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I spend most of my time in the far less rarefied air of corporate finance and valuation, where businesses try to decide what projects to invest in, and investors attempt to estimate business value. A key tool in both endeavors is a hurdlerate a rate of return that you determine as your required return for business and investment decisions.
In every introductory finance class, you begin with the notion of a risk-free investment, and the rate on that investment becomes the base on which you build, to get to expected returns on risky assets and investments. What is a risk free investment?
Data: Trickle to a Flood! It is perhaps a reflection of my age that I remember when getting data to do corporate financialanalysis or valuation was a chore. That said, to use mean reversion in analysis or investing, you need to know what these averages are, either over time or across companies, and data can help in that pursuit.
In pursuit of an answer to that question, I used company-specific data from Value Line, one of the earliest entrants into the investment data business, to compute an industry average. Return on (invested) capital 2. Ratings & Spreads 2. Ratings & Spreads 2. Tax rates 4. Excess Returns on investments 4.
It is perhaps a reflection of my age that I remember when getting data to do corporate financialanalysis or valuation was a chore. That said, to use mean reversion in analysis or investing, you need to know what these averages are, either over time or across companies, and data can help in that pursuit.
All of the data that I use in my data analysis is in the public domain, and while I am lucky enough to have access to large (and expensive) databases like Bloomberg and S&P, there are tens of thousands of investors who have similar access. So, why bother?
To the extent that divide is not just descriptive, but also drives real world investment, both companies and investors may be misallocating their capital, and I will argue for finer delineations of risk.
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