How do they calc the expected change in the P/E? The formula for the Ibbotson model is
(1+expected Inflation)(1+Real earnings)(1+change in P/E) - 1 + div yield - RF
They come up with a change in P/E of .97??? The problem says the market is overvalued by 10% and they don’t really give the expected change in P/E.
OK, so I just realized the baseline valuation for this is 0 and will change depending on over/under valuation. But, I still don’t see where they come up with .97?
