Please answer number 2

Assignment: Grinold Kroner Model First, some review: E(Re)=(V0)D0(1+g)+g=(P0)D1+g In the above equation, we make a simple modification to the infinite period dividend discount model, [ P0=D1/kg], to solve for the expected return on the market (thus we can forecast the price next year). In words, the price now equals the dividend next year divided by the required return less growth. The above equations just solves for k. k is the same as E(Re) in the above equation. Sometimes we call it expected return, or sometimes we call it required return. Same thing. If we have the price of a stock, or an index value, and an estimate for next year dividend and growth we can estimate the expected (required return) on the market. One way to estimate growth is using [retention rate x ROE]. Next, we can look at the infinite period dividend discount model.. P0=D1/kg..and divided both sides by earnings to provide some theoretical basis for the PE ratio. The PE ratio is a measure of relative value and shows the value, or multiple, the investors are willing to pay to own a share of the earnings: E1Pi=kgD1/E1 Shiller discusses the PE ratio measured with 10 year inflation adjusted numbers. Our next step is to come up with another way to forecast for the market, using some of these ideas. The associated reading with this assignment discusses the Grinold Kroner Model: Please answer the following two questions. Post your response in the assignment dropbox before class on the due date. 1. In your own words, explain the Equity Risk Premium. 2. What is your forecast for the equity risk Premium