2009 AM Q5 on Grinold-Kroner model

[272Celsius]

2009 AM Past exam question 5:
it asks about the component sources of the historical nominal return for UK equities.
i thought (ii) earnings growth should be = i + g = expected equities real earnings growth rate + expected long-term inflation rate = 2.7% + 2.5% = 5.2%
but the answer just simply says earnings growth = nominal earnings growth return = 4.6% (directly from the exhibit)
why is it?

 

[FinNinja]

the data you are using (2.7 and 2.5) are the current and FORWARD looking data. the question asks for HISTORICAL data which is in the upper portion of the exhibit.

 

[Soccertom9]

Yeah really ugly question. Forces you to read the whole thing in great detail.

 

[SkipE99]

Everyone struggles with this one. I’m surprised your post isn’t referencing the “share repurchase” issue

 

[pimpineasy]

well what about question 9
Maple Leaf is long a Forward contract on 50M Eur…………….my intrepreation is that they would deliver the underlying in this case the EUR but thats not the case……………………………also for the european option the ending value ( in the future) of the option is compared with today’s spot exchange value……..no accounting for time value of money?

 

[thems]

Being long a 50M Eur fwd means you have an obligation to buy 50M euros for a given exchange rate at a later time. In the example, the rate in the contract is higher than the current fwd rate, so they’re going to have to pay above mkt for the Euros i.e. they owe money to their counterparty on the contract.