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Ibbotson Chen Earnings Model Formula

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Equity Risk Premium refers to an excess return that investing in the stock market provides over a risk-free rate. Check FAQs
ERP=((1+(I⋅0.01))⋅(1+(rEg⋅0.01))⋅(1+(Peg⋅0.01))-1+(Y⋅0.01)-(RF⋅0.01))⋅100
ERP - Equity Risk Premium?I - Expected Inflation?rEg - Expected Real Growth in EPS?Peg - Expected Changes in PE Ratio?Y - Expected Yield on Index?RF - Expected Risk Free Rate?

Ibbotson Chen Earnings Model Example

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Here is how the Ibbotson Chen Earnings Model equation looks like with Values.

Here is how the Ibbotson Chen Earnings Model equation looks like with Units.

Here is how the Ibbotson Chen Earnings Model equation looks like.

10.8124Edit=((1+(2Edit⋅0.01))⋅(1+(8Edit⋅0.01))⋅(1+(1.5Edit⋅0.01))-1+(6Edit⋅0.01)-(7Edit⋅0.01))⋅100
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Ibbotson Chen Earnings Model Solution

Follow our step by step solution on how to calculate Ibbotson Chen Earnings Model?

FIRST Step Consider the formula
ERP=((1+(I⋅0.01))⋅(1+(rEg⋅0.01))⋅(1+(Peg⋅0.01))-1+(Y⋅0.01)-(RF⋅0.01))⋅100
Next Step Substitute values of Variables
∴ ERP=((1+(2⋅0.01))⋅(1+(8⋅0.01))⋅(1+(1.5⋅0.01))-1+(6⋅0.01)-(7⋅0.01))⋅100
Next Step Prepare to Evaluate
∴ ERP=((1+(2⋅0.01))⋅(1+(8⋅0.01))⋅(1+(1.5⋅0.01))-1+(6⋅0.01)-(7⋅0.01))⋅100
LAST Step Evaluate
∴ERP=10.8124

Ibbotson Chen Earnings Model Formula Elements

Variables
Equity Risk Premium
Equity Risk Premium refers to an excess return that investing in the stock market provides over a risk-free rate.
Symbol: ERP
Measurement: NAUnit: Unitless
Note: Value should be greater than 0.
Expected Inflation
Expected Inflation refers to the anticipated increase in the general price level of goods and services over a specific period, influencing economic decisions and monetary policy.
Symbol: I
Measurement: NAUnit: Unitless
Note: Value should be greater than 0.
Expected Real Growth in EPS
Expected Real Growth in EPS is the rate at which a company's earnings per share (EPS) is increasing or decreasing, expressed as a percentage.
Symbol: rEg
Measurement: NAUnit: Unitless
Note: Value should be greater than 0.
Expected Changes in PE Ratio
Expected Changes in PE Ratio include incorporating adjusted earnings or accounting for non-recurring items to provide a more accurate reflection of a company's valuation relative to its earnings.
Symbol: Peg
Measurement: NAUnit: Unitless
Note: Value should be greater than 0.
Expected Yield on Index
Expected Yield on Index is the projected annual return, from the collective performance of its constituent assets, including dividends, interest, or other distributions, over a given period.
Symbol: Y
Measurement: NAUnit: Unitless
Note: Value should be greater than 0.
Expected Risk Free Rate
Expected Risk Free Rate is the anticipated return on an investment with no risk of financial loss, often approximated by yields on government bonds or similar securities over a specific time frame.
Symbol: RF
Measurement: NAUnit: Unitless
Note: Value should be greater than 0.

Credits

Creator Image
Created by Keerthika Bathula
Indian Institute of Technology, Indian School of mines, Dhanbad (IIT ISM Dhanbad), Dhanbad
Keerthika Bathula has created this Formula and 100+ more formulas!
Verifier Image
Verified by Vishnu K
BMS College of Engineering (BMSCE), Bangalore
Vishnu K has verified this Formula and 200+ more formulas!

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How to Evaluate Ibbotson Chen Earnings Model?

Ibbotson Chen Earnings Model evaluator uses Equity Risk Premium = ((1+(Expected Inflation*0.01))*(1+(Expected Real Growth in EPS*0.01))*(1+(Expected Changes in PE Ratio*0.01))-1+(Expected Yield on Index*0.01)-(Expected Risk Free Rate*0.01))*100 to evaluate the Equity Risk Premium, The Ibbotson Chen Earnings Model is a macroeconomic model for the Equity Risk Premium (ERP). Equity Risk Premium is denoted by ERP symbol.

How to evaluate Ibbotson Chen Earnings Model using this online evaluator? To use this online evaluator for Ibbotson Chen Earnings Model, enter Expected Inflation (I), Expected Real Growth in EPS (rEg), Expected Changes in PE Ratio (Peg), Expected Yield on Index (Y) & Expected Risk Free Rate (RF) and hit the calculate button.

FAQs on Ibbotson Chen Earnings Model

What is the formula to find Ibbotson Chen Earnings Model?
The formula of Ibbotson Chen Earnings Model is expressed as Equity Risk Premium = ((1+(Expected Inflation*0.01))*(1+(Expected Real Growth in EPS*0.01))*(1+(Expected Changes in PE Ratio*0.01))-1+(Expected Yield on Index*0.01)-(Expected Risk Free Rate*0.01))*100. Here is an example- 10.8124 = ((1+(2*0.01))*(1+(8*0.01))*(1+(1.5*0.01))-1+(6*0.01)-(7*0.01))*100.
How to calculate Ibbotson Chen Earnings Model?
With Expected Inflation (I), Expected Real Growth in EPS (rEg), Expected Changes in PE Ratio (Peg), Expected Yield on Index (Y) & Expected Risk Free Rate (RF) we can find Ibbotson Chen Earnings Model using the formula - Equity Risk Premium = ((1+(Expected Inflation*0.01))*(1+(Expected Real Growth in EPS*0.01))*(1+(Expected Changes in PE Ratio*0.01))-1+(Expected Yield on Index*0.01)-(Expected Risk Free Rate*0.01))*100.
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