1. What is VE Institutional ?
VEInstitutional software gives equity managers the power of our award-winning Stock Valuation Model. This model is the foundation upon which all of VE Institutional's unique valuation, forecasting, and optimization tools are built. This defining solution to stock and portfolio valuation provides professionals with a three-dimensional view of their equity positions and the ability to make consistent, reliable, objective decisions.
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2. Why should I have confidence
in the valuation of a stock by VE Institutional?
The VE Institutional stock valuation model has been extensively
back-tested and studied using stock market data from the
U.S., Asian, and European economies. The model's investment
performance has been shown to surpass any other known investment
method, such as momentum investing, value strategy (e.g.,
based on, book/market, PIE, price/sales, price/cash flow),
small-cap investing, and index-investing.
3. Who is the principal architect
behind VE Institutional?
Dr. Zhiwu Chen, Professor
of Finance at Yale University,
is the Founder and Co-Chairman of ValuEngine Inc. and is
responsible for overall investment technology research.
Dr.Chen is a winner of numerous prestigious awards and prizes
including the Pacesetter Research Award in 1999, the Merton
Miller Prize in 1994 and the 1994 Chicago Board Options
Exchange Competitive Research Award. Dr.Chen, a key researcher
at the Yale International Center for Finance, is well known
for his leading research in areas of stock valuation, investments,
financial options, and futures.
has published numerous research papers in distinguished
economic and financial journals, including The Journal of
Finance, Journal of Financial Economics, Advanced Fixed
Income Valuation Tools, Journal of Business, Review of Financial
Studies, American Economic Review, Journal of Economic Theory,
Mathematical Finance, and the Pacific Basin Finance Journal.
Relevant articles include:
- "Pricing and Hedging Long-Term Options," with Gurdip Bakshi
and Charles Cao, Journal of Econometrics 94, January 2000.
- "An Alternative Valuation Model for Contingent Claims,"
with Gurdip Bakshi, Journal of Financial Economics 44, (1997).
- "Portfolio Performance Measurement: Theory and Applications,"
with Peter Knez, Review of Financial Studies, Vol. 9 No.2, (June 1996).
4. How does VE Institutional
differ from products provided by vendors such as Barra International?
By providing a benchmark fair-value (model price) assessment
for each stock, VE Institutional offers much more than the
Barra products. A typical investment decision process involves
two processes. First, evaluate and select individual stocks.
Second, create an optimal portfolio of the selected stocks.
VE Institutional covers both of these steps, whereas products
such as Barra's only deal with the second step (since they
include only portfolio- optimization and portfolio-risk-tracking
5. Is VE Institutional based
on fundamentals or on technical charting?
Stock valuation in VE Institutional is based on the fundamentals
of both the firm and the macro economy. Still, the model
valuation can be applied in conjunction with momentum and
other relative- strength rankings included in the investment
6. What are the fundamental
variables used in the valuation model?
There are three basic variables:
(i) the trailing 12- month earnings-per-share (EPS),
The values of these three variables change dynamically from
day to day for each stock, depending on current and future
prospects for the firm as well as for the macro economy.
Consequently, a stock's model price can change from day
(ii) the forecasted EPS for the next 12 months, and
(iii) the current 30-year Treasury yield.
7. What other factors play
a role in determining a stock's model price?
There are seven firm-specific and three interest-rate
parameters that are all determinants of a stock's fair value
today. The firm-specific parameters reflect, among other
things, its long-term EPS growth, its actual EPS growth
stability, the nature of the firm's business cycle, the
volatility or stability of analyst expectations about its
future EPS growth, and sensitivity to macroeconomic risk
factors. These EPS parameters differ from firm to firm and
across business sectors, giving the model ample flexibility
to capture each stock's distinct characteristics.
8. How are the model parameters
The model parameters for each stock are all estimated from
the stock's own history, reflecting not only the business
characteristics of the firm, but also the usual supply-demand
situation for the stock on the market. The resulting model
price thus captures the firm 's fundamental soundness, management
effectiveness, and the implicit historical valuation standard
of the stock by the market.
9. What is the relative importance
of EPS growth versus interest rate to VE Institutional?
In determining an individual stock's fair value, EPS and
EPS growth are more important than interest rates.
10. Is the quality of EPS
estimates critical to VE Institutional?
No. The parameter estimation process for our model automatically
adjusts for both accounting irregularities and EPS estimates
that are persistently inaccurate. Of course, the better
the forecasts about a firm's future EPS, the more accurate
the resulting model price for the stock. However, even if
the EPS estimates are inaccurate or "noisy," our model-determined
fair value for a stock can still be a good one -as long
as the EPS forecasting errors have been consistent and persistent
11. How does VE Institutional
go beyond dividend-discount, earnings-discount and book-value-
based equity valuation models (such as the ones marketed
What sets VE Institutional apart from variants of traditional
discount models is a reasonable parameterization of each
firm's EPS growth and the economy's interest-rate processes,
plus the method in which these parameters are estimated.
This is also why our proprietary model performs better than
all other equity-valuation models available, in identifying
truly undervalued, profitable stocks. First, the traditional
dividend-discount or earnings-discount models offer no structural
parameterization of a firm's business growth process or
the interest-rate process. In valuing stocks, these models
cannot distinguish one industry from another; nor can they
differentiate between business-growth stages of the same
firm. Second, the traditional models pay no attention to
how a given stock has been valued in the past or what the
supply-demand condition has been for the stock. These model
valuations are completely independent of the market's assessments
about the stock. Third, many research studies have demonstrated
that these dividend-discount or earnings-discount models
usually do not help much in finding profitable stock opportunities.
12. How does the stock valuation
model in VE Institutional differ from the CAPM, the APT,
and other factor-beta models?
There is a fundamental difference. The VE Institutional
stock valuation formula goes beyond generic asset-pricing
models such as the CAPM and the APT, giving you not only
the expected future return for a stock but also its fair
value at which the stock should be traded at the moment.
Models such as the CAPM and the APT only try to explain
the expected returns that individual stocks deserve (given
their systematic risk levels), whereas VE Institutional
tells you how much each stock
should be worth based on information currently available.
For example, the CAPM might say that IBM's expected future
return is 15% per year, but it does not tell you whether
a price of $120 per share is too high or too low.
13. Is the under/over-valuation
measure determined by VE Institutional different from the
Yes, it is fundamentally different. Whether it is based
on the CAPM or the APT, Jensen's alpha measure can only
reflect a stock's past average performance, while the VE
Institutional-determined mispricing measure reflects the
stock's present and future. Recall that a stock's alpha
measures its average return deviation from the security
market line. On a factor-risk adjusted basis, the higher
a stock's alpha, the more attractive the stock. VE Institutional,
however, focuses on whether the stock is currently under/over-valued,
rather than on the stock's past average performance. A stock's
alpha measure may be zero, positive, or negative. But, according
to VE Institutional, there must be good and bad times to
buy the stock. A stock with a high positive alpha may be
overvalued at the moment, an ideal time to buy. There can
also be stocks that have low alpha values but are highly
underpriced by the market, priced to buy.
14. What is the VE Institutional
included in stock universe?
About 7000 stocks for the U.S. version, 500 stocks each
for Taiwan and Hong Kong, and 4000 stocks for Japan.