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Posted on Jul 24, 2024

If you as an analyst use a 20-year historical geometric average equity risk premium (ERP) of 2,5% instead of the current implied equity risk premium

If you as an analyst use a 20-year historical geometric average equity risk premium (ERP) of 2,5% instead of the current implied equity risk premium of 5,2% in the market, what are you likely to find?

Answer choices:

a. US stocks are now more accurately priced now compared to the last 20 years

b. Stocks overall are overvalued

c. Stocks overall are undervalued

d. their standard errors are low thanks to the law of large numbers

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