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A Fast and Parsimonious Way to Estimate the Implied Rate of Return on Equity

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  • Sanna, Dario

Abstract

I propose a fast and parsimonious way to estimate the implied rate of return on common equity of single stocks and indexes, resulting from the combination of two easily computable ratios.

Suggested Citation

  • Sanna, Dario, 2020. "A Fast and Parsimonious Way to Estimate the Implied Rate of Return on Equity," MPRA Paper 102072, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:102072
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    References listed on IDEAS

    as
    1. Andrew Ang & Geert Bekaert, 2007. "Stock Return Predictability: Is it There?," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 651-707.
    2. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-Run Stock Market Outlook: An Update," NBER Working Papers 8221, National Bureau of Economic Research, Inc.
    3. James Claus & Jacob Thomas, 2001. "Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets," Journal of Finance, American Finance Association, vol. 56(5), pages 1629-1666, October.
    4. Chin, Michael & Polk, Christopher, 2015. "A forecast evaluation of expected equity return measures," Bank of England working papers 520, Bank of England.
    5. Lleo, Sebastien & Ziemba, William T., 2014. "Does the bond-stock earning yield differential model predict equity market corrections better than high P/E models?," LSE Research Online Documents on Economics 59290, London School of Economics and Political Science, LSE Library.
    6. Carl Chiarella & Shenhuai Gao, 2002. "Solving the Price-Earnings Puzzle," Working Paper Series 116, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    7. Kenton K. Yee, 2005. "Aggregation, Dividend Irrelevancy, and Earnings†Value Relations," Contemporary Accounting Research, John Wiley & Sons, vol. 22(2), pages 453-480, June.
    8. Maio, Paulo & Xu, Danielle, 2020. "Cash-flow or return predictability at long horizons? The case of earnings yield," Journal of Empirical Finance, Elsevier, vol. 59(C), pages 172-192.
    9. Bali, Turan G. & Demirtas, K. Ozgur & Tehranian, Hassan, 2008. "Aggregate Earnings, Firm-Level Earnings, and Expected Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(3), pages 657-684, September.
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    More about this item

    Keywords

    Earnings Yield; Implied Cost of Equity; Price Earnings Ratio; Quadratic Roe Ratio; Roe Discount Model;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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