You are interested in estimating the market risk premium as an input into the Capital Asset Pricing Model (CAPM). For the S&P 500 Index, you observe that the S&P 500 dividend yield is 1.4% and you estimate that the long-term dividend growth rate for S&P 500 companies will be 3.7%.

1) If the risk-free rate of return is 1.6%, use the dividend discount model to estimate the implied market risk premium.

2) Is your implied market risk premium estimate similar to, above, or below market risk premium estimates based on historical data (no explanation required)?

Answer rating: 100% (QA)

To estimate the implied market risk premium using the dividend discount model we can use t... View the full answer