The inclusion of index returns prior to Year 1 would be expected to: A. bias the historical
Question:
The inclusion of index returns prior to Year 1 would be expected to:
A. bias the historical ERP estimate upward.
B. bias the historical ERP estimate downward.
C. have no effect on the historical ERP estimate.
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.
Transcribed Image Text:
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%
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