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Equity Premium - Asset Managment - Lecture Slides, Slides of Management Fundamentals

Mizoram UniversityManagement Fundamentals

Asset Management is an important subject in Economics. In these Lecture Slides, following concepts are discussed : Equity Premium, Variables, Two Alternative Ways, Measure Returns, Growth in Prices, Dividend Growth, Earning Growth, Aggregate Price Index, Earning, Ratios

Typology: Slides

2012/2013

Uploaded on 07/26/2013

devnarayan
devnarayan ๐Ÿ‡ฎ๐Ÿ‡ณ

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FF๎˜ƒ(2002)๎˜ƒ:๎˜ƒThe๎˜ƒEquity๎˜ƒPremium๎˜ƒ
โ€ขAll๎˜ƒvariables๎˜ƒare๎˜ƒin๎˜ƒreal๎˜ƒterms.๎˜ƒ๎˜ƒ๎˜ƒ
A(Rt)๎˜ƒ=๎˜ƒA(Dt/Ptโ€1)๎˜ƒ+๎˜ƒA(GPt)๎˜ƒ๎˜ƒ
๎˜ƒ
โ€ขTwo๎˜ƒalternative๎˜ƒways๎˜ƒto๎˜ƒmeasure๎˜ƒreturns๎˜ƒ๎˜ƒ
๎˜ƒA(RDt)๎˜ƒ=๎˜ƒA(Dt/Ptโ€1)๎˜ƒ+๎˜ƒA(GDt)๎˜ƒ๎˜ƒ
๎˜ƒA(RYt)๎˜ƒ=๎˜ƒA(Dt/Ptโ€1)๎˜ƒ+๎˜ƒA(GYt)๎˜ƒ๎˜ƒ
๎˜ƒ
where๎˜ƒ๎˜ƒ โ€˜Aโ€™๎˜ƒstands๎˜ƒfor๎˜ƒaverage๎˜ƒ
๎˜ƒ๎˜ƒ๎˜ƒ GPt๎˜ƒ=๎˜ƒgrowth๎˜ƒin๎˜ƒprices๎˜ƒ(=pt/ptโ€1)*(Ltโ€1/Lt)๎˜ƒโ€“๎˜ƒ1)๎˜ƒ
๎˜ƒ๎˜ƒ๎˜ƒ GDt๎˜ƒ=๎˜ƒdividend๎˜ƒgrowth๎˜ƒ(=๎˜ƒdt/dtโ€1)*(Ltโ€1/Lt)๎˜ƒโ€1)๎˜ƒ
๎˜ƒ๎˜ƒ๎˜ƒ GYt๎˜ƒ=๎˜ƒearning๎˜ƒgrowth๎˜ƒ(=๎˜ƒyt/ytโ€1)*(Ltโ€1/Lt)๎˜ƒโ€1)๎˜ƒ
๎˜ƒ๎˜ƒ๎˜ƒ L๎˜ƒis๎˜ƒthe๎˜ƒaggregate๎˜ƒprice๎˜ƒindex๎˜ƒ(e.g.๎˜ƒCPI)๎˜ƒ
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Download Equity Premium - Asset Managment - Lecture Slides and more Slides Management Fundamentals in PDF only on Docsity!

FF

The

Equity

Premium

All

variables

are

in

real

terms.

A(R

t

A(D

t

/P

t โ€ 1

A(GP

t

Two

alternative

ways

to

measure

returns

A(RD

)t

A(D

/Pt tโ€ 1

A(GD

t

A(RY

)t

A(D

/Pt tโ€ 1

A(GY

)t where โ€˜Aโ€™ stands for average GP t^ = growth in prices (=p /pt tโ€ 1 )*(L tโ€ 1 /L )t

  1. GD t^ = dividend growth (= d /dt tโ€ 1 )*(L tโ€ 1 /L )t โ€
    1. GY t^ = earning growth (= y /yt tโ€ 1 )*(L tโ€ 1 /L )t โ€
      1. L is the aggregate price index (e.g. CPI)

US Data ( โ€

: Div/P and Earning/P ratios 8 6 4 2 0 18 16 14 12 10 1865 1885 1905 1925 1945 1965 1985 2005 percent

FF (2002) : The Equity Premium (Cont.)

F t = risk free rate - R t = return on equity - RXD t = equity premium, calculated using dividend growth - RXY t = equity premium, calculated using earnings growth - RX t = actual equity premium (= R t - F t )

Linearisation

of

RVF

h t+

ln(1+H t+

ln[(P t+

D

t+

)/P

]t

h t+

p t+

p t

)d t+

k

where p t^

ln(P )t

and

Mean(P)

[Mean(P)

Mean(D)]

t^

dt

p t

h t+

t^

t+

dt+

k Dynamic version of the Gordon Growth model

p t

dt

const.

E

t^

[

jโ€ 1

dt+j

h t+j

)]

lim

j^ (p t+j

d t+j

Stock

Market

Bubbles

Bubbles

Examples

South

Sea

share

price

bubble

1720s

Tulipmania

in

the

th

century

Stock

market

1920s

and

collapse

in

Stock

market

rise

of

and

subsequent

crash