Pascal edited introduction.tex  almost 8 years ago

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\section{Introduction}  In a prior working paper, Pierre and al. have showed how to build a stock selection framework based on the profitability of a firm and its stock price valuation. This Profitability-Valuation framework is derived from the Residual Income Model (hereafter \textit{RIM}) which is in fact a derivation of the Dividend Discount Model (hereafter \textit{DDM}). In this context, Pierre and al. show that profitability is necessarely measured using Return On Equity (hereafter \textit{ROE}) while the valuation metric is necessarely the Price To Book (hereafter \textit{PB}). As such, screening for stocks using ROE and PB consists in buying stocks that appear cheap from a dividend perspective or, more generally from an earnings perspective. En effet, dividends can be replaced by earnings as long as the clean surpplus accounting rule that underpins the RIM is observed.  \newline \\  Drawbacks of the dividend or earnings approach to valuation are well known, and practitioners in the equity investment community tend to prefer cash-flow based valuation metrics. $V_{t}=\displaystyle\sum_{i=1}^{K}\frac{C_{t+i}}{(1+R)^i}+V_{t+K}$