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The right answer is C. But why B is not correct? Yardeni model considers default risk premium, while Fed model does not. Is this also an improvement?
Ok so imagine using the fed model gave you the ratio of earnings yield to treasury yield of 1. This means that that your earnings yield = treasury yield (least riskiest security) which ideally shouldn’t be the case. Investing in firms is highly risky due to multiple risks associated with generating suffient cash flow to investors and the uncertainty involved in it. Because this risk isn’t really considered in the Fed model (ratio of 1), it is said that ignores risk premium.
About growth, from what I remember one of the variables in Yardeni is LTEG (5 years) unlike the Fed model which just takes into account EPS/V0. Again, a fed model ratio of 1 would mean that growth is ignored and we all know treasury bonds just pay coupon unlike stocks where cash flow to equity is heavily influenced by growth (unless there is some one time charge or whatever).
So yeah that’s about it from what I’ve understood.
Would love to hear what the Magician would have to say about this though.
Cheers.