A Simple Model Relating the Expected Return (Risk) to the Book-to-Market and the Forward Earnings-to-Price Ratios
9 Pages Posted: 4 Apr 2005
Date Written: February 2005
This paper exploits a well-known valuation framework to assess how a firm's discount factor relates to basic accounting ratios. Specifically, a parametric version of the Residual Income Valuation (RIV) model provides the framework. It is shown that the discount-factor relates positively to the forward earnings-to-price ratio and negatively to the book-to-price ratio. The result bears on the empirical research suggesting that the book-to-market ratio should be viewed as a risk-factor.
Keywords: Valuation, Risk, Return, Book-to-market, Earnings-to-price
JEL Classification: M4, G1, G3
Suggested Citation: Suggested Citation