Equity appreciation question

CFA Level II
#1

Just a quick economics question .For a developed economy, the forecasted long-term growth rate of potential GDP is 3% and the forecasted long-term inflation rate is 2%. The long-term equity market appreciation in this economy will be closest to ?

I thought that it would be same as potential gdp growth but would we add inflation?

#2

I think when we talk about “potential GDP,” it’s always REAL GROWTH. So, I don’t think inflation should be added. Moreover, potential GDP drives REAL interest rate.

I could be wrong, but the point of potential GDP is real growth is stated in Kaplan’s book (book1, page 285)

#3

That’s what i thought too, but i found it in IFT that the calculated is 5% (after adding inflation)

#4

any help here?

#5

You looking for nominal or real growth

#6

It was not mentioned, just the equity market appreciation

This is exhibited from IFT

#7

Inflation should be added. Long-term equity price appreciation growth uses nominal GDP growth and some other components. Here’s Example 2 from CFAI pg. 606:

Decomposition of S&P 500 Returns/Growth Rate, 1946-2007

  • Real GDP growth: 3.01%
  • Inflation: 3.94%
  • EPS/GDP: -0.12%
  • P/E: 0.32%
  • Dividend Yield: 3.67%

Total: 10.82%

S&P 500 Return: 10.82%

#8

Thank You !! that as such a help