Sensitivity measures for equity investments

By differentiating a discounted cash flow valuation formula (expressed in real terms), with respect to the underlying fundamental real variables, we derive ‘sensitivity measures’ for equity investments. These show how the present value of expected future dividends will vary as the real discount rate changes and the long-term real dividend growth rate changes. In both cases, sensitivity depends on dividend yield: the lower the dividend yield, the more sensitive the stock to changes in both the real discount rate and the real growth rate. We also derive a total differential model which allows for simultaneous changes in both the real discount rate and the real growth rate, and briefly compare this model with the model of Leibowitz et al. for equity duration.