Consider a simple asset-pricing model in which there is only one more period remaining in the future. Denote the current period by t and the remaining period by t + 1. Assume that the current and future dividends are non-zero.

(a) What is the definition of rate of return R_t+1 in this model? Simplify as much as you can.

(b) Derive the Campbell-Shiller return identity that applies to period t + 1. Recall that the identity links returns, dividend-growth, and dividend-price ratios.

(c) Formalize the idea that variation in price-dividend ratios comes either from news of dividend-growth or from news of changing discount rates within the context of this model.