relative to price4Price/Earnings(P/E)ratios4Market/Book Value(P/B)ratios4Price/Cash Flow(P/C)ratios4Price/Dividend(P/d)ratiosAny combination of these methods is possibleReturns to Passive InvestmentsTechnical Screening:Returns to SizeAverage Monthly Returns and Estimated Betas from July 1963 to December 1990 for Ten Size GroupsReturns to Beta:Is Beta Dead?Average Monthly Returns and Estimated Betas from July 1963 to December 1990 for Ten Beta GroupsFundamental Screening:Return to Price-to-BookAverage Monthly Returns and Estimated Betas from July 1963 to December 1990 for Ten Price/Book Groups.Returns to two fundamental screensYear by Year Returns:Value minus GlamourProblems with ScreeningYou could be loading up on a risk factor4You need a risk modelYou are in danger of trading with someone who knows more than you4You need a model that anticipates future payoffsA full-blown fundamental analysis supplies thisA P/V Ratio:The Dow Stocks,1979-98StatisticsBenchmark DatesMean1.07September1987:1.41StdDev.22April1993:0.87Max1.74April1994:0.93Min0.61April1995:1.18Mean+2 Std Dev=1.51April1996:1.15Mean-2 StdDev=0.63April1997:1.46April1998:1.74THE P/V RATIO IS:1.52(as of market close on December 4,1998).（第14讲）考场作文开拓文路能力分解层次(网友来稿)江苏省镇江中学 陈乃香说明：本系列稿共24讲，20XX年1月6日开始在资源上连载【要义解说】文章主旨确立以后，就应该恰当地分解层次，使几个层次构成一个有机的整体，形成一篇完整的文章。如何分解层次主要取决于表现主旨的需要。【策略解读】一般说来，记人叙事的文章常按时间顺序分解层次，写景状物的文章常按时间顺序、空间顺序分解层次；说明文根据说明对象的特点，可按时间顺序、空间顺序或逻辑顺序分解层次；议论文主要根据“提出问题分析问题解决问题”顺序来分解层次。当然，分解层次不是一层不变的固定模式，而应该富于变化。文章的层次，也常常有些外在的形式：1小标题式。即围绕话题把一篇文章划分为几个相对独立的部分，再给它们加上一个简洁、恰当的小标题。如世界改变了模样四个小标题：寿命变“长”了、世界变“小”了、劳动变“轻”了、文明变“绿”了。2序号式。序号式作文与小标题作文有相同的特点。序号可以是“一、二、三”，可以是“A、B、C”，也可以是“甲、乙、丙”从全文看，序号式干净、明快；但从题目上看，却看不出文章内容，只是标明了层次与部分。有时序号式作文，也适用于叙述性文章，为故事情节的展开，提供了明晰的层次。3总分式。如高考佳作人生也是一张答卷。开头：“人生就是一张答卷。它上面有选择题、填空题、判断题和问答题，但它又不同于一般的答卷。一般的答卷用手来书写，人生的答卷却要用行动来书写。”主体部分每段首句分别为：选择题是对人生进行正确的取舍，填空题是充实自己的人生，判断题是表明自己的人生态度，问答题是考验自己解决问题的能力。这份“试卷”设计得合理而且实在，每个人的人生都是不同的，这就意味着这份人生试卷的“答案是丰富多彩的”。