The Economics of Security Analysis

Abstract

The investment CAPM, in which expected returns vary cross-sectionally with investment, profitability, and expected growth, provides an equilibrium foundation for Graham and Dodd (1934). The q5 model is a good start to explaining prominent security analysis strategies, such as Abarbanell and Bushee’s (1998) fundamental signals, Frankel and Lee’s (1998) intrinsic-to-market, Greenblatt’s (2005) “magic formula,” Asness, Frazzini, and Pedersen’s (2019) quality-minus-junk, Bartram and Grinblatt’s (2018) agnostic analysis, operating cash flow-to-market inspired by Ball (1978), and Penman and Zhu’s (2014, 2020) expected-return strategy, as well as best-performing active, discretionary funds, such as Buffett’s Berkshire Hathaway.

Keywords: The investment CAPM, cross-sectionally varying expected returns, Graham and Dodd (1934), security analysis, active equity funds, the q5 model, Buffett’s alpha

JEL Classification: G12, G14, G31, M41