# Question: The current yield to maturity on a one year Treasury bill

The current yield to maturity on a one-year Treasury bill is 2 %. You believe that the expected risk premium on stocks vs. bills equals 7.7 %.

a. Estimate the expected return on the stock market next year.

b. Explain why the estimate in part (a) may be better than simply assuming that next year’s stock market return will equal the long-term average return.

a. Estimate the expected return on the stock market next year.

b. Explain why the estimate in part (a) may be better than simply assuming that next year’s stock market return will equal the long-term average return.

**View Solution:**## Answer to relevant Questions

In this problem we will use Figure to estimate the expected return on the stock market. To estimate the expected return, we will create a list of possible returns and we will assign a probability to each outcome. To find the ...The table below shows annual returns for Merck and one of its major competitors, Eli Lilly. The final column shows the annual return on a portfolio invested 50% in Lilly and 50% in Merck. The portfolio’s return is simply a ...If an asset lies above the security market line, is it overpriced or underpriced? Explain why. Wendi Deng recently inherited $1 million and has decided to invest it. Her portfolio consists of the following positions in several stocks. Calculate the portfolio weights to fill in the bottom row of the table. In an odd twist of fate, the return on the stock market has been exactly 1% in each of the last eight months. The return on Simon Entertainment stock in the past eight months has been as follows: 8%, 4%, 16%, –10%, 26%, ...Post your question