Question #15

Reading: Reading 39 Economics and Investment Markets

PDF File: Reading 39 Economics and Investment Markets.pdf

Page: 6

Status: Incorrect

Correct Answer: A

Your Answer: B

Part of Context Group: Q15-16 First in Group
Shared Context
- Professor Chapman's statement about utility, inflation, GDP growth, and the yield curve is most likely: A) correct. B) incorrect as the circumstances described would have no effect on the yield curve. C) incorrect as the circumstances described would flatten an upward-sloping yield curve.
Question
The equity risk premium in Nearland is closest to:
Answer Choices:
A. 4.50%
B. 7.60%
C. 10.40%
Explanation
The equity risk premium is the return demanded by equity investors in excess of the nominal return on a risk-free bond. It comprises a credit risk premium (credit spread) representing the risk of default on a risky bond, as well as an additional risk premium relative to risky bonds for an investment in equities. The break-even inflation rate comprises expected inflation as well as a risk premium for uncertainty about inflation. It is included in both the overall expected return on equity and the nominal risk-free rate, so does not affect the equity risk premium.
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