One method of forecasting the risk premium is to use the ________.
A) coefficient of variation of analysts' earnings forecasts
B) variations in the risk-free rate over time
C) average historical excess returns for the asset under consideration
D) average abnormal return on the index portfolio

Question

Quizplus · Accepted Answer

Using the average historical excess returns for the asset under consideration can provide an estimate of the risk premium, which is the additional return investors require to compensate for the increased risk of holding that asset over a risk-free investment. This method examines how much more return an investor has historically received holding the asset when compared to a risk-free investment, and assumes that such excess return will continue in the future. The other options listed do not directly provide an estimate of the risk premium.

One Method of Forecasting the Risk Premium Is to Use