Just want to confirm, because I feel like I’m taking crazy pills…
The Grinold-Kroner model is a model to calculate/determine expected return correct? In the material and on some questions, ‘risk premium’ is used interchangeably with expected return and I just want to make sure that the equation is for E® and not ERP like the first step in Singer-Terhaar.
I’m not trying to mess up a simple equation because I didn’t add/subtract the risk-free rate here…Thanks.
Yes. Its E(R) and not ERP.
i have seen it written as ERP in a few mocks though.
That’s like the #1 trap you can fall for with Grinold-Kroner. Grinold-Kroner= E(r) , Singer-Terhaar = equity risk premium. They’re presented after one another in the curriculum so the chance for confusion is high!
This is actually a good reminder to add the damn Rf back to the singer-terhaar model to land on E(R). Missed that a few times on AM practice exams when in a rush to move on.
In this question… what “g” and “i” will you choose for the model?
The correct answer is 4,6% (Nominal earnings growth return (%)) but from my point of view we should use 2,7+2,5. Why using historical data when we have future stimates?
Thanks in advance for your time.
The question states “use the information to determine the component sources of historical nominal return for UK equities.”
You may have to read the question carefully.
