Question: 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

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.

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