Jump to content

How to reverse engineer implied return expectations?


Recommended Posts

I was profoundly intrigued by horse betting recently in Vegas and a simple strategy of betting only on highest  implied odds in the expectations market with no consideration of fundamentals. I was surprised how well this worked. It seems a crowd often assesses odds quite accurately and was thinking if anyone knows how this might work with stocks. Is there a quick way to determine the implied return expectations of a given stock price? Eg.. Given any stock price, what are investors in aggregate implying as their return goal? 

Link to comment
Share on other sites

Have some models that do this for banks.  Basically take a DDM with the standard market assumptions and then calculate an implied P/B and P/E.


Another alternative is to do a DCF on the stock and back into a multiple.


The objection most have to this is that DCF and DDM are riddled with assumptions, which is correct.  But if you're using the same assumptions as the market you can get some interesting data.  The point isn't to find exact values, but rather determine odds.  So you can run this model over the market and then break it down into deciles.


Link to comment
Share on other sites

Mauboussin's first book:




It was an interesting read, and educational for me at the time, but I don't use it.  I do keep the book on my shelf, and pull it out once in a while, just to look at the blurb on the back cover by Jeffrey Skilling, as a cautionary reminder.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
  • Create New...