Risk neutral valuation

This one is not written up yet

The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.

Written up from the same chapter

• BetaHow sharply a share moves relative to the market index — beta 1 moves with the index, above 1 amplifies it, below 1 dampens it. The standard measure of systematic risk.
• CAPMA model that prices the return an investor should demand from a share: the risk-free rate plus beta times the market risk premium.
• Discounted Cash FlowA valuation method that estimates the cash a business will generate in future years and converts each year back to what it is worth today.
• Dividend Discount ModelA valuation that treats a share as worth the present value of every dividend it will ever pay, discounted at the return an equity investor demands for holding it.
• Earnings yieldEarnings per share divided by the current market price — the reciprocal of the P/E ratio, expressed as a percentage so that equity can be set directly against a bond yield.
• Enterprise ValueWhat it would cost to buy the whole business — market capitalisation plus debt, less cash — as opposed to market capitalisation, which buys only the equity.