5

For example professional investor apply the Capital Asset Pricing Model (CAPM) to determine the intrinsic value of an equity. What would be the result of such a financial analysis?

  • 1
    This would be interesting, hope the mods let the community vote on this. – eth Jun 3 '16 at 19:48
5

This question might be a bit off-topic and likely to result in unproductive debate, but maybe it's worth providing a couple references anyway.

CAPM can't tell you the value of an equity. It tells you what rate of return investors will demand for a given amount of volatility; if you hold a risky asset, you can expect a higher rate of return over time, as compensation for risking a loss.

But CAPM assumes that investors have already incorporated all available information into the current market price. This is the "efficient market hypothesis." Therefore, according to CAPM the intrinsic value of ether is precisely its current market cap. If the market cap doubles or halves, that will still be the case.

A good book on this is A Random Walk Down Wall Street; for a skeptical view on CAPM and the efficient market hypothesis, see Mandelbrot's The Misbehavior of Markets.

If you assume that equities can be mispriced (as many investors and academics do), then figuring out their value is hard. However, one formula for the value of a currency is pretty simple: basically, take the total value of goods exchanged for the currency over the course of a year, and divide by the average number of times a currency unit changes hands over that year. This is the velocity of money; wikipedia has a good article: https://en.wikipedia.org/wiki/Velocity_of_money

Unfortunately, we don't really have the input data for that formula.

We could also use any financial calculator to figure a present value based on our expectations of future growth, but since our expectations could be wildly inaccurate, that wouldn't really tell us much.

  • thank you @dennisP while I've read both books you mentioned, I didn't get its CAPM. might be the time between the books and the model or the superficial knowledge of the model, which I only got from a conversation with an investor. Obviously this is a provocative question for an Ethereum stackexchange. But my heart beats with the thinkers of uncertainty like Finetti, Savage and Raiffa, Shafer et alii – Roland Kofler Jun 6 '16 at 19:22

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.