Improvement of Yardeni Model over Fed model is that Yardeni Model captures:
A. pure equity risk premium
B. pure default risk premium
C. effect of long-term growth on equity market values
Correct Answer: C
Why is Answer B incorrect? On 1st paragraph after Equation 8 (Pg 148) it says, “risk premium captured by the [Yardeni] model is largely a default risk premium.”
Source: CFA Volume 3 / Equity market valuation / Pg 167
it is a question of language. … which could end up tripping u up.
largely a default risk premium (What the text says) -> answer says “pure default risk premium” - but largely is NOT EQUAL to Pure. (Pure means complete default risk premium is captured).
I am not sure but as I recall, the problem is Yardeni uses A corporate bond risk premium what is default risk but on corporate bonds not an equity risk premium. Thus, it would not be an improvement. Tricky question, play with words.
I didnt have that in my vocabulary. It now makes sense! Thnks.
Fed Model uses yield on T-bonds. Yardeni Model uses yield on T-bonds + default risk premium (if I am not mistaken)
Therefore, it should be an improvement on this facet too.
As per the question, the word “pure” is most likely the word-play, not " improvement".
Hopefully CFAI doesnt test many twisted-word-play questions like this.
Check once again, Yardeni uses A rated Corporate bonds as default risk premium.