The expected rate of return on any asset can be written as the risk-free rate of interest plus the asset's level of volatility relative to the market times the difference between market's expected rate of return and the risk-free rate. This model and the pricing result became

As yields shift upward on short, intermediate, and long-term government issues, bond yields will generally rise, meaning that bond prices decline, whereas stock prices will begin to fall (or price-earnings ratios decline). When yields on fixed-return government issues decline, conversely, stock prices usually move upward, although some at faster rates than others.

Since stocks are bought on the basis of expected returns for the next year (or for several years into the future), a perceived shift in the rate of inflation (or of the interest rate level) will send most common stocks to higher or lower levels. Strength of the overall economy, the sector in which the firm operates, its own industry's strengths and weaknesses, and individual firm's characteristics likewise have a bearing on the assessed market value of equity issues.

With the constant growth model, a justified market rate of return is determined by applying the capital asset pricing model, as explained and illustrated in Figure 1. The growth rate for the stock is then estimated, and the value of the infinite stream of dividends is computed in the following manner:

The dividend growth model variation might assume that the 10% growth would prevail for a few years and then trend downward for a few years to about average in the nation, where this rate of growth would continue forever. A realistic infinite growth rate might be the rate of inflation (e.g., unit price increases to offset consumer price index [CPI] changes), plus 1% for population growth and another one or two percentage points for productivity gains. Growth in book value per share, due to the retention of E/S, might be anothe

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