Valuations and long-term stock returns

Now that we illuminated the risks Of starxiard MPT with assumed static 10% returns, we can Offer a solution based on a new approach to MPT to develop diversified strategies that factor in a considerable loss risk.

The answer is combined with an investment menu design that compliments ttE new MPT approach.
Yale Professor Robert Shiller developed the cyclically adjusted price-to-earnings ratio (CAPE) and detailed it in his paper, Valuation Ratios and the Long-Run Stock Market Outlook.

This valuation measure Of stocks using the real (inflation-adjusted) pershare earnings over ten years Of the S&P 500. CAPE, or what is also called the P/E 10 ratio, uses smoothed real earnings.

The Shiller P/E 10 is based on Graham and Dodd’s work Security Analysis in which the smoothing process Of using multi-year average earnings per share was recommended. We can see the inverse relationship of valuation and subsequent 10 year returns.