Schweser Book 5 Exam 2 - PM Section

Re: Question 91. How do they calc the expected change in the P/E? The formula for the Ibbotson model is

(1+expected Inflation)(1+Real earnings)(1+change in P/E) - 1 + div yield - RF

They come up with a change in P/E of .97??? The problem says the market is overvalued by 10% and they don’t really give the expected change in P/E.

OK, so I just realized the baseline valuation for this is 0 and will change depending on over/under valuation. But, I still don’t see where they come up with .97?

Also looking for explanation for the same question. Anyone can help? :slight_smile:

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