Attribute Bias

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Attribute bias

The tendency of stocks preferred by the dividend discount model to share certain equity attributes such as low price-earnings ratios, high dividend yield, high book value ratio, or membership in a particular industry sector.

Attribute Bias

1. A bias within the dividend discount model in which the model favors certain stocks. The dividend discount model is a method for valuing stock according to the present value of future dividends. Because of attribute bias, the model tends to rate more highly stocks with high dividend yields, and low P/E ratios.

2. More broadly, a situation in which any model rates securities that share similar characteristics more highly. Some analysts caution against this bias because it eliminates some of the benefits of diversification, though others believe that attribute bias poses little problem as long as the securities have strong fundamentals.

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