The Fed model advocates the following logic: Let Y represent the yield on 10-year Treasuries...
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The Fed model advocates the following logic: Let Y represent the yield on 10-year Treasuries and E/P represent aggregate earnings to price ratio or earnings yield adjusted for risk premiums. Then stocks and bonds are competing investments. As a result, stocks are cheap when E/P exceeds Y, expensive when Y exceeds E/P, and fairly value when Y and E/P are equal. Which of the following statements is mostly correct? A. Stocks and bonds are not competing investments due to different preferences for risk. While investors in equity markets are a mixture of retail and institutional, investors in bond markets are mostly institutional. B. Y should be the yield of perpetual bonds to be comparable with equity, which has indefinite claims in the future. C. Y should be the yield of inflation-adjusted bonds (TIPS) as aggregate E/P is a real quantity. D. Y should be the yield of shorter-term bonds because long-term bonds are much less liquid than equity
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