Case/Group Exercise 1
Review the data in spreadsheet “Case1 Data.xls.” This is a collection of annual S&P equity index data
from 1922 through 2019, both nominal and real series.
Plot the real price index and real earnings. Comment on the relationship. Why do we prefer the real
data series?
Column J has a “smoothed” P/E ratio series, following Robert Shiller’s “CAPE” ratio. It represents the
current price divided by the average of the previous 10 years of earnings. What might be the reason for
using this construction using average earnings? What are the drawbacks?
Columns K, L, and M have 1-yr, 5-yr, and 10-yr forward geometric average returns. Use these series to
evaluate the power of the smoothed P/E ratio series to predict future returns. Run three regressions –
using each forward return series as the dependent variable and the smoothed P/E as the independent
variable. What are your observations? (Quality of the fit? Coefficient value? Significant variables?)
The data set is annual information from 1923 through 2019. Using the data set, predict 2020 returns.
Factor to consider: Should you use the entire data set? If not, how many years should you use? How
does your prediction compare to the approximate YTD S&P return though mid-November?
Write a summary report responding to these questions and prompts (about 2-3 pages), and be prepared
to discuss your work in class on Tuesday 1 Dec. Upload a pdf of your report to Canvas by 11pm on
Tuesday 1 Dec.
Be sure to include the names of all group members in the report. The group only needs to
submit/upload one report.

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