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Primary Article

The P/B-ROE Valuation Model Revisited

Jarrod W. Wilcox and Thomas K. Philips
The Journal of Portfolio Management Summer 2005, 31 (4) 56-66; DOI: https://doi.org/10.3905/jpm.2005.570151
Jarrod W. Wilcox
The president of Wilcox Investment, Inc., in Newton, MA.
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  • For correspondence: jwilcox@wilcoxinvest.com
Thomas K. Philips
Head of Investment Strategy and Risk Control at OTA Asset Management in Purchase, NY.
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  • For correspondence: thomas.philips@otaam.com
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Abstract

A two-stage stock valuation model derived from the P/B-ROE approach is shown to be a surprisingly effective tool for a broad variety of uses, including the explanation of current prices and the prediction of future return differences. This applies both to the cross-section of individual U.S. stocks and the time series of the S&P 500 index. Besides offering a new closed-form expression for firm value, the model measures the investment horizon over which the market predicts exceptional profitability, demonstrates the dependence of expectations for future profitability on past volatility of return on equity, and quantifies the extent of the recent U.S. stock price bubble. Perhaps the model's most persuasive result is its no-look-ahead statistical support for tactical asset allocation.

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The Journal of Portfolio Management
Vol. 31, Issue 4
Summer 2005
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The P/B-ROE Valuation Model Revisited
Jarrod W. Wilcox, Thomas K. Philips
The Journal of Portfolio Management Jul 2005, 31 (4) 56-66; DOI: 10.3905/jpm.2005.570151

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The P/B-ROE Valuation Model Revisited
Jarrod W. Wilcox, Thomas K. Philips
The Journal of Portfolio Management Jul 2005, 31 (4) 56-66; DOI: 10.3905/jpm.2005.570151
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