Chartered Financial Analyst (CFA) Practice Exam Level 2

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According to the Yardeni Model, what does the variable LTEG represent?

Long Term Expected Growth
Last Time Earnings Growth
Leverage Tax and Economic Growth
Latest Earnings Growth

The correct answer is: Long Term Expected Growth

The variable LTEG in the Yardeni Model stands for Long Term Expected Growth. This model is designed to evaluate the fair value of the stock market by incorporating expectations of future earnings growth, among other factors. LTEG specifically reflects the anticipated growth rate of a company’s earnings over the long term, which is crucial for estimating intrinsic values of stocks. Long term expected growth is a significant component because it combines both the company’s historical performance and broader economic indicators, providing a forward-looking perspective. By using LTEG in the analysis, investors can gauge how much they should be willing to pay for a company’s shares based on its potential future earnings, thus aiding in investment decisions and asset valuation. In contrast, the other options do not accurately characterize the variable in the context of the Yardeni model. "Last Time Earnings Growth" and "Latest Earnings Growth" refer to historical or recent performance rather than future expectations. Likewise, "Leverage Tax and Economic Growth" introduces unrelated factors that are not relevant to this specific variable, which focuses purely on growth expectations.