Interesting here: I’m going through the 2005 Exam and they say that the GK model estimates teh Equity risk Premium! I thought I originally read that, but it really calculates the expected Return!!! What the deuce. So we have: Dividend Yield - Share Repurchase + growth + inflation + Change in P/E I guess since we dont have the Real Yield in there, we would need to add it to the equation to get the expected return??? Even though its not like that on the Mock or Sample 3, one fo the two… hmmm

i realized that too. it;s suppost to be expected return though

it is suppose to calculate expected return … and then if you have the rf then you can deduce the equity risk premium (it has been some time since i did the 2005 paper)

Grinnold-Kroner calculates expected return…as per CFAI v3 book pg 35

Ret on commone quity = D/P + g all that they are doing is breaing it up further. AFAIC it is not risk prem for sure…

now that BW is firing off 90s on practice tests and done studying, he starts lobbing in distractors - - maybe he works for the CFA - - hey, i think i saw a test back in '72 where they calc’d IPS return as (1+r)/(1-tax) + inflation!!

true. It is an extension of Gordon Growth Model. I guess they have changed “terminology” since them.

hahahaha… i dont believe that he needs to do that.

Don’t forget, you’re rearranging p = d1/(re-g) re by definition is required return, i.e. rf + ERP. So rf’s already in there.

bigwilly Wrote: ------------------------------------------------------- > Interesting here: I’m going through the 2005 Exam > and they say that the GK model estimates teh > Equity risk Premium! I thought I originally read > that, but it really calculates the expected > Return!!! What the deuce. So we have: > Dividend Yield - Share Repurchase + growth + > inflation + Change in P/E > > I guess since we dont have the Real Yield in > there, we would need to add it to the equation to > get the expected return??? Even though its not > like that on the Mock or Sample 3, one fo the > two… hmmm It estimates expected return, which implies that it also estimates risk premium since you can simply subtract the rfr from expected return to get the risk premium. It’s primarily a way to find expected return though…

don’t forget, there was also a specific los that year on the components of the erp, which is what they refer to in the answer. my guess is that section tied gk specifically back to erp. it’s not tough to back out the rfr, but if i remember the Q correctly, i think they asked for 3 components, which threw me b/c i think of gk as having 4…