Judge Of Securities Reasonable Pricing Level Three-stage Model, With Risk Compensation Rate

Valuation is an essential part of all investments including direct investments and securities. Because of the development of security markets in China and increase in the number of commercial transactions in a market economy,valuation becomes an increasingly important issue. Consequently,demand for professional valuation service is rising.With regard to the fair valuation of securities,one phenomenon has been haunting the investment community in China,which is the much higher valuation of the domestic security markets than those of the international markets such as Hong Kong or U. S.,in terms of P/E ratios. For shares that represent the same ownership right and economic benefit,the A-share,B-share or related shares in Hong Kong and U. S. are having valuation gaps of up to several times. The investment community has been having a big debate on the fair valuation of China' s stock market. While no consensus has been reached on the fair P/E for the securities,investors realize it is fundamentally flawed to have only one valuation criteria.Clearly we need better criteria for asset valuation. There is another approach. Utilizing the basic theory of return and risk and the main methodologies and models of asset valuation,we can study the implied risk premium from the current share prices by incorporating stock analysts' forecast on companies' earnings and growth. By comparing the implied risk premium with the actual risk level of the particular investment,we can decide better whether its valuation is fair.Because the impact on a security' s valuation by free-risk returns in different markets is removed,this methodology is suitable for valuation work for securities in one market or comparison between several markets. Our empirical studies using data from markets in U.S.,China and Hong Kong prove that this risk-premium model can provide a satisfactory answer to the question of fair valuation.Not only can this model reflect the real value of a security better than P/E ratio,its methodology also offers a reference for setting a fair valuation for various types of securities.