Question

Assume a stock had an historical equity risk premium of 5.49 percent and a standard deviation of 11.46 percent over the past two decades. What is the 95.4 percent range for the equity risk premium

Answer 1

The range of equity risk premium would be -17.43% to 28.41%

Step-by-step explanation:

Firstly, we need to know standard score value (z-score value) at 95.4% confidence level.

The z-value at 95.4% obtainable from a z-score table is 2.0 approximately.

Next, we compute the range of equity risk premium as follows;

Range of equity risk premium = Average equity risk premium ± (z-value × standard deviation)

From the question, the average equity risk premium = 5.49% , while the standard deviation = 11.46%

Inputting these values in the equation above, we have;

Range of equity risk premium = 5.49% ± (2.0 × 11.46%)

= 5.49%-(2.0 × 11.46%) to 5.49% + (2.0 × 11.46%)

Range of equity risk premium = -17.43% to 28.41%