Historical risk premium = 2%

Expected annual equity return = -3.29%

1. Using your answer to Part b, calculate the expected annual equity risk premium.

10-year Historical Current Capital Market Expectations 10-yr avg. govt. bond yield 10-yr govt. bond yield 6.2% 3.8% Avg. annual equity return Year-over-year equity return 8.2% -9.4% Avg. annual inflation rate year-over-year inflation rate Expected annual inflation 2.8% 2.6% 3.0% Equity Market P/E Current equity market P/E Expected equity market P/E 15.OX 14.0x 12.0x Avg. annual income return Expected dividend yield 1.5% 3.0% Avg. annual real earnings growth Expected annual real 6.0% earnings growth: 4.0% 10-year Historical Current Capital Market Expectations 10-yr avg. govt. bond yield 10-yr govt. bond yield 6.2% 3.8% Avg. annual equity return Year-over-year equity return 8.2% -9.4% Avg. annual inflation rate year-over-year inflation rate Expected annual inflation 2.8% 2.6% 3.0% Equity Market P/E Current equity market P/E Expected equity market P/E 15.OX 14.0x 12.0x Avg. annual income return Expected dividend yield 1.5% 3.0% Avg. annual real earnings growth Expected annual real 6.0% earnings growth: 4.0%