Final answer:
The two valuation approaches commonly applied to the aggregate stock market include the earnings multiple approach and the dividend discount model. These methods involve projecting future earnings or dividends and discounting them to their present value to determine a stock's valuation.
Step-by-step explanation:
Two valuation approaches commonly applied to the aggregate stock market include (c) an earnings multiple approach and (d) a dividend discount model.
An earnings multiple approach, also known as a price-earnings ratio, measures the price of a stock relative to its earnings per share, providing insight into how much investors are willing to pay for each dollar of earnings.
The dividend discount model values a stock based on the hypothesis that it is equal to the sum of all of its future dividend payments when discounted back to their present value. This model of valuation considers the concept of present discounted value (PDV), which is the amount an investor is willing to pay now for a series of future payments, after taking into account an appropriate discount rate.
Valuation of stocks and bonds is inherently forward-looking and requires careful consideration of future events. When valuing stocks using these models, one has to best guess expected profits and decide on a suitable interest rate for discounting future cash flows, including potential capital gains and dividends.
The present value of a stock will depend on its expected future profits and the dividends expected to be received, which can be calculated using present discounted value.
This P V calculation becomes more complex with differing opinions on future prospects, interest rate fluctuations, and projected capital gains or dividends. These differing perspectives can lead to varying willingness to buy or sell stock among investors.