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

An analyst decomposes the expected return on an equity index into components. Which set of components is most likely used in the standard decomposition of equity returns into earnings growth, valuation change and income?

Equity return is most commonly decomposed into dividend yield, earnings growth and the change in the P/E multiple. Income, growth and repricing together explain price change plus cash distributions, whereas inflation, beta or interest rates are drivers behind these components, not components themselves.

  1. ADividend yield, change in P/E, and growth in earningsCorrect
  2. BDividend yield, change in book value, and inflation
  3. CShare repurchase yield, interest rate, and beta

Explanation

The standard decomposition (Grinold-Kroner style) splits return into income (dividend yield and repurchase yield), earnings growth, and the change in the P/E multiple. The other options mix in items such as inflation, beta and interest rates that are not direct components.

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