An Australian investor currently holds an A$240 million equity portfolio. He is considering rebalancing the portfolio based on an assessment of the risk and return prospects facing the Australian economy. Information relating to the Australian investment markets and the economy has been collected in the following table:

A. Calculate the historical Australian equity risk premium using the “equity-vs-bonds”
premium method.
B. Calculate the expected annual equity return using the Grinold–Kroner model (assume no change in the number of shares outstanding).
C. Using your answer to Part B, calculate the expected annual equity risk premium.

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10-Year Historical Current Capital Market Expectations Average government bond yield: 2.8% 10-year government bond yield: 2.3% Average annual equity return: 4.6% Year-over-year equity return: -9.4% Average annual inflation rate: 2.3% Year-over-year inflation rate: Expected annual inflation: 2.3% Equity market P/E (beginning of period): 15 Average annual dividend income return: 2.6% Average annual real earnings growth: 6.0% 2.1% Current equity market P/E: 14.5 Expected equity market P/E: 14.0x Expected annual income return: 2.4% Expected annual real earnings growth: 5.0%