hi I’m confused why to compare a stock’s price multiple to that of a benchmark portfolio, the stock has to have a similar growth rate and required rate of return as the benchmark. I get that these 2 are inputs to computing the price using gordon growth but since it is a fundamental driver for stock price shouldn’t the final price just be used for comparison? Thanks in advance!
The final price in terms of what?
It’s a relative valuation after all. The price of a benchmark portolio may have a market cap worth 100s of billions of dollars, while the market cap of a stock may only be a few billions. Does that make the stock attractive because it’s priced less?
In any case, the PE relative valuation is only more useful if the benchmark portfolio bears the same characteristics of growth and risk as the stock in question, like you’ve said. So you could use the PE of the SP500 relative to a stock inside the SP500.