FIN5425 - Quiz 4. Geometric vs. Arithmetic Average and Historic Equity Risk Premium

0.0(0)
Studied by 0 people
call kaiCall Kai
learnLearn
examPractice Test
spaced repetitionSpaced Repetition
heart puzzleMatch
flashcardsFlashcards
GameKnowt Play
Card Sorting

1/3

encourage image

There's no tags or description

Looks like no tags are added yet.

Last updated 11:34 PM on 6/6/26
Name
Mastery
Learn
Test
Matching
Spaced
Call with Kai

No analytics yet

Send a link to your students to track their progress

4 Terms

1
New cards

Imagine an emerging market with only 15 years of data. Compute the historical ERP using the geometric mean. (Hint: Compute the annual ERP=Rm-Rrf first and then calculate the geometric mean of it). Save the data to answer Question 2.

        Rm

         Rrf

1

0.100

0.035

2

0.120

0.045

3

0.300

0.068

4

0.200

0.060

5

0.050

0.030

6

-0.030

0.020

7

0.050

0.010

8

0.100

0.030

9

0.450

0.060

10

0.230

0.050

11

0.150

0.040

12

0.100

0.030

13

0.060

0.020

14

0.020

0.020

15

-0.100

0.010

0.079

0.085

0.063

0.094

  • 0.079

2
New cards

Using the data from question 1, compute the historical ERP using the arithmetic mean.

0.081

0.079

0.085

0.098

0.085

3
New cards

Imagine that the value of the SP500 is 3980. Last 12-months’ dividends and buybacks were 162.00 and are projected to grow over the next 5 years at 3.5%. After that the long-run growth rate is 1%. Risk free rate is 1%. Compute the implied ERP. (Use this illustration for January 2019 ERP as a jumping off point. Once you compute r, don't forget to subtract out Rrf to get implied ERP.)

ERP Jan2019-1.png

   

6.8

5.6

4.6

6.3

  • 4.6

4
New cards

A global firm domiciled in the US is exposed to risk in the markets where it operates. Its ERP is:

US ERP

Combination of ERPs from markets where it operates

Combination of ERPs from markets where it operates