Definition
The CAPE ratio, developed by Robert Shiller, smooths out business cycle effects by using 10-year average earnings adjusted for inflation. It's primarily used for broad market valuation rather than individual stocks. Historical average for S&P 500 is around 17.
Formula
CAPE = Current Price / 10-Year Average Inflation-Adjusted EPS
Example
If S&P 500 is at 4,500 with 10-year average real earnings of $150, CAPE is 30x. Above 25 historically suggests the market may be overvalued.
FAQ
What is CAPE Ratio (Shiller P/E)?
Cyclically Adjusted P/E using 10-year average inflation-adjusted earnings.
How do you calculate CAPE Ratio (Shiller P/E)?
A common formula for CAPE Ratio (Shiller P/E) is: CAPE = Current Price / 10-Year Average Inflation-Adjusted EPS
Why is CAPE Ratio (Shiller P/E) important?
CAPE Ratio (Shiller P/E) helps investors evaluate valuation and make more informed decisions.