(b) Make a prediction for S&P 500 returns using the Equity Return Scenarios tab and defend your prediction.

(c) Check Mkt Returns and Valuations tab. The second part of the table shows real annual returns of S&P 500 given the normalized PE ratio at the time of the purchase. What does the table imply for returns on S&P 500 over the next five years? Do you want to change your answers? Why?

Please answer long.

Scenarios for US Equity Returns Historical Average 1970-2007 Optimistic Scenario 2021-2025 Middle Scenario 2021-2025 Pessimistic Scenario 2021-2025 Our Scenario 2021-2025 Earnings x Valuation Change = Growth in S&P Index + Reinvested dividends = Total Equity returns 7,9% 0,0% 7,9% 3,2% 13,2% 5,0% 9,7% 15,2% 2,0% 17,2% 1,5% -1,9% -0,4% 2,0% 1,6% -2,0% -7,4% -9,2% 2,0% -7,2% 1,5% 1,2% 2,7% 2,0% 4,7% Number of years 38 5 5 5 5 Assumptions: Trailing PE ratio Change in Profit Margins Nominal GDP 35 1,0% 4,0% 20 -1,0% 2,5% 15 -3,0% 1,0% 23,33333 -0,01 7,5% 0,025 Latest S&P PE: 22 Scenarios for Developed Market Equity Returns Our Historical Average 1970-2007 Optimistic Scenario 2021-2025 Middle Scenario 2021-2025 Pessimistic Scenario 2021-2025 Scenario 2021-2025 Earnings x Valuation Change = Growth in MSCI Index + Reinvested dividends = Total Equity returns 7,9% 0,0% 7,9% 3,2% 11,1% 7,0% 2,2% 9,3% 2,0% 11,3% 4,4% 0,0% 4,4% 2,0% 6,4% 1,3% -2,4% -1,1% 2,0% 0,9% 4,2% 0,0% 4,2% 2,0% 6,2% Number of years 38 5 5 5 5 Assumptions: Trailing PE ratio Change in Profit Margins Nominal GDP 19,7 2,0% 5,0% 17,7 0,0% 4,4% 15,7 -2,0% 3,3% 17,7 0 0,042333 7,2% Sept. 2015 PE on MSCI World: 17,7 Scenarios for Emerging Market Equity Returns Our Historical Average 1988-2007 Optimistic Scenario 2021-2025 Middle Scenario 2021-2025 Pessimistic Scenario 2021-2025 Scenario 2021-2025 Earnings x Valuation Change = Growth in MSCI Index + Reinvested dividends = Total Equity returns 8,4% 3,2% 11,9% 2,9% 14,8% 9,5% 8,2% 18,5% 2,6% 21,1% 5,5% 3,1% 8,7% 2,6% 11,3% 1,0% -5,2% -4,3% 2,2% -2,1% 5,3% 2,5% 7,9% 2,2% 10,1% Number of years 20 5 5 5 5 Assumptions: Trailing PE ratio Change in Profit Margins Nominal GDP 17 2,0% 7,5% 14 0,0% 5,5% 10 -2,0% 3,0% 13,66667 0 0,053333 8,4% Sept. 2015 PE on MSCI EM: 12,4 Earnings growth equals sales growth (assumed to be roughly equal to nominal GDP growth) plus growth in profit margins. Scenarios for US Equity Returns Historical Average 1970-2007 Optimistic Scenario 2021-2025 Middle Scenario 2021-2025 Pessimistic Scenario 2021-2025 Our Scenario 2021-2025 Earnings x Valuation Change = Growth in S&P Index + Reinvested dividends = Total Equity returns 7,9% 0,0% 7,9% 3,2% 13,2% 5,0% 9,7% 15,2% 2,0% 17,2% 1,5% -1,9% -0,4% 2,0% 1,6% -2,0% -7,4% -9,2% 2,0% -7,2% 1,5% 1,2% 2,7% 2,0% 4,7% Number of years 38 5 5 5 5 Assumptions: Trailing PE ratio Change in Profit Margins Nominal GDP 35 1,0% 4,0% 20 -1,0% 2,5% 15 -3,0% 1,0% 23,33333 -0,01 7,5% 0,025 Latest S&P PE: 22 Scenarios for Developed Market Equity Returns Our Historical Average 1970-2007 Optimistic Scenario 2021-2025 Middle Scenario 2021-2025 Pessimistic Scenario 2021-2025 Scenario 2021-2025 Earnings x Valuation Change = Growth in MSCI Index + Reinvested dividends = Total Equity returns 7,9% 0,0% 7,9% 3,2% 11,1% 7,0% 2,2% 9,3% 2,0% 11,3% 4,4% 0,0% 4,4% 2,0% 6,4% 1,3% -2,4% -1,1% 2,0% 0,9% 4,2% 0,0% 4,2% 2,0% 6,2% Number of years 38 5 5 5 5 Assumptions: Trailing PE ratio Change in Profit Margins Nominal GDP 19,7 2,0% 5,0% 17,7 0,0% 4,4% 15,7 -2,0% 3,3% 17,7 0 0,042333 7,2% Sept. 2015 PE on MSCI World: 17,7 Scenarios for Emerging Market Equity Returns Our Historical Average 1988-2007 Optimistic Scenario 2021-2025 Middle Scenario 2021-2025 Pessimistic Scenario 2021-2025 Scenario 2021-2025 Earnings x Valuation Change = Growth in MSCI Index + Reinvested dividends = Total Equity returns 8,4% 3,2% 11,9% 2,9% 14,8% 9,5% 8,2% 18,5% 2,6% 21,1% 5,5% 3,1% 8,7% 2,6% 11,3% 1,0% -5,2% -4,3% 2,2% -2,1% 5,3% 2,5% 7,9% 2,2% 10,1% Number of years 20 5 5 5 5 Assumptions: Trailing PE ratio Change in Profit Margins Nominal GDP 17 2,0% 7,5% 14 0,0% 5,5% 10 -2,0% 3,0% 13,66667 0 0,053333 8,4% Sept. 2015 PE on MSCI EM: 12,4 Earnings growth equals sales growth (assumed to be roughly equal to nominal GDP growth) plus growth in profit margins