1. What is VE Institutional™ ?
VEInstitutional software gives equity managers the power of our award-winning Stock Valuation Model. This model is the foundation upon which all of VE Institutional's unique valuation, forecasting, and optimization tools are built. This defining solution to stock and portfolio valuation provides professionals with a three-dimensional view of their equity positions and the ability to make consistent, reliable, objective decisions. Click here to find out more information.

2. Why should I have confidence in the valuation of a stock by VE Institutional?
The VE Institutional stock valuation model has been extensively back-tested and studied using stock market data from the U.S., Asian, and European economies. The model's investment performance has been shown to surpass any other known investment method, such as momentum investing, value strategy (e.g., based on, book/market, PIE, price/sales, price/cash flow), small-cap investing, and index-investing.

3. Who is the principal architect behind VE Institutional?
Dr. Zhiwu Chen, Professor of Finance at Yale University, is the Founder and Co-Chairman of ValuEngine Inc. and is responsible for overall investment technology research. Dr.Chen is a winner of numerous prestigious awards and prizes including the Pacesetter Research Award in 1999, the Merton Miller Prize in 1994 and the 1994 Chicago Board Options Exchange Competitive Research Award. Dr.Chen, a key researcher at the Yale International Center for Finance, is well known for his leading research in areas of stock valuation, investments, financial options, and futures.

He has published numerous research papers in distinguished economic and financial journals, including The Journal of Finance, Journal of Financial Economics, Advanced Fixed Income Valuation Tools, Journal of Business, Review of Financial Studies, American Economic Review, Journal of Economic Theory, Mathematical Finance, and the Pacific Basin Finance Journal.

Relevant articles include:

• "Pricing and Hedging Long-Term Options," with Gurdip Bakshi and Charles Cao, Journal of Econometrics 94, January 2000.
• "An Alternative Valuation Model for Contingent Claims," with Gurdip Bakshi, Journal of Financial Economics 44, (1997).
• "Portfolio Performance Measurement: Theory and Applications," with Peter Knez, Review of Financial Studies, Vol. 9 No.2, (June 1996).

4. How does VE Institutional differ from products provided by vendors such as Barra International?
By providing a benchmark fair-value (model price) assessment for each stock, VE Institutional offers much more than the Barra products. A typical investment decision process involves two processes. First, evaluate and select individual stocks. Second, create an optimal portfolio of the selected stocks. VE Institutional covers both of these steps, whereas products such as Barra's only deal with the second step (since they include only portfolio- optimization and portfolio-risk-tracking functions).

5. Is VE Institutional based on fundamentals or on technical charting?
Stock valuation in VE Institutional is based on the fundamentals of both the firm and the macro economy. Still, the model valuation can be applied in conjunction with momentum and other relative- strength rankings included in the investment system.

6. What are the fundamental variables used in the valuation model?
There are three basic variables:

(i) the trailing 12- month earnings-per-share (EPS),
(ii) the forecasted EPS for the next 12 months, and
(iii) the current 30-year Treasury yield.

7. What other factors play a role in determining a stock's model price?
There are seven firm-specific and three interest-rate parameters that are all determinants of a stock's fair value today. The firm-specific parameters reflect, among other things, its long-term EPS growth, its actual EPS growth stability, the nature of the firm's business cycle, the volatility or stability of analyst expectations about its future EPS growth, and sensitivity to macroeconomic risk factors. These EPS parameters differ from firm to firm and across business sectors, giving the model ample flexibility to capture each stock's distinct characteristics.

8. How are the model parameters estimated?
The model parameters for each stock are all estimated from the stock's own history, reflecting not only the business characteristics of the firm, but also the usual supply-demand situation for the stock on the market. The resulting model price thus captures the firm 's fundamental soundness, management effectiveness, and the implicit historical valuation standard of the stock by the market.

9. What is the relative importance of EPS growth versus interest rate to VE Institutional?
In determining an individual stock's fair value, EPS and EPS growth are more important than interest rates.

10. Is the quality of EPS estimates critical to VE Institutional?
No. The parameter estimation process for our model automatically adjusts for both accounting irregularities and EPS estimates that are persistently inaccurate. Of course, the better the forecasts about a firm's future EPS, the more accurate the resulting model price for the stock. However, even if the EPS estimates are inaccurate or "noisy," our model-determined fair value for a stock can still be a good one -as long as the EPS forecasting errors have been consistent and persistent over time.

11. How does VE Institutional go beyond dividend-discount, earnings-discount and book-value- based equity valuation models (such as the ones marketed by others)?
What sets VE Institutional apart from variants of traditional discount models is a reasonable parameterization of each firm's EPS growth and the economy's interest-rate processes, plus the method in which these parameters are estimated. This is also why our proprietary model performs better than all other equity-valuation models available, in identifying truly undervalued, profitable stocks. First, the traditional dividend-discount or earnings-discount models offer no structural parameterization of a firm's business growth process or the interest-rate process. In valuing stocks, these models cannot distinguish one industry from another; nor can they differentiate between business-growth stages of the same firm. Second, the traditional models pay no attention to how a given stock has been valued in the past or what the supply-demand condition has been for the stock. These model valuations are completely independent of the market's assessments about the stock. Third, many research studies have demonstrated that these dividend-discount or earnings-discount models usually do not help much in finding profitable stock opportunities.

12. How does the stock valuation model in VE Institutional differ from the CAPM, the APT, and other factor-beta models?
There is a fundamental difference. The VE Institutional stock valuation formula goes beyond generic asset-pricing models such as the CAPM and the APT, giving you not only the expected future return for a stock but also its fair value at which the stock should be traded at the moment. Models such as the CAPM and the APT only try to explain the expected returns that individual stocks deserve (given their systematic risk levels), whereas VE Institutional tells you how much each stock should be worth based on information currently available. For example, the CAPM might say that IBM's expected future return is 15% per year, but it does not tell you whether a price of $120 per share is too high or too low.

13. Is the under/over-valuation measure determined by VE Institutional different from the Jensen alpha?
Yes, it is fundamentally different. Whether it is based on the CAPM or the APT, Jensen's alpha measure can only reflect a stock's past average performance, while the VE Institutional-determined mispricing measure reflects the stock's present and future. Recall that a stock's alpha measures its average return deviation from the security market line. On a factor-risk adjusted basis, the higher a stock's alpha, the more attractive the stock. VE Institutional, however, focuses on whether the stock is currently under/over-valued, rather than on the stock's past average performance. A stock's alpha measure may be zero, positive, or negative. But, according to VE Institutional, there must be good and bad times to buy the stock. A stock with a high positive alpha may be overvalued at the moment, an ideal time to buy. There can also be stocks that have low alpha values but are highly underpriced by the market, priced to buy.

14. What is the VE Institutional included in stock universe?
About 7000 stocks for the U.S. version, 500 stocks each for Taiwan and Hong Kong, and 4000 stocks for Japan.