Final answer:
The statement that using historical returns to estimate the market risk premium is disadvantageous because the past may not be indicative of the future is true. Historical returns may not accurately predict future market conditions due to changing economic environments, making them less reliable for forecasting market risk premiums.
Step-by-step explanation:
One of the disadvantages of using historical returns to estimate the market risk premium is that the past may not be a good guide to the future: a) True.
Indeed, this statement is true. Relying solely on historical returns assumes that the future will behave like the past, which may not necessarily be the case. Market conditions, economic environments, and other factors change over time, which can cause historical data to become less predictive. For example, during the Great Recession of 2008, the stock market experienced a sharp decline that historical trends could not have predicted. Similarly, the high interest rate environment of the 1970s and early 1980s differed significantly from the low rate environment seen in the early 2000s. Therefore, while historical returns can provide some insight, they have limitations and can potentially misguide investors about future risks and returns.