Grinold and Kroner Model


The Grinold and Kroner Model is used to calculate expected returns for a stock, stock index or the market as whole. It is a part of a larger framework for making forecasts about market expectations.
The model states that:

Where
One offshoot of this discounted cash flow analysis is the Fed Model. Under the Fed model, the earnings yield is compared to the 10-year treasury bonds. If the earnings yield is lower than that of the bonds, the investor would shift their money into the less risky T-bonds.
Grinold, Kroner, and Siegel estimated the inputs to the Grinold and Kroner model and arrived at a then-current equity risk premium estimate between 3.5% and 4%. The equity risk premium is the difference between the expected total return on a capitalization-weighted stock market index and the yield on a riskless government bond.