Abstract
This article shows a value-oriented investor how to determine the margin of safety that she should demand. In addition to market price volatility, the model identifies three sources of fundamental risk: 1) risk that interim news may necessitate revision of an initial valuation estimate before profits can be taken; 2) uncertainty over the reliability of a value estimate; and 3) uncertainty over when market price will converge to the investor9s value estimate. The model indicates that, while investors should demand margins of safety that are typically 10% to 25% of the share price, larger margins are justified for especially risky stocks. <b>TOPICS:</b>Risk management, security analysis and valuation, exchanges/markets/clearinghouses
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