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In estimating the future equity risk premium, it is important to include assumptions about the:
Question 20Answer

a.
future risk environment and the amount of risk aversion of future investors.

b.
future risk environment only.

c.
historical distribution of returns on derivative securities only.

d.
historical distribution of returns on derivative securities and the future risk environment.

e.
amount of risk aversion of future investors only.



Answer :

vidragon60

Answer:

a. future risk environment and the amount of risk aversion of future investors.

When estimating the future equity risk premium, it is crucial to consider both the future risk environment and the amount of risk aversion of future investors. The equity risk premium is influenced by the perceived risk of equities compared to risk-free assets and how much additional return investors demand for taking on that risk, which is shaped by their level of risk aversion.

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