- CFA Exams
- CFA Level I Exam
- Topic 4. Corporate Issuers
- Learning Module 18. Cost of Capital: Advanced Topics
- Subject 3. The Equity Risk Premium
CFA Practice Question
What is the primary consideration when using the historical approach for estimating ERP?
A. Market sentiment
B. Current market conditions
C. Length of the historical period
D. Expected future cash flows
Correct Answer: C
Analysts use tradeoffs to determine the best estimation time period. A longer data period may be problematic because the past may not represent the current market environment in a market. A shorter data period uses less representative contained in longer data series.
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