Apparent conflict? In Schweser, book 2, session 6, answer to question 5 on page 134, they state that P/E ratios account for most of the variation in stock prices, however, in prior session 5, the Grinold Kroner method (page 74) seems to indicate that the dividend yield is the largest component of return. That session seems to indicate that while the P/E is volatile, it isn’t a large compenent in variation in stock prices. Is session 5 discussion just poorly worded? Any clarifiying logic to these 2 comments? Thanks,
prockets Wrote: ------------------------------------------------------- > Apparent conflict? Don’t understand why there can be conflict. Grinold Kroner performs forecast for expected return of a stock, p.134 mentions valuation of stock price. > In Schweser, book 2, session 6, answer to question > 5 on page 134, they state that P/E ratios account > for most of the variation in stock prices, yes. > however, in prior session 5, the Grinold Kroner > method (page 74) seems to indicate that the > dividend yield is the largest component of return. where in Schweser is this mentioned? > That session seems to indicate that while the P/E > is volatile, it isn’t a large compenent in > variation in stock prices. I don’t think Schweser has hinted/mentioned this. > Is session 5 > discussion just poorly worded? Any clarifiying > logic to these 2 comments? > > Thanks, What I get from Schweser are: 1. Under “earnings multiple approach of stock valuation”, PE is volatile and so can affect our result very easily — so care must be taken in estimating it 2. Delta (PE) component in GK model has found to be volatile. I don’t think these 2 points are much related though. Comments? - sticky
Yeah…seems to me there are two different concepts here. One is talking about the volitaility of stock return (standard deviation); one is talking about the return components.