Finance dissertation proposal
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Topic outline
The market risk premium (MRP)- the expected reward for bearing risk of investing in equities, rather than in low-risk investments such as government bills or bonds is usually estimated from historical data(Dimson et all 2000). Also referred to as, equity risk premium.(ERP)
Simply we can say that the equity-risk premium is the return on equities minus the return on "risk-free" government bonds.
It is a very important economic variable which is crucial to projecting future
investment returns, calculating the cost of equity capital, valuating companies and
stocks, appraising capital investment projects, and determining fair rates of return (Dimson et all 2002).
The MRP is expectation and therefore is not observable. The standard procedure is to
collect historical data on MRP over long time period and use arithmetical mean as a estimate for future MRP. However this approach is often subject of many critiques such as the relevant period for taking the average. There has been adopted alternative method, which take the ratio of total equity returns over total bond returns (Dimson et all 2000).
Research by Ferson and Harvey (1991), and Evans (1994) showing the importance of understanding the MPR over the time.
The MRP have great importance on calculations of investment and cost of equity capital through Treynor (1961), Sharpe (1964), and Lintner (1965), Capital Asset Pricing Model (CAPM), and Fama-French (1996) three factor model, where MRP is one of the essential variables...