Change in P/E for Grinold Kroner

[johntavv]

Question says calculate the ∆P/E for Grinold Kroner given:
Current P/E = 15.6
Expected P/E 10 years prior = 15
Answer says: the compound annual growth rate of the P/E = (15/15.6)^(1/10) – 1. = – 0.4%
Why do we not use (15.6/15)^(1/10) – 1 = 0.4%?

 

[proanalyst]

in Grinold Kroner model you add % change in P/E.
Current P/E is 15.6, expected P/E is l15 so the change in P/E would be negative

 

[johntavv]

proanalyst wrote:
in Grinold Kroner model you add % change in P/E.
Current P/E is 15.6, expected P/E is l15 so the change in P/E would be negative

I understand that you add % ∆P/E, but the isn’t the %∆ here positive? 10 years prior P/E was 15.0, but currently P/E is 15.6? So (15.6/15)^(1/10) – 1 = 0.4%?

 

[MrSmart]

It says forecast in 10 years is 15.0

 

[johntavv]

MrSmart wrote:
It says forecast in 10 years is 15.0

The vignette says “expected P/E 10 years prior”. So we just disregard the word prior?
Expected P/E 10 years prior = 15

 

[MrSmart]

Prior here means 10 years from today.
I’d just take the expected as key word. In any case, you got the concept down, it’s bad wording that gave you problems.