The following average annualized returns are obtained for over various holding periods:

Required:

(1)  What would be your best estimate of market risk premium for Hong Kong equity? 

(2)  If expected inflation rate increases by 1%, what would happen to market risk premium?

(3)  Determine expected market return. 
 

Current 1 year 2 years 3 years Hang Seng Index N/A -4.29% 12.36% 15.05% 5 years 10.29% 20 years 14.08% Exchange Fund Bill Yield 0.66% 1.08% 1.12% 1.58% 1.46% 4.81%