1. Chapter 4 Multivariable and Factor Valuation

2. Extended CAPM Allowance for a tax effect The presence of inflation
Market capitalization
P/E and M/B value effects

3. Allowance for the Tax Effect
Dividends
Tax wedge
Capital gain or loss
PV advantage
Systematic bias effect
Three-dimensional relationship
Yield tilt

4. Three-Dimensional Security Market Surface Illustrating a Tax Effect
Figure 4-1
Security Market Surface
Expected return
Systematic risk (beta)
Dividend yield

5. The Presence of Inflation
Add an inflation premium
Unanticipated changes
Covariance of uncertainty with the stock is desirable
Adding an inflation variable
Covariance with inflation
Desirable
Undesirable

6. Market Capitalization Size
Number of shares outstanding x share price
Small stock effect
Provides less utility
Requires a higher return

7. P/E and M/B Value Effects
P/E ratio
Observed returns
Higher for low P/E ratio stocks
Lower for high P/E ratio stocks
Form of mean reversion
Important in tempering return estimates
M/B ratio
Higher for low M/B ratio stocks
Lower for high M/B ratio stocks
Fama and French

8. Final Observations Size Consistent & Significance P/E M/B
Dividend-Yield Effect Most Controversial
Precise Measurements
Extensions
Market Equilibrium
Beta Dominant

9. Factor Models in General
Two-factor model
Only the factor risks are important
Unanticipated changes matter
Equilibrium conditions to be upset
Security prices to change
More than two factors
Economic variables
Behavioral variables

10. Arbitrage Pricing Theory
The arbitrage process
Roll-Ross and their five factors
Other empirical testing
Implications of the APT for this book

11. APT An equilibrium model Developed by Ross Arbitrage eliminates itself
Profit opportunities become exhausted
Security Returns
Relationship
Limited Number of Factors

12. The Arbitrage Process Buy the security with the higher expected return
Sell short the security with the lower expected return
Price adjustment will occur
Foundation for equilibrium pricing is arbitrage

13. Roll-Ross and Their Five Factors
Change in expected inflation
Unanticipated changes
In inflation
In industrial production
In the yield differential
Between low- and high-grade bonds
The default-risk premium
Between long-term and short-term bonds
The term structure of interest rates
Affect primarily cash flows
Affect market capital-ization

14. Other Empirical Testing
No agreement on important risk factors
No agreement on the number of factors
Inconclusive testing
No superior models
Estimates are subject to wide error

15. Implications of the APT for This Book
Intuitively appealing
Relating security returns to underlying risk factors
Provide better understanding of the economic forces that affect share price
APT has not displaced the CAPM