The current yield to maturity on a one-year Treasury bill is 2 %. You believe that the

Question:

The current yield to maturity on a one-year Treasury bill is 2 %. You believe that the expected risk premium on stocks vs. bills equals 7.7 %.

a. Estimate the expected return on the stock market next year.

b. Explain why the estimate in part (a) may be better than simply assuming that next year’s stock market return will equal the long-term average return.

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...