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CFA Level I · CFA Level I Exam · Sources of Equity Returns

An analyst decomposes the expected return on a share into components. Which of the following is the most likely set of components in the standard decomposition of equity return used in the curriculum?

The standard decomposition splits an equity return into dividend yield, earnings growth and the change in the price-to-earnings multiple (re-rating). The risk-free rate and beta belong to required-return models such as CAPM, not to the return decomposition.

  1. ADividend yield, earnings growth and change in the price-to-earnings multipleCorrect
  2. BRisk-free rate, equity risk premium and company beta only
  3. CBook value growth, inflation and the change in the exchange rate only

Explanation

The standard decomposition of equity return breaks it into income (dividend yield), earnings growth and re-rating (change in the P/E multiple). Option B describes a required-return build-up (CAPM), not a decomposition of realized or expected return. Option C lists items that are not the standard components.

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