Set out the methods used to form expected returns for equity markets

Historical averages are simple but period-dependent. The Grinold–Kroner model decomposes expected return as dividend yield + (nominal earnings growth − % change in shares outstanding) + % change in P/E. With a 2% yield, 5% earnings growth, net buybacks shrinking shares by 1% and a P/E expected to fall 0.5% a year, the estimate is 2 + 5 + 1 − 0.5 = 7.5%. Equilibrium approaches such as Singer–Terhaar compute a risk premium as volatility × correlation with the global market × the market Sharpe ratio, blended with a segmented version by degree of integration. Risk premium build-ups add the premium to a bond yield. The trap is assuming P/E expansion continues indefinitely.