Consider Linda with CRRA utility. Her risk aversion is = 5 and the time discount rate is = 2%. The expected growth rate of aggregate consumption is 4.5% and the volatility is 2%. The equity market has a volatility of 16%.

1-What are the minimum and the maximum levels of equity risk premium in this point?

2- If the correlation between consumption growth and equity market return is 0.7, what should the expected equity return be?

Answer rating: 100% (QA)

To calculate the minimum and maximum levels of equity risk premium well use the following formula ER... View the full answer