Lubos Pastor and Pietro Veronesi develop a model to explain stock valuation and the volatility of stock returns, focusing on the uncertainty about average profitability. The market-to-book (M/B) ratio increases with this uncertainty, especially for firms that do not pay dividends. The M/B ratio is predicted to decline over a firm's lifetime due to learning, with steeper declines for younger firms. Empirical evidence supports these predictions, showing that younger stocks and those that pay no dividends have more volatile returns. The model also explains the recent increase in idiosyncratic return volatility by attributing it to increased uncertainty about firm profitability. The authors argue that this uncertainty contributes to the high valuations of young firms, which tend to decline over time as investors learn more about the firm's prospects.Lubos Pastor and Pietro Veronesi develop a model to explain stock valuation and the volatility of stock returns, focusing on the uncertainty about average profitability. The market-to-book (M/B) ratio increases with this uncertainty, especially for firms that do not pay dividends. The M/B ratio is predicted to decline over a firm's lifetime due to learning, with steeper declines for younger firms. Empirical evidence supports these predictions, showing that younger stocks and those that pay no dividends have more volatile returns. The model also explains the recent increase in idiosyncratic return volatility by attributing it to increased uncertainty about firm profitability. The authors argue that this uncertainty contributes to the high valuations of young firms, which tend to decline over time as investors learn more about the firm's prospects.