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Article

Stocks Should Be Valued with a Term Structure of Required Returns

Gary Smith and Albert Xu
The Journal of Investing Summer 2017, 26 (2) 61-68; DOI: https://doi.org/10.3905/joi.2017.26.2.061
Gary Smith
is the Fletcher Jones Professor of Economics at Pomona College in Claremont, CA
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Albert Xu
is an investment analyst at Payden & Rygen in Los Angeles, CA
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Abstract

In theory, the intrinsic value of a stock is determined by discounting the projected cash flow by a term structure of time-varying required returns. In practice, investors typically use a single discount rate, often a Treasury rate plus a risk premium. A single discount rate is a noisy proxy for the full term structure and can cause large valuation errors. If a single discount rate is used, the yield to perpetuity recommended by John Burr Williams is likely to be a better approximation to a complete term structure than are short-term rates.

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The Journal of Investing: 26 (2)
The Journal of Investing
Vol. 26, Issue 2
Summer 2017
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Stocks Should Be Valued with a Term Structure of Required Returns
Gary Smith, Albert Xu
The Journal of Investing May 2017, 26 (2) 61-68; DOI: 10.3905/joi.2017.26.2.061

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Stocks Should Be Valued with a Term Structure of Required Returns
Gary Smith, Albert Xu
The Journal of Investing May 2017, 26 (2) 61-68; DOI: 10.3905/joi.2017.26.2.061
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