CFA Level I · CFA Level I Exam · Sources of Equity Returns
Compared with a historical estimate of the equity risk premium, a forward-looking (supply-side) estimate is most likely to:
A forward-looking estimate most likely depends on current valuations and expected fundamentals, such as dividend yield and expected earnings growth. A historical estimate instead averages past returns. Forward-looking estimates are therefore sensitive to the analyst's assumptions rather than independent of them.
- Arely on past average returns
- Bdepend on current valuations and expected fundamentalsCorrect
- Cbe unaffected by the analyst's growth assumptions
Explanation
Forward-looking estimates use current market information such as dividend yield, expected earnings growth and valuation changes. Historical estimates average past returns and can suffer from survivorship bias and non-stationarity. Forward-looking estimates are sensitive to growth assumptions.
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