Familiarize yourself with the financial market data available on the Internet (e.g., http://www.finance.yahoo.com). Download the weekly closing prices of the exchange-traded fund SPDR that replicates the S&P 500 index (ticker SPY) for 1996–2003. Calculate simple weekly returns for this data sample (we shall use these data for other exercises).

Calculate the present value of SPY for 2004 if the asset risk premium is equal to

(a) 3% and

(b) 4%. The SPY dividends in 2003 were $1.63. Assume the dividend growth rate of 5% (see Exercise 5.3 for a more accurate estimate). Assume the risk-free rate of 3%. What risk premium was priced in SPY in the end of 2004 according to the discounted-cash-flow theory?