The argument about the relative safety of dividends presupposes that market prices reflect on a biased way differences in the relative risk of the components of return.
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Hey, Poonam!
Thank you for your question.
Could you please explain where exactly you are stuck?
Regards,
I didn’t understand the entire statement.
Okay, let’s break down the statement to ease our understanding.
The argument about the relative safety of dividends (1) presupposes that market prices reflect (2) on a biased way differences in the relative risk (3) of the components of return (4).
1: The argument about the relative safety of dividends
There is an argument about how safe dividends are compared to other metrics. This safety is in regard to valuation. Basically, the argument argues that dividends are comparatively safer inputs to value a stock.
2 : market prices reflect
Now, this argument presupposes something. It presupposes that market prices reflect something. Let’s find out what the market prices reflect.
3 : differences in relative risk
The said market prices reflect differences in the relative risk of something. Note that this reflection is biased.
4: components of return
The market prices reflect the differences in the relative risk of the components of return (dividend, earnings growth, and change in the level of valuation (P/E ratio)).
So, to sum up, the statement says that the argument about the relative safety of dividends presupposes that market prices reflect in a biased way the differences in relative risk of 3 metrics – dividend, earnings growth, and change in the level of valuation.
Hope this helps! 🙂
Regards,