You are on the investment committee of the university endowment. As part of the process in developing capital market expectations, you have been tasked with coming up with the nominal 3-year projected equity market returns for the asset class consisting of U.S. equity securities.

Using the information below, forecast the 3-year equity market return based on the Ibbotsen-Chen macroeconomic model.

You forecast inflation will run at 4% per year, higher than the Feds 2% target due to short term supply chain constraints that are putting upward pressure on input prices, output prices, and wages.

The labor force in the U.S. has grown historically at around 1%, annually. However, due to demographic factors, you believe that this growth rate will slow to 0.5% while you expect labor force productivity to grow around 3.0% per year.

You expect dividend yields to average around 2.0% over the forecast period.

The price to earnings ratio on the broad equity index is currently at the high end of its historical range at around 35. Due to high inflation and the prospect of higher interest rates in the future, you expect this ratio to experience some degree of mean reversion. You project that the ratio will be 30 by the end of the 3-year period.

The 5-year treasury rate is currently at 1%.

What is the projected equity market return based on the Ibbotsen-Chen macroeconomic model?

Remember: The Ibbotsen-Chen model was given in the lecture as an expected return premium. Make sure you adjust the formula for the fact that we are looking for expected return (as opposed to the premium).

Enter as decimal or percent (please do NOT include a percentage sign).

(Please use 4 decimals if writing as a decimal, and 2 decimal places if writing as a %)