Perspectives: Combining Value Estimates to Increase Accuracy
Posted: 10 Aug 2004
The estimates provided by discounted cash flow, the method of comparables, and market prices usually disagree. Combining two or more of these value estimates makes sense because every bona fide estimate provides information and because relying on one estimate ignores the information content of the others. How, then, should financial analysts combine different value estimates to form a more accurate estimate than that provided by any one method? Drawing from Bayesian decision theory, the Delaware Block Method, and forecasting research, this article suggests five rules of thumb for combining two or more value estimates into a superior value estimate.
Keywords: Equity Investments: Fundamental Analysis and Valuation Models
Suggested Citation: Suggested Citation