In bond-yield-plus-risk-premium method, the Equity Risk Premium(ERP) is different from ERP=E(equity return)-(risk free rate), right? Vol 3, page 41.
dont think so …i think they are one and the same…its one of the enduring questions in finance how do we estimate ERP
That is the market risk premium. So, if in the bond plus yield approach you are attempting to determine if equities in general are over/undervalued you would use that form. I suppose that if you were attempting to determine if a specific stock was over/undervalued you would have to use an appropriate bond plus the ERP of that stock, which would include risk/correlation as well.
apologies jmac is correct (thanks)… E® - risk free is simply the market premium E® - bond returns is the ERP . by the way i feel this is very testable yardeni fed model etc
Im calling it now, estate and gifting is on this years test.
thanks, jmac. This is “correlated” to fed model…
wake - agree. Haven’t seen a single question on any sample, and any past exams, this is showing up in a big way. Even notice they recently errata’d the question in book 2 regarding RV gift taxes when DONOR pays? They are conforming this to the LoS command word which says “describe”, not “calculate” - i interpret this cleanup to be a signal.
RV(charitable gift) = (1+Rg)^n ----------------------------------- + Toi [(1-Te)*[1+Re*(1-Tie)]^n] Looks better?