QUESTIONS

  1. Identify four key drivers of the P/E multiple.
  2. What has historically been the key driver of equity prices in the very long run?
    1. What are the ranking of the phases in terms of average real price returns?
    2. Which phase offers the highest average real earnings growth?
  4. Which of the economic variables considered in the chapter explains most of the variation in the market implied equity risk premium?
  5. What is the rational for adjusting valuation for the economic cycle?

* We would like to thank Hanyi Lim and Matthieu Walterspiler for research assistance for the analysis used in this chapter.

1 See the discussion in John Y. Campbell, “Estimating the Equity Premium,” NBER Working Paper 13423 (2007), and the references therein for the arguments on both sides of this debate.

2 Anders E. B. Nielsen and Peter Oppenheimer, “The Equity Cycle Part 1: Identifying the Phases”, Goldman Sachs European Portfolio Strategy, 2009.

3 Anders E. B. Nielsen and Peter Oppenheimer, “The Equity Cycle Part 2: Investing in the Phases”, Goldman Sachs European Portfolio Strategy (2009).

4 See, for example, Eugene F. Fama and Kenneth R. French, “The Cross-Section of Expected Stock Returns,” Journal of Finance 47, no. 2 (1992): 427–465; and Eugene F. Fama and Kenneth R. French, “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics 33, no. 1 (1993): 3–56.

5 Kevin Daly, Anders E. B. Nielsen and Peter Oppenheimer, “Finding Fair Value in Global Equities: Part II—Forecasting ...

Get Equity Valuation and Portfolio Management now with the O’Reilly learning platform.

O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.

Start your free trial