## Wednesday, September 28, 2005

### Reverse Valuations of Stocks and Bonds

When we talk about the valuations of the stocks or stock market indexes we always use P/E ratios as valuations criterion. Also, for bonds we use the yield or coupon of the bond as a valuation measurement. In the following table I display the inverse of the common valuation ratios.

 Criteria Value Earnings Yield of S&P 500 4.91% Earnings Yield of Value Stocks 6.75% Earnings Yield of REIT Index 2.48% P/E of 30 Year Bond 21.92 P/E of 10 Year Bond 23.14 P/E of Cash (Savings Account) 25.00

Here is how I obtained these values:
• The P/E of S&P 500 is 20.36. The inverse of P/E is E/P and it is 0.0491. In percentage terms, the earnings yield of S&P 500 is 4.91%.
• The P/E of MSCI US Prime Market Value Index is 14.8. The E/P of the Value Index is 0.0675. In percentage terms, the earnings yield of the MSCI US Prime Market Value Index is 6.75%.
• By doing the same type of calculation with MSCI US REIT Index I arrived at the value of 2.48%. The P/E of the MSCI US REIT Index is 40.3.
• The earnings yield of the 30-year bond is 4.56%. So, the P/E of the 30-year bond is 100/4.56 = 21.92.
• The earnings yield of the 10-year bond is 4.32%. So, the P/E of the 10-year bond is 100/4.32 = 23.14.
• To calculate the P/E of cash, I used the Emigrant Direct’s savings accounts rate as yardstick. The current yield is 4%. So, the P/E of cash is 25.

#### 1 comment:

Harvey Multani said...

Good insight, I haven't seen a great deal of analysis on the inverse of common ratios.

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