A. Suppose that over the long run, the risk premium on stocks relative to Treasu

Question

A. Suppose that over the long run, the risk premium on stocks relative to Treasury bills has been 7.6% in the U.S. Suppose also that the current Treasury bill yield is 1.5%, but the historical average return on Treasury bills is 4.1%. Estimate the expected return on stocks and explain how and why you arrived at your answer.

B. Suppose that over the long run, the risk-premium on stocks relative to Treasury bonds has been 6.5%. The current Treasury bond yield is 4.5%, but the historical return on T-bonds is 5.2%. Estimate the expected return on stocks and explain how and why you arrived at your answer.

C. Compare your answers above and explain any differences.

Explanation / Answer

(a)

(b)

(c)

Expected Return based on current Yield has been changed in Long Run, It shows indication of Long Run.

Expected Return based on current Yield Risk Premium 7.60% Add: Current Treasury Yield 1.50% Expected Return based on current Yield 9.10% Expected Return based on historic average return Risk Premium 7.60% Add: Historic average return 4.10% Expected Return based on historic average return 11.70%

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