We introduce discounted alpha - a novel framework for equity valuation. By correcting market prices rather than discounting long-horizon cash flows, our approach delivers lower-variance, better-performing estimates of a stock’s value. Our real-time estimates indicate that private equity funds capture substantial CAPM misvaluation, both initially at buyout and subsequently at exit, and that fundamental buy-and-hold funds tilt toward characteristics that predict underpricing but not short-term alphas. Although firm equity values are “almost efficient” relative to the CAPM benchmark by Black’s (1986) definition, these misvaluations have trended upward since 2000, even as cross-sectional alphas have declined, reflecting greater persistence in price-level inefficiencies.
