Appeal 2007-2745
Application 09/761,671
1 equity portfolio of its pension fund. Forty indicators are used to rank the
2 expected future returns of 1,000 equities. Currently owned stocks are
3 sold and are replaced by those with future return rating over a certain
4 cutoff, which results in an 80% monthly turnover. The portfolio return,
5 net of transaction costs, exceeds that of the Standard & Poor's 500 index.
6 Other firms use neural network to predict the S & P 500 index and the
7 performance of stocks and bonds to help market traders in making their
8 buy, hold, and sell decisions. The system recognizes patterns in market
9 activity before they are apparent to a human, which may mean millions
10 in trading profits (Brown 56:Center col., Investments).
11 Rappaport
12 27. Rappaport describes techniques for creating shareholder value
13 (Rappaport Title).
14 28. A component of the cost of equity is a risk premium. One way of
15 estimating the risk premium for a particular stock is by computing the
16 product of the market risk premium for equity (the excess of the
17 expected rate of return on a representative market index such as the
18 Standard & Poor's 500 stock index over the risk-free rate) and the
19 individual security's systematic risk, as measured by its beta coefficient
20 (Rappaport 39:Middle full ¶).
21 29. Rappaport teaches that three factors determine stock prices: cash
22 flows, a long-term forecast of these cash flows, and the cost of capital or
23 discount rate that reflects the relative risk of a company's cash flows.
24 The present value of a company's future cash flows, not its quarterly
25 earnings, determines its stock price (Rappaport 70:Last full ¶).
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Last modified: September 9, 2013