Final Answer:
The Equity Risk Premium is 11%, calculated by subtracting the risk-free rate (4%) from the market return rate (15%).
Step-by-step explanation:
A flat yield curve suggests that the interest rates for short-term and long-term investments are the same. In this case, the T-bill rate of 4% reflects the risk-free rate, while the market return rate of 15% represents the return investors anticipate from equities.
The Equity Risk Premium (ERP) is calculated as the difference between the market return rate and the risk-free rate. In this scenario, subtracting the T-bill rate (4%) from the market return rate (15%) gives us the Equity Risk Premium of 11%.
This 11% figure signifies the additional return that investors expect to receive by investing in the broader market compared to the risk-free investment (T-bills) over a similar period. It acts as compensation for the added risk associated with investing in equities compared to risk-free assets.
A flat yield curve often hints at economic stability or potential stagnation. Despite this stability in interest rates across different durations, the Equity Risk Premium remains crucial in guiding investors' decisions by indicating the potential excess return they might achieve by taking on the added risk of investing in the market.