Common Stock Valuation Models: Estimation of the Discount Rate Using the Geometric-Mean Criterion

Baylor Business Studies, Vol. 7, No. 2, pp. 41-45, May-June-July-August 1976

5 Pages Posted: 5 Jun 2015 Last revised: 7 Nov 2015

See all articles by R. Anderson

R. Anderson

University of Maryland (Deceased)

John A. Haslem

University of Maryland - Robert H. Smith School of Business; University of Maryland - Robert H. Smith School of Business

Date Written: November 5, 2015

Abstract

Given the sensitivity of stock valuation models to the discount rate k*, it follows that their operational usefulness is significantly dependent upon the accuracy of the estimate of k*. The purpose of this study is to illustrate the use of the geometric mean to estimate k*. The usual approach to estimating k* is to somehow add a risk premium to the riskless rate. However, this study describes a particular way of estimating the risk-adjusted rate, k* -- an approach consistent with the application of the geometric-mean criterion to the selection of mutual exclusive investments.The geometric mean has long been argued as a normative criterion for choice among risk ventures.

Suggested Citation

Anderson, R. and Haslem, John A. and Haslem, John A., Common Stock Valuation Models: Estimation of the Discount Rate Using the Geometric-Mean Criterion (November 5, 2015). Baylor Business Studies, Vol. 7, No. 2, pp. 41-45, May-June-July-August 1976, Available at SSRN: https://ssrn.com/abstract=2614099

R. Anderson

University of Maryland (Deceased)

John A. Haslem (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742
United States
202-387 2025 (Phone)

University of Maryland - Robert H. Smith School of Business ( email )

5901 MacArthur Blvd NW 124
Washington, DC DC 20016
United States
202-236 3172 (Phone)

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