Relative Valuation

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Cliff Ang

Senior Vice President, Compass Lexecon

Law of One Price

Relative valuation is based on the Law of One Price, i.e., two assets that look the same must have the price

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Law of One Price (Example)

Stock Subject Firm A B
Payoff If Economy Does Well 9 10 8
Payoff If Economy Does Poorly 3 4 2
Price ??? 7 5
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The Subject Firm's Price is $6

Stock Subject Firm A B Average
Payoff If Economy Does Well 9 10 8 9
Payoff If Economy Does Poorly 3 4 2 3
Price ??? 7 5 6
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Identifying Comparables

  • Some approaches
    • Firms within same industry classification
    • Competitors
  • Filter by risk, growth, and profitability
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Let's practice!

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