Question

Proponents of the bubble view believe that when using historical averages to estimate an equity premium,

Question 20 options:

	the equity premium will be higher after recent market surges (this answer was wrong)
	the equity premium will be lower after recent market surges
	the equity premium will be lower after recent market surges
	the average should be based on the last 10 to 15 years of historical data only since earlier data is no longer descriptive of current conditions, e.g., bubbles

Answer 1

Answer: None of the above options is correct. There are only 3 options mentioned.

The correct answer should be, "An average should be calculated by using the earliest recorded point in time"

Equity risk premium- It is the excess return over risk free rate of retrun. It shows that stocks with high risk, provide higher returns too. Equity risk premium changes as the market conditions change. When there is fear and uncertainty in the market, related to stocks then equity risk premium will be higher. High risky investment has high equity premium. Equity risk premium is higher when stocks have potential to grow in the future.

When the market surges, equity risk premium can be lower.