Assume that the S&P/TSX Composite Index currently has a dividend yield of 2% and that on average,the dividends of S&P/TSX Composite Index firms have increased by about 7% per year.If the risk-free interest rate is 4%,then your estimate for the future market risk premium is:
A) 4%
B) 7%
C) 8%
D) 5%

Question

Quizplus · Accepted Answer

D) r = d₁/ p₀ +g = dividend yield + g = .02 + .07 = .09 Risk premium = expected return on market - risk free rate = .09 - .04 = .05

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