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The Journal of Portfolio Management

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The Stock as a Portfolio of Durations: Solving Black’s Dividend Puzzle Using Black’s Criteria

Oscar Varela
The Journal of Portfolio Management Summer 2015, 41 (4) 122-132; DOI: https://doi.org/10.3905/jpm.2015.41.4.122
Oscar Varela
holds the Charles R. and Dorothy S. Carter Chair in Business Administration at the University of Texas at El Paso, in El Paso, TX.
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  • For correspondence: ovarela3@utep.edu
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Abstract

This article addresses the dividend puzzle in the corporate finance literature. It extends existing literature that shows that dividends aren’t merely puzzling—they matter for the stock’s duration. Treating stocks as a portfolio of dividends and terminal cash flows, the author shows that the durations of dividends and terminal values are not perfectly negatively correlated, but their values are. The stock’s value is a perfectly hedged portfolio; the stock’s duration is not. Dividend policy matters, and stocks with higher dividends have smaller durations and risks.

TOPICS: Portfolio management/multi-asset allocation, portfolio theory

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The Journal of Portfolio Management: 41 (4)
The Journal of Portfolio Management
Vol. 41, Issue 4
Summer 2015
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The Stock as a Portfolio of Durations: Solving Black’s Dividend Puzzle Using Black’s Criteria
Oscar Varela
The Journal of Portfolio Management Jul 2015, 41 (4) 122-132; DOI: 10.3905/jpm.2015.41.4.122

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The Stock as a Portfolio of Durations: Solving Black’s Dividend Puzzle Using Black’s Criteria
Oscar Varela
The Journal of Portfolio Management Jul 2015, 41 (4) 122-132; DOI: 10.3905/jpm.2015.41.4.122
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  • Article
    • Abstract
    • THEORETICAL FRAMEWORK
    • SIMULATION FRAMEWORK, PRICES AND DURATIONS
    • THE STOCK AS A PORTFOLIO OF CASH FLOWS AND DURATIONS
    • FURTHER DISCUSSION WHEN THE COST OF EQUITY CHANGES
    • SUMMARY
    • ENDNOTES
    • REFERENCES
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