What the hell is Ibbotson-Chen?

CFA Level II
#1

Not seen that in Schweser, I swear…

1 Like
#2

There was a thread on it the other day. I hadn’t seen it either.

#3

effect of reading only schweser!!! Chapter on Return Concepts: Equity Risk Premium = [(1+EGREPS)(1+EINFL)(1+EGPE ) -EInc] - LTBYield(Expected risk free return) EGREPS = Expected growth rate in EPS EINFL = Expected long term forecast of Inflation EGPE=Expected growth rate in P/E [defaults to 0, usually) EINC=Dividend yield or growth of income portion.

#4

Macro based multifactor model for calculating equity risk premium. Also called supply side rate of return ERP=[(1+Infl)(1+Growth PE)(1+Growth EPS)-1+Increase in Earnings]-RFR

#5

I think, but not positive, Ibbot Chen provides the equity risk premium. I think this is also called the “macro economic model” , something like compute the equity risk premium with the macro economic model sweet formula: [(1+expected inflation)(1+expected growth in GDP)(1+expected growth in P/E)] -1 + expected return of the market - risk free rate

#6

can someone please confirm that ibbot chen is also called the “supply side rate of return”

#7

Thanks folks. God, I hate Schweser. Last time, I swear…

#8

oops supply side Estimate of Equity risk premium…not rate of return as i wrote earlier…apologies… cf: cfai equity p150

#9

ranjan.rao Wrote: ------------------------------------------------------- > oops supply side Estimate of Equity risk > premium…not rate of return as i wrote > earlier…apologies… > cf: cfai equity p150 Yes, Ibbotson Chen is also referred to as the supply-side estimate of the equity risk premium. CFA state “To illustrate a supply-side analysis, the total return to equity can be analyzed into four components as explained by Ibbotson and Chen” on page 120 of volume 4. Cheers

#10

its in schweser, page 44 book 3

#11

Forward looking estimate of the Equity Risk premium

#12

Ibbotsen Chen is specifically mentioned in an LOS. No idea how Schweser missed this.

#13

Just checked. It is in schweser. The show NY is right, p44. But it’s not referred to as the Ibottson Chen model, but the supply side rate of return.

#14

soddy1979 Wrote: ------------------------------------------------------- > Ibbotsen Chen is specifically mentioned in an LOS. > No idea how Schweser missed this. Which LOS? I just checked the Finquiz site and didn’t see anything.

#15

reading 35 - Supply side estimates of Equity Risk Premium

#16

its in schweser… they just didn’t call it the ibbtson chen.

#17

it’s also called supply side model or somethinglike that.

#18

So is there or is there not an actual LOS # associated with Ibbotsen Chen?

#19

doesn’t mention it by name… but los 35.c: discuss strengths and weaknesses of methods used to determine equity risk premium is present.

#20

cpk123 Wrote: ------------------------------------------------------- > doesn’t mention it by name… > > but los 35.c: discuss strengths and weaknesses of > methods used to determine equity risk premium > > is present. If that’s the case, then I don’t think learning the formula is relevant to the exam. Just know what it is, how it works and move on.