Hi, I am confused with the answe to Q91 Exam 2 in first Schweser mock booklet.
My question is how does the answe get 0.97 for the PEg variable when we are told that PEg is -.1? Should’nt the variable be .9 (calc: 1 - .1) rather then 0.97?
If anyone can help clarify that would be great. Could not find an example in CFAi or Schweser like this to compare.
The answer is given as follows:
The equity risk premium is estimated as:
ERP = [1 + i] × [1 + REg] × [1 + PEg] − 1 + Y − RF
where:
i
= the expected inflation rate = 2.6%
REg
= expected real growth in GDP = 3.0%
PEg
= relative value changed due to changes in P/E ratio = −0.10
Y
= yield on the market index = 1.7%
RF
= risk-free rate of return = 2.7%
ERP
= (1.026) × (1.030) × (0.97) − 1 + 0.017 − 0.027 = 0.015 = 1.50%
My question is how does the answe get 0.97 for the PEg variable when we are told that PEg is -.1? Should’nt the variable be .9 (calc: 1 - .1) rather then 0.97?
If anyone can help clarify that would be great. Could not find an example in CFAi or Schweser like this to compare.
The answer is given as follows:
The equity risk premium is estimated as:
ERP = [1 + i] × [1 + REg] × [1 + PEg] − 1 + Y − RF
where:
i
= the expected inflation rate = 2.6%
REg
= expected real growth in GDP = 3.0%
PEg
= relative value changed due to changes in P/E ratio = −0.10
Y
= yield on the market index = 1.7%
RF
= risk-free rate of return = 2.7%
ERP
= (1.026) × (1.030) × (0.97) − 1 + 0.017 − 0.027 = 0.015 = 1.50%