In addition to emphasizing long-horizon expected returns, the approach taken here differs from previous treatments in that it uses ex ante estimates of expected returns, rather than ex post actual returns. Expected returns are estimated by incorporating corporate cash flow projections into an expanded version of the Campbell and Shiller (1988, 1989) dividend-price ratio model, in which the log of the price-earnings ratio is a linear function of required future returns, expected earnings growth rates, and expected dividend payout rates. Given one adequately controls for expected earnings growth and payout rates–and assuming the model is true–then any residual relationship between the price-earnings ratio and expected.
