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Estimating the Discount Rate As indicated in the comments, you would use the CAPM (or another equity factor model) to model stock returns $r_{it}$ beyond the risk-free rate $r_f$ as a function of returns on a market index $r_{Mt}$: $$ r_{it} - r_f = \alpha_i + \beta_i (r_{Mt} - r_f) + \epsilon_{it}. $$ Once we have estimates $\hat\alpha_i$ and $\hat\beta_i$, ...


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The answer to your question could fill an entire asset pricing text book. Your question mixes theory and empirics. A different way of looking at it is to look at the identity: $$ 1 = E[M_t R_t]$$ To generate a sufficient risk premium either you need to have the covariance of the SDF with the the return to be sufficiently high. Campbell and Cochrane basically ...


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The cash flow news / discount rate news decomposition is given by $$r_{t+1}-\mathbb{E}_t[r_{t+1}]=(\mathbb{E}_{t+1}-\mathbb{E}_t)\sum_{j=0}^{\infty}\rho^j\Delta d_{t+1+j}-(\mathbb{E}_{t+1}-\mathbb{E}_t)\sum_{j=1}^{\infty}\rho^j\Delta r_{t+1+j},$$ where $r_{t}$ is log-return $d_{t}$ is log-dividend and $\rho$ is a constant. This follows directly from the ...


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The CAPM claims that only systematic risk matters (i.e. covariation with the market) to determine an asset's expected return. So the fact that low volatility stocks have returns that are not explainable by market beta is an empirical contradiction of the CAPM to start with. The CAPM is too rigid and performs poorly in explaining the cross section of equity ...


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