Ibbotson Chen model

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jmaldonado

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Is this not in the curriculum anymore (or just Schweser) and do we need to know it?
also, earlier post shows two different formulas. Is the last component of removing the dividend yield/income growth accurate?
ERP
((1+exp inflation)(1+exp PE g)(1+exp EPS g)-(div yield or growth income)) - RFR
 
I assume we could be tested on it.
The formula is
((1+ EInfl)(1+EGEPS)(1+EGPE) -1)) + dividend yield or income component - RFR
This formula is also referred to as the supply-side estimate of equity risk premium.
 
Thanks! Two things:
  1. isn’t counting income growth component and EPS growth component essentially double counting the impact of earnings growth (AND PE growth is in there)?
  2. the last term before RFR; I am seeing it as “yield” as well as “income growth”. Which is it?
I wouldn’t be sure which to use if both are given, although from the context of real rates being provided, it may be clear in a given question. It would be nice to know of a CFAI question on this. I may look to the actual curriculum since it seems Schweser may not have covered this well.
 
1) It isn’t really the same thing. EPS growth is a proxy for the real GDP growth (labor productivity growth + labor supply growth rate). On the other hand, the PE growth is a proxy for how efficient the markets are (wether the security is over/undervalued).
2) The before-last item is the Income component (which also includes the reinvestment income) : Basically a dividend yield + eventually a reinvestment return from this dividend yield.
I have struggled with this quite a lot then went back to CFAi for Reading 28. Was worth the read. Schweser and Wiley are too much simplistic on this chapter.
 
Def, a plug and play question in my opinion from what I have seen in the mocks.
 
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