Question: E5.15. The Expected Return for the S&P 500 (Medium) On January 1, 2008, the S&P 500 index stood at 1468 with a price-to-book ratio of

E5.15. The Expected Return for the S&P 500 (Medium) On January 1, 2008, the S&P 500 index stood at 1468 with a price-to-book ratio of 2.6. Expected earnings for the index for calendar year 2008 were 72.56. These earnings estimates, compiled from analysts' consensus earnings forecasts for the 500 stocks in the index, are in the same dollar units as the index.

a. What is the forecast of return on common equity (ROCE) for the index for 2008?

b. If you expect residual earnings growth for the corporate sector to equal the GDP growth rate of 4 percent for the economy as a whole, what is the implied expected return to buying the S&P 500 at 1468?

c. The risk-free rate at the time was 4 percent. If you requise a risk premium of 5 percent to buy equities, would you have bought an index fund that tracks the S&P 500 index?

d. In 1999, the price-to-book ratio for the S&P 500 was much higher, at 5.4. Trailing ROCE was 23 percent. With the same GDP growth rate for growth in residual earnings, calculate the implied expected return to buying the S&P 500 at that point in time. Would you have purchased a market index fund that tracks the S&P 500 index?

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