S&P 500 vs. Real yield by VIX
¨ Theoretically to price an asset two major factors that are taken into account are expected yield and expected future growth rate. But in reality there are other factors that too impact the pricing of asset due to factors of supply and demand. Today’s chart looks at the performance of S&P 500 since 1997 overlaid with and a ratio which is the 5 year TIPS yield adjusted by VIX i.e. (1+ 5Y TIPS yield) / (1+VIX)
¨ The yield expected by investors on assets is the sum of risk free rate i.e. yield on government bond and risk premium, the latter is dependant on the risk which is volatility of an asset. Assuming yield as a proxy for expected growth and VIX as a proxy for risk premium we get the primary ingredients to price S&P 500. Though the caveat is that the maturities of government yield and VIX are not comparable. Using two factors we get a ratio which kind of replicates the price level of S&P 500
¨ Theoretically to price an asset two major factors that are taken into account are expected yield and expected future growth rate. But in reality there are other factors that too impact the pricing of asset due to factors of supply and demand. Today’s chart looks at the performance of S&P 500 since 1997 overlaid with and a ratio which is the 5 year TIPS yield adjusted by VIX i.e. (1+ 5Y TIPS yield) / (1+VIX)
¨ The yield expected by investors on assets is the sum of risk free rate i.e. yield on government bond and risk premium, the latter is dependant on the risk which is volatility of an asset. Assuming yield as a proxy for expected growth and VIX as a proxy for risk premium we get the primary ingredients to price S&P 500. Though the caveat is that the maturities of government yield and VIX are not comparable. Using two factors we get a ratio which kind of replicates the price level of S&P 500
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