Assume that the S&P/TSX Composite Index currently has a dividend yield of 3% and that on average,the dividends of S&P 500 firms have increased by about 5% per year.If the risk-free interest rate is 4%,then your estimate for the future market risk premium is:
A) 7%
B) 8%
C) 6%
D) 4%

Question

Quizplus · Accepted Answer

D) r = d₁/ p₀ +g = dividend yield + g = .03 + .05 = .08 Risk premium = expected return on market - risk free rate = .08 - .04 = .04

Assume That the S&P/TSX Composite Index Currently Has a Dividend