CFA Level I · CFA Level I Exam · Sources of Equity Returns
Compared with a historical-estimate approach, an equity risk premium estimate from a forward-looking (ex ante) approach is most likely to:
A forward-looking approach most likely reflects current market conditions, using inputs like the current dividend yield, expected growth and valuation levels. Historical estimates instead depend on realized returns over a past sample, which may not represent future expectations.
- Abe unaffected by current market valuations
- Brely on realized returns over a long sample period
- Creflect current market conditions such as the prevailing dividend yield and growth expectationsCorrect
Explanation
Forward-looking approaches use current data such as yields, growth and valuations, so they adapt to current conditions. Historical estimates use realized returns and can be distorted by sample period and survivorship.
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