Week 2a: Implied Equity Risk Premiums

The attached excel spreadsheet contains the implied equity risk premiums. historical risk premiums and riskfree rates (T.Bills and T.Bonds). It also includes the Baa default spreads for each year.

a. Looking at the data, what is the relationship between movements in the implied equity risk premium and in the historical risk premium?

b. Using this data, make your best estimate of the implied equity risk premium today, given the treasury bill and bond rates today. (Assume that the treasury bill rate today is 4.4% and the 10-year T.Bond is 4.6%.

c. Using the data, make your best estimate of the implied equity risk premium today, given the Baa default spread today. (Assume that the Baa default spreatd today is 1.42%. )