Persistence factor
A number ω between zero and one giving how much of residual income carries into the next year. Zero means it vanishes after the forecast horizon; one means it continues at the same level.
Where you will meet it
Persistence factor appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Work out a common share's intrinsic value with residual income models that have one constant-growth stage or several stages, and explain the result
“Multistage models forecast residual income year by year for a horizon, then add a continuing residual income term whose form depends on what is assumed afterwards: persistence at a constant level, an immediate drop to zero, or gradual fading governed by a persistence factor ω between zero and one.”
- Explain continuing residual income and defend an estimate of it at the forecast horizon in light of the firm's and industry's outlook
“The persistence factor ω captures fading.”
See also
Practise it
Practise persistence factor until it is automatic: questions that explain every wrong option.
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