Which one of these will produce an acceptable estimate of the value of the market risk premium?
A.
Historical rate of return on a market index
B.
Average rate of return on the S&P 500 plus the risk-free rate
C.
Dividend yield of the S&P 500 + Consensus forecast of future dividend growth - U.S. Treasury bill rate
D.
Total dividends paid by the S&P 500 firms for a 1-year period divided by the U.S. Treasury bill rate
E.
Rate computed using the CAPM and a beta of 1
Which one of these will produce an acceptable estimate of the value of the market risk premium?
| A. | Historical rate of return on a market index |
| B. | Average rate of return on the S&P 500 plus the risk-free rate |
| C. | Dividend yield of the S&P 500 + Consensus forecast of future dividend growth - U.S. Treasury bill rate |
| D. | Total dividends paid by the S&P 500 firms for a 1-year period divided by the U.S. Treasury bill rate |
| E. | Rate computed using the CAPM and a beta of 1 |
Related questions
| Top hedge fund manager Diana Sauros believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $45. The stock will pay a dividend at year-end of $4.00. Assume that risk-free Treasury securities currently offer an interest rate of 2.5%. |
| Average rates of return on Treasury bills, government bonds, and common stocks, 1900â2013 (figures in percent per year) are as follows. |
| Portfolio | Average Annual Rate of Return | Average Premium (Extra return versus Treasury bills) | |||
| Treasury bills | 3.9 | ||||
| Treasury bonds | 5.2 | 1.3 | |||
| Common stocks | 11.5 | 7.6 | |||
| What is the discount rate if the interest rate is 4.0%? (Enter your answer as a percent rounded to 2 decimal places.) |
| Discount rate | % |
| What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Stock price | $ |
