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In The Risk Premium Factor: A New Model for Understanding theVolatile Forces That Drive Stock Prices, Stephen D. Hassettpresents a radical new theory—the "factor" that explainstheentire stock market, providing a definitive link between lossaversion theory, the equity risk premium, and stock price, andshows how you can make the most of the connection.
Where others have tried and failed to find a link between lossaversion and the processes that control how investors set prices inthe stock market, The Risk Premium Factor succeeds.Demonstrating that the equity risk premium is proportional tolong-term Treasury yields, the book establishes for the first timea quantitative connection between loss aversion and equity riskpremium.
This remarkable new concept can be used to explain stock pricesfrom 1960 through to the present day, including the 2008 financialmeltdown, not through theories and simulations, but with historicaldata that bear out the truth. It shows how the S&P 500 hasconsistently reverted to predicted values and solves the equitypremium puzzle by showing that it is consistent with findings onloss aversion. Putting you back in the driver's seat when it comesto investing, the book clearly demonstrates the stock market'sreptilian-like response to three factors drive valuation and stockprice: earnings, long-term growth, and interest rates. This bookalso includes a companion website with historical data,calculators, and links to additional apps and readings.
Dispelling the notions that the stock market is a mysteriousarbiter of value, when, in fact, it is easy to understand the RiskPremium Factor Valuation Model is a game-changer for anyone whoworks in investments—from professional investors to corporatedecision makers to private individuals. After all, if you don'tunderstand how the market values businesses, you don't reallyunderstand the market at all.
"Stephen Hassett is onto something. His notion that the riskpremium on stocks is not constant, but varies with the risk freerate, helps to explain an enduring puzzle: why actual stock pricesvary from the estimates that analysts' models imply. This book willoffer fresh and provocative insight to careful students of thestock market. Read it and grow wiser."—Robert F. Bruner, Deanand Charles C. Abbott Professor of Business Administration, DardenGraduate School of Business, University of Virginia
"The equity risk premium is a key input to the cost of capital.During periods of economic stability, practitioners typically usedan estimate of the long-term average equity risk premium, typicallyadjusting the estimate once a year. But all that changed as thecrisis in late 2008 unfolded. In these uncertain economic times, wehave found the Risk Premium Factor Valuation Model to be a powerfultool for adjusting our equity risk premium estimate as we movethrough the rapidly changing business cycle. We recommend thatpractitioners use the Risk Premium Factor Valuation Model to betterunderstand the economic interrelationships that drive the pricingof the broad stock market and the equity risk premium."—RogerJ. Grabowski, Managing Director, Duff & Phelps LLC and coauthorof Cost of Capital: Applications and Examples
"Understanding and accurately estimating the cost of capital isfundamental to making decisions that create value. StephenHassett's Risk Premium Factor Valuation Model provides aneasy-to-understand approach to estimating the cost of equitycapital that is accessible and insightful to those with a basicunderstanding of finance and expert practitioners alike. Further,it demystifies the drivers of market valuation and provides acompelling and often under-appreciated linkage between growth andstock price. It will enrich the perspective of any investor ormanager."—David M. Kostel, Managing Director and Co-Head ofHealthcare Mergers & Acquisitions, Credit Suisse