An estimate of the ERP consistent with the Grinold-Kroner model is closest to:

A. 2.7%.

B. 3.0%.

C. 4.3%.

An equity index is established in Year 1 for a country that has recently moved to a market
economy. The index vendor constructed returns for the four years prior to Year 1 based on
the initial group of companies constituting the index in Year 1. From Year 12 to Year 16, a
series of military confrontations concerning a disputed border disrupted the economy and
financial markets. The dispute is conclusively arbitrated at the end of Year 16. In total, 20 years of equity market return history is available. Other selected data are in the following
tables.

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Selected Data Geometric mean return relative to 10-year government bond returns (over a 20-year period) Arithmetic mean return relative to 10-year government bond returns (over a 20-year period) Index forward dividend yield Forecasted public company earnings growth Forecasted market P/E growth Forecasted real GDP growth rate (by Year 19) Current vs. long-term inflation forecast Current yield curve (inversion) 2% per year 2.3% per year 1% 5% per year 1% per year 4% 6% vs. 4% per year Short maturities: 9% 10-year maturities: 7%