Grinold and Kroner Model
The Grinold and Kroner Model is used to calculate expected returns for a stock, stock index or the market as whole.
Description
The model states that:Where
are the expected returns
- is the dividend in next period
- is the current price
- is the expected inflation rate
- is the real growth rate in earnings
- is the changes in shares outstanding
- is the changes in P/E ratio
Grinold, Kroner, and Siegel estimated the inputs to the Grinold and Kroner model and arrived at a then-current equity risk premium estimate between 3.5% and 4%. The equity risk premium is the difference between the expected total return on a capitalization-weighted stock market index and the yield on a riskless government bond.