- 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
Survivorship bias tends ______ historical estimates of the equity risk premium.
B. to deflate.
C. not to affect.
A. to inflate.
B. to deflate.
C. not to affect.
Correct Answer: A
Survivorship bias inflates historical ERP estimates. This bias is present in data from equity markets when companies are removed from the index due to poor performance.
User Contributed Comments 4
| User | Comment |
|---|---|
| kodali | Doesn't the survivor bias underestimate the risk premium |
| prabhur08 | The companies that survive over the long term have on average outperformed the market (the reason why they have survived!). The fact that the under performers or the companies that failed and no longer exist are not included in the average, makes the average look even better. Thus the survivorship bias tends to inflate the average equity returns. |
| gregsob2 | gregsob2 |
| thebkr777 | thanks prabhur08 |