Persistance Factor

[nycet824]

The SchweserNotes say that a high ROE is indicative of a low persistance factor. Can someone explain to me why this is the case? Shouldn’t high ROE indicate that the firm is sustaining a competitive advatage in its industry and having a higher ROE than cost of equity means RI is continuing in the future?

 

[Harrogath]

Can you indicate the exact page number or at least the LOS? Most of the time the book is correct but the lector interprets wrongly.

 

[Moey]

Looks like it was answered here: http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91311568

growinginside wrote:
High ROE without any other explanation could suggest that high ROE this period was an anamoly and company profits will soon revert to average - this is a bit of a gray area for me.

Basically context is important.

 

[JayWill]

A high ROE is likely not sustainable, as a high ROE will attract competion reducing ROE to a more sustainable level. Thus ROE should fall which leads to a low persistence factor.

 

[Moey]

JayWill wrote:
a high ROE will attract competion reducing ROE to a more sustainable level

Well said.

 

[JayWill]

Moey wrote:

JayWill wrote:
a high ROE will attract competion reducing ROE to a more sustainable level

Well said.

Thanks. It might have been better said if I managed to spell competition correctly.

 

[nycet824]

Ah, I see now. Thanks guys!

 

[Yayyywork]

Every question I have seen by the CFAI about persistance factors they seem to mention that the period of high ROE will eventually level off to industry average so that is the clue to use the formula.