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Ibbotson Chen Earnings Model Formula

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Equity Risk Premium refers to an excess return that investing in the stock market provides over a risk-free rate. Check FAQs

ERP = ((1 + (I \cdot 0.01)) \cdot (1 + (rEg \cdot 0.01)) \cdot (1 + (Peg \cdot 0.01)) - 1 + (Y \cdot 0.01) - (RF \cdot 0.01)) \cdot 100

ERP - Equity Risk Premium?I - Expected Inflation?rEg - Expected Real Growth in EPS?Peg - Expected Changes in PE Ratio?Y - Expected Yield on Index?RF - Expected Risk Free Rate?

Ibbotson Chen Earnings Model Example

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Here is how the Ibbotson Chen Earnings Model equation looks like with Values.

Here is how the Ibbotson Chen Earnings Model equation looks like with Units.

Here is how the Ibbotson Chen Earnings Model equation looks like.

10.8124 = ((1 + (2 \cdot 0.01)) \cdot (1 + (8 \cdot 0.01)) \cdot (1 + (1.5 \cdot 0.01)) - 1 + (6 \cdot 0.01) - (7 \cdot 0.01)) \cdot 100

10.8124 = ((1 + (2 \cdot 0.01)) \cdot (1 + (8 \cdot 0.01)) \cdot (1 + (1.5 \cdot 0.01)) - 1 + (6 \cdot 0.01) - (7 \cdot 0.01)) \cdot 100

10.8124 = ((1 + (2 \cdot 0.01)) \cdot (1 + (8 \cdot 0.01)) \cdot (1 + (1.5 \cdot 0.01)) - 1 + (6 \cdot 0.01) - (7 \cdot 0.01)) \cdot 100

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Ibbotson Chen Earnings Model Solution

Follow our step by step solution on how to calculate Ibbotson Chen Earnings Model?

FIRST Step Consider the formula

ERP = ((1 + (I \cdot 0.01)) \cdot (1 + (rEg \cdot 0.01)) \cdot (1 + (Peg \cdot 0.01)) - 1 + (Y \cdot 0.01) - (RF \cdot 0.01)) \cdot 100

Next Step Substitute values of Variables

∴

ERP = ((1 + (2 \cdot 0.01)) \cdot (1 + (8 \cdot 0.01)) \cdot (1 + (1.5 \cdot 0.01)) - 1 + (6 \cdot 0.01) - (7 \cdot 0.01)) \cdot 100

Next Step Prepare to Evaluate

∴

ERP = ((1 + (2 \cdot 0.01)) \cdot (1 + (8 \cdot 0.01)) \cdot (1 + (1.5 \cdot 0.01)) - 1 + (6 \cdot 0.01) - (7 \cdot 0.01)) \cdot 100

LAST Step Evaluate

∴

ERP = 10.8124

Ibbotson Chen Earnings Model Formula Elements

Variables

Equity Risk Premium

Equity Risk Premium refers to an excess return that investing in the stock market provides over a risk-free rate.

Symbol: ERP

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Equity Risk Premium

Expected Inflation

Expected Inflation refers to the anticipated increase in the general price level of goods and services over a specific period, influencing economic decisions and monetary policy.

Symbol: I

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Expected Inflation

Expected Real Growth in EPS

Expected Real Growth in EPS is the rate at which a company's earnings per share (EPS) is increasing or decreasing, expressed as a percentage.

Symbol: rEg

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Expected Real Growth in EPS

Expected Changes in PE Ratio

Expected Changes in PE Ratio include incorporating adjusted earnings or accounting for non-recurring items to provide a more accurate reflection of a company's valuation relative to its earnings.

Symbol: Peg

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Expected Changes in PE Ratio

Expected Yield on Index

Expected Yield on Index is the projected annual return, from the collective performance of its constituent assets, including dividends, interest, or other distributions, over a given period.

Symbol: Y

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Expected Yield on Index

Expected Risk Free Rate

Expected Risk Free Rate is the anticipated return on an investment with no risk of financial loss, often approximated by yields on government bonds or similar securities over a specific time frame.

Symbol: RF

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Expected Risk Free Rate

Other formulas in Quantitative Finance category

Go Capital Market Line

R p = Rf + (\frac{ER m - Rf}{σ m}) \cdot σ p

Go Risk Neutral Probability

π = \frac{((1 + (\frac{R f}{100})) \cdot P0) - S d}{S u - S d}

How to Evaluate Ibbotson Chen Earnings Model?

Ibbotson Chen Earnings Model evaluator uses Equity Risk Premium = ((1+(Expected Inflation*0.01))*(1+(Expected Real Growth in EPS*0.01))*(1+(Expected Changes in PE Ratio*0.01))-1+(Expected Yield on Index*0.01)-(Expected Risk Free Rate*0.01))*100 to evaluate the Equity Risk Premium, The Ibbotson Chen Earnings Model is a macroeconomic model for the Equity Risk Premium (ERP). Equity Risk Premium is denoted by ERP symbol.

How to evaluate Ibbotson Chen Earnings Model using this online evaluator? To use this online evaluator for Ibbotson Chen Earnings Model, enter Expected Inflation (I), Expected Real Growth in EPS (rEg), Expected Changes in PE Ratio (Peg), Expected Yield on Index (Y) & Expected Risk Free Rate (RF) and hit the calculate button.

FAQs on Ibbotson Chen Earnings Model

What is the formula to find Ibbotson Chen Earnings Model?

The formula of Ibbotson Chen Earnings Model is expressed as Equity Risk Premium = ((1+(Expected Inflation*0.01))*(1+(Expected Real Growth in EPS*0.01))*(1+(Expected Changes in PE Ratio*0.01))-1+(Expected Yield on Index*0.01)-(Expected Risk Free Rate*0.01))*100. Here is an example- 10.8124 = ((1+(2*0.01))*(1+(8*0.01))*(1+(1.5*0.01))-1+(6*0.01)-(7*0.01))*100.

How to calculate Ibbotson Chen Earnings Model?

With Expected Inflation (I), Expected Real Growth in EPS (rEg), Expected Changes in PE Ratio (Peg), Expected Yield on Index (Y) & Expected Risk Free Rate (RF) we can find Ibbotson Chen Earnings Model using the formula - Equity Risk Premium = ((1+(Expected Inflation*0.01))*(1+(Expected Real Growth in EPS*0.01))*(1+(Expected Changes in PE Ratio*0.01))-1+(Expected Yield on Index*0.01)-(Expected Risk Free Rate*0.01))*100.

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Ibbotson Chen Earnings Model Formula

Ibbotson Chen Earnings Model Example

Ibbotson Chen Earnings Model Solution

Ibbotson Chen Earnings Model Formula Elements

Other formulas in Quantitative Finance category

How to Evaluate Ibbotson Chen Earnings Model?

FAQs on Ibbotson Chen Earnings Model

Variable Name