GK Model

CFA Level III Economics
#1

How do you know when to use which of the two below formulas to estimate long term equity returns?

  1. GK model: eqy growth = Div Yield + (% Inc E - % Inc S/O) + % Inc P/E

  2. eqy growth = Nominal GDP growth + Capital/GDP growth + P/E growth + Div Yield

I understand in the ‘long term’ formula 1 and 2 become equity growth = Nominal GDP growth + Div Yield. In the GK model the % Inc E is subbed for Nominal GDP growth.

Please correct me on any of this.

Thank you