1. An equity index is established in 2001 for a country with a recently established market economy.The index vendor constructed returns for the five years prior to 2001 based on the initial group of companies constituting the index in 2001.Over 2004 to 2006, a military confrontation disrupted the economy and financial markets.The dispute is conclusively arbitrated at the end of 2006.In total, ten years of equity market return history is available as of the beginning of 2007. The geometric mean excess return relative to 10-year government bond returns over 10 years is 2% per year.The forward dividend yield on the index is 1%.Stock returns over 2004 to 2006 reflect the setbacks, but economists predict the country will be on a path of a 4% real GDP growth rate by 2009.Earnings in the public corporate sector are expected to grow at a 5% per year real growth rate.Consistent with that, the market P/E ratio is expected to grow at 1% per year.Although inflation is currently high at 6% per year, the long-term forecast is for an inflation rate of 4% per year.Although the yield curve has usually been upward sloping, currently the government yield curve is inverted; at the short-end, yields are 9%, and at 10-year maturities yields are 7%.

The events of 2004 to 2006 would be expected to:

1. Bias the historical equity risk premium estimate upwards.
2. Bias the historical equity risk premium estimate downwards.
3. Have no effect on the historical equity risk premium estimate.
4. Does it really matter?I mean really?I would much prefer to invest in bonds.I hate anything to do with the stock market ...