2022 CFA Program Level III Volume 1 Behavioral Finance, Capital Market Expectations, and Asset Allocation

High growth need not translate one-for-one into higher return unless it can be expected to continue forever. Declining return on investment essentially means that either GDP growth slows or profits decline as a share of GDP, or both. And, of course, valuation multiples do matter.

he economy, Sk (earnings/GDP), and the P/E ratio (PE).

We can express the aggregate market value of equity, Ve, as the product of three factors: the level of nominal GDP, the share of profits in the economy, Sk (earnings/GDP)