Hello, it seems that long term domestic market equity return formula is:
% change in nominal GDP + % change in profits/GDP + %change in P/E + Dividend yield which is different from Grinold Kroner. I ran into this in 2 mocks now but I cant seem to find it in the curriculum. Can anyone please advise? Thanks!
I believe you are confusing Grinold Kroner formula and the derivation of some of its inputs.
GK model is used to estimate expected equity return.
“% change in nominal GDP” can be used as the %ΔE input in GK model. There is a blue box in the curriculum that show this.
No there is actually a different formula for the long term equity market return. I took the above formula from a past CFA mock. I also found it in the Mark Meldrum notes but still confused between the use of the below 2.
Got it, your question was not very clear to me.
Anyway, the difference is that first formula focuses growth rate of the economy, where it is implied that the market value (Ve) of equity will grow according to GDP growth rate.
The second formula (GK) is specific for forecasting equity returns.
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