分解层次，应追求作文美学的三个价值取向：一要匀称美。什么材料在前，什么材料在后，要合理安排；什么材料详写，什么材料略写，要通盘考虑。自然段是构成文章的基本单位，恰当划分自然段，自然就成为分解层次的基本要求。该分段处就分段，不要老是开头、正文、结尾“三段式”，这种老套的层次显得呆板。二要波澜美。文章内容应该有张有弛，有起有伏，如波如澜。只有这样才能使文章起伏错落，一波三折，吸引读者。三要圆合美。文章的开头与结尾要遥相照应，把开头描写的事物或提出的问题，在结尾处用各种方式加以深化或回答，给人首尾圆合的感觉。【例文解剖】话题：忙忙，不亦乐乎 忙，是人生中一个个步骤，每个人所忙的事务不同，但是不能是碌碌无为地白忙，要忙就忙得精彩，忙得不亦乐乎。忙是问号。忙看似简单，但其中却大有学问。忙是人生中不可缺少的一部分，但是怎么才能忙出精彩，忙得不亦乐乎，却并不简单。人生如同一张地图，我们一直在自己的地图上行走，时不时我们眼前就出现一个十字路口，我们该向哪儿，面对那纵轴横轴相交的十字路口，我们该怎样选择?不急，静下心来分析一下，选择适合自己的坐标轴才是最重要的。忙就是如此，选择自己该忙的才能忙得有意义。忙是问号，这个问号一直提醒我们要忙得有意义，忙得不亦乐乎。忙是省略号。四季在有规律地进行着冷暖交替，大自然就一直按照这样的规律不停地忙，人们亦如此。为自己找一个目标，为目标而不停地忙，让这种忙一直忙下去。当目标已达成，那么再找一个目标，继续这样忙，就像省略号一样，毫无休止地忙下去，翻开历史的长卷，我们看到牛顿在忙着他的实验；爱迪生在忙着思考；徐霞客在忙着记载游玩；李时珍在忙着编写本草纲目。再看那位以笔为刀枪的充满着朝气与力量的文学泰斗鲁迅，他正忙着用他独有的刀和枪在不停地奋斗。忙是省略号，确定了一个目标那么就一直忙下去吧!这样的忙一定会忙出生命灵动的色彩。忙是惊叹号。世界上的人都在忙着自己的事，大自然亦如此，小蜜蜂在忙，以蜂蜜为回报。那么人呢?居里夫人的忙，以放射性元素的发现而得到了圆满的休止符；爱因斯坦在忙，以相对论的问世而画上了惊叹号；李白的忙，以那豪放的诗歌而有了很大的成功；张衡的忙，因为那地动仪的问世而让世人仰慕。每个人都应该有效率的忙，而不是整天碌碌无为地白忙。人生是有限的、短暂的，因此，每个人都应该在有限的生命里忙出属于他的惊叹号；都应在有限的生命里忙出他的人生精彩篇章。忙是万物、世界、人生中都不可缺少的一部分。作为这世上最高级动物的我们，我们在忙什么呢?我们要忙得有意义，有价值，我们要忙出属于我们的精彩。我们的忙不能永远是问号，而应是省略号和感叹号。忙就要忙得精彩，忙得不亦乐乎。解剖：本文将生活中的一句口头禅“忙得不亦乐乎”机智翻新，拟作标题，亮出一道美丽的风景。并据此展开述说，让人神清气爽。文章开篇扣题，亮出观点：忙，是人生中一个个步骤，不能碌碌无为地白忙，要忙就忙得精彩，忙得不亦乐乎。然后，作者分别用问号、省略号、惊叹号巧妙设喻，抓住这三种标点符号的特征，摆实事，讲道理，入情入理，入理入心。深刻地阐明人生忙，忙要像问号一样，经常问问自己，不能盲目，不能瞎忙，要忙得有意义；人生如四季一样是有规律的，要选准目标，像省略号一样，毫无休止地忙下去，忙出生命灵动的色彩；而人生有限，每个人都应有限的生命里忙出属于他的惊叹号，忙出人生精彩的篇章。结尾，作者用一个段落总结全文，照应开头，照应题目，有力收束。【精题解析】阅读下面的材料，根据要求作文。在一处地势十分险恶的峡谷，谷底奔腾着咆哮的急流，峡谷间有一座索桥，几根光秃秃、晃悠悠的铁索横在峡谷间，它是通过这个地方的唯一路径，这里经常有人因为失足而跌入深谷。有一天，有三个人来到了这里。一个聋子，一个瞎子，还有一个健康的人。聋子看看这座桥，很害怕，但是他听不到急流的声音，他用眼睛看着脚下步伐，很顺利地过去了。瞎子不知峡谷的险恶，他心平气和，十分稳妥地通过了。第三个人是健康人，一直犹豫不敢走这索桥，可是又没有其他路可走。于是，他十分紧张地硬着头皮走上索桥，到了桥中央，他看到脚下万丈深渊，云雾升腾，听到谷底急流咆哮，早已两腿颤颤，面如土色，一不小心跌下桥去。请就“不要把困难看得太明白”为话题写一篇文章。注意所写内容必须在话题范围之内。试题引用的材料，考生在文章中可用也可不用。立意自定。文体自选。题目自拟。不少于800字。不得抄袭。解析：有时候，把困难看得太明白，分析得太透彻，反而会被困难吓倒以至于阻拦我们前进的脚步。倒是那些未把困难完全看清楚而勇往直前的人，更容易达到终点。作者邮箱：13952865227谢谢观赏谢谢观赏
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