NakedPuts2011

Got it. Year 2009 is the base year, so.

Real stock price index(2009) = Nominal stock price index(2009).

Actually, the base year can be any year, because it shows in the numerator and denominator. Set base year t=0 is more intuitive to me.

Real stock price index(t) = Nominal stock price index(t) * CPI(2009) / CPI(t)
Real earnings(t) = Nominal earnings(t) * CPI(2009) / CPI(t+1)

The trick is that the Nominal stock price (t) is the price in January in year t, while the earning is for year t(known at year end).

Thanks for raising the Q.



Edited 1 time(s). Last edit at Wednesday, May 18, 2011 at 11:35AM by deriv108.