What Can Explain the Failure of Relative PPP to Hold

question 45

Essay

What can explain the failure of relative PPP to hold in reality?

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Definitions:

Cost of Equity

The return a company requires to decide if an investment meets capital return requirements, often based on the risk of investing in that company's equity.

Dividend Growth Model

A valuation method that estimates the price of a company's stock based on the dividend growth rate and the expected dividend payments.

Estimated Dividend Growth Rate

The projected annual rate at which dividends paid by a company or fund are expected to grow.

Cost of Equity

The return a company is required to earn to convince investors to hold its shares, often estimated using models like the Capital Asset Pricing Model (CAPM).