Professor Jeremy Siegel of Wharton argued in 1998 that the stock market was not irrationally overvalued at the time, but rather merely that investors had (rationally) realized that the stock market is not particularly risky, so that required returns on the stock market had fallen.
a. Using the present value framework, explain this argument.
b. Does this argument explain the fantastic bull market of 95-98?
c. What would the argument predict going forward? Do you think the subsequent events vindicated this argument or not?
d. Your friend Bob is not particularly bright.
He says “what do you mean, returns have gone down. For the past three years, returns have gone up. If you’re estimating expected returns using historical returns, you should raise your estimate of future expected returns, not lower it.” Respond