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Application 3:
The Three‐Factor Model
Javier Estrada ADFIN – Winter/2014
- 1. The Three‐Factor Model
- Your results
- The distribution of the required return on equity
- Impact on performance evaluation
- Fundamental indexation (smart beta) and the 3FM
- Buffett’s alpha and the 3FM
- 2. Risk‐Adjusted Returns & Fees and Returns
- Risk‐adjusted returns: A few comments on your results
- Fees and returns: A few comments on your results
Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014
The 3FM
- As already discussed, the 3FM has …
- corporate finance applications
- Estimation of the required return on equity
Input in the cost of capital Hence, project evaluation, company valuation, …
- portfolio management applications
- Estimation of the required return on funds
Input in alpha Performance evaluation
- Your work in App3 largely focused on corporate
finance applications
- So far, but before we move on, a few more thoughts
- n the CorpFin applications of the model
GoXls