Q#4. An investor currently holds a $200 million equity portfolio. He is considering rebalancing the portfolio based on an assessment of the risk and return prospects facing the U.S. economy. Information pertaining to the U.S. investment markets and the economy is provided in the following table: 10-year Historical Current Capital Market Expectations 10-yr avg.govt. bond yield 6.2% 10-yr govt. bond yield 3.8% Year-over-year equity return Avg, annual equity return 8.2% -9.4% Avg. annual inflation rate year-over-year inflation rate Expected annual inflation 3.0% 2.8% 2.6% Expected equity market P/E Equity Market P/E 15.0x Current equity market P/E 14.0x Avg. annual income return 12.0x Expected dividend yield 3.0% 1.5% Avg. annual real earnings growth Expected annual real 6.0% earnings growth: 4.0% Using the information in the table, address the following problems: a) Calculate the historical U.S. equity risk premium using the bond-yield-plus risk-premium method. b) Calculate the expected annual equity return using the Grinold-Kroner model (assume 1% decrease in the number of shares outstanding). c) Using your answer to Part b, calculate the expected annual equity risk premium