Gordon Growth Fair Value Model
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The Discounted Cash Flow Terminal Value Model As an Investment Strategy
Henrik Rasmussen; Andre Thormann
- DKCopenhagen Business School
- ?Copenhagen Business School, Students
Strategy in a nutshell
The strategy uses the Gordon growth model to estimate fair value for S&P 500 stocks (excluding financials). It invests in companies whose market cap is below their fair value and rebalances the value-weighted portfolio monthly.
Economic rationale
Stocks can deviate from their fundamental values due to short-term sentiment. By comparing market prices to discounted future cash flows, the strategy identifies undervalued companies to buy and overvalued companies to sell.company is overvalued and should be sold.
Backtest performance
Annualised return14.63%
Volatility11.89%
Sharpe ratio1.23