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nism-series-xa-yield-gap-ratio-bond-equity-earnings-yield[ INVESTMENT ADVISER (LEVEL 1) ]

What does the 'Yield Gap Ratio' (Bond-Equity Earnings Yield Ratio) evaluate in Tactical Asset Allocation?

[ A ]The ratio of commercial bank salary expenses to office rent.
[ B ]The difference in flight arrival times between two international airports.
[ C ]The ratio of the 10-Year Sovereign G-Sec Yield to the Equity Earnings Yield (1 / (P/E Ratio)); a high ratio indicates equity overvaluation relative to debt, prompting tactical trimming of equities.[ CORRECT ]
[ D ]The profit margin earned by agricultural crop farmers.
Takeaway

The Yield Gap Ratio compares the 10-year G-Sec yield to the equity earnings yield (the inverse of the P/E ratio); a high ratio signals equities look expensive relative to bonds, prompting a tactical trim in equity allocation.

Derivation
Earnings Yield = 1 / (P/E Ratio) represents the return equity investors are implicitly earning on price paid for earnings, expressed in yield terms comparable to a bond yield. Dividing the risk-free G-Sec yield by this earnings yield produces a single number that rises when bond yields climb relative to equity earnings yield (equities look pricey/bonds look attractive) and falls when equity earnings yield is generous relative to bonds (equities look cheap). Tactical asset allocation desks use this ratio as a valuation-timing signal — a historically elevated Yield Gap Ratio has often preceded equity market corrections — which is why the exam tests whether candidates can correctly identify both inputs (G-Sec yield and 1/P-E) and the direction of the signal.
Why the others fail
A — The ratio of commercial bank salary expenses to office rent.
Bank salary-to-rent expense ratios are internal corporate cost-structure metrics with no connection to comparing bond yields against equity valuation.
B — The difference in flight arrival times between two international airports.
Flight arrival time differentials are an unrelated aviation logistics measure with no bearing on fixed-income-versus-equity valuation comparisons.
D — The profit margin earned by agricultural crop farmers.
Agricultural crop profit margins are a farm-sector operating metric, entirely disconnected from the bond-yield-to-earnings-yield comparison the Yield Gap Ratio performs.