You are trying to forecast the expected level of aggregate Toronto stock market for the next year. Suppose the current T-Bill rate is 4%, and the yield to maturity for the 10-year Canada bonds is 5% per year, the expected rate of inflation is 2% per year, and the expected EPS for the S&P/TSX composite is $450.
What is your forecast level, assuming 3.5% risk premium (difference between corporate earnings yield and 10-year government bond)?What is your forecast, assuming no risk premium?