Reference no: EM13836843

1. Use two methods to estimate equity risk premium:

1.1. Arithmetic average and geometric average of returns on stocks and bonds. Use any period from historical data, except 1928-2014, that you deem appropriate for the task. Make sure that you include most recent years in your dataset. Explain your choice of dataset logically.

1.2. Implied equity risk premium for two values of the index:

- Current value of the index.

- S&P 500 drops fifty percent from current level. Assume that amount of dividend paid remains unchanged, increasing dividend yield (enhanced dividend/index value, where enhanced dividend = dividends + buybacks). You can use file implprem.xls from or file from ACORN, but you need to show all calculations by hand.

Use the following sources of data for implied equity risk premium estimation:

- Risk-free rate. Risk-free rate equals ten-year yield on the US Treasuries;

- Dividends and buybacks. Obtain data on current dividend yield (dividend + buybacks) from S&P 500 website, and estimate a five-year average. On the webpage, go to Index Announcements located close to the center of the page, and find the most recent information for S&P 500 Stock Buybacks;

- Growth in year one - year five. Use historical growth in the level of S&P 500 or consensus estimate for S&P 500 for Next 5 Years (per annum) from Yahoo!Finance. If you use historical data, choose appropriate period and justify it.

Attachment:- assignment_1_data_1.xlsx