Proponents of the Bubble View Believe That When Using Historical

question 26

Multiple Choice

Proponents of the bubble view believe that when using historical averages to estimate an equity premium,

• A)the average should be based on the last 10 to 15 years of historical data only since earlier data is no longer descriptive of current conditions, e.g., bubbles.
• B)the average should be calculated using data from the earliest recorded point in time in order to ensure that any temporary bubbles are smoothed out.
• C)the equity premium will be lower after recent market surges.
• D)the equity premium will be higher after recent market surges.

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Definitions:

Probabilities

The measure of the likelihood that an event will occur, expressed as a number between 0 and 1.

Coin Toss

A simple randomness procedure used to decide between two equally probable outcomes with the flip of a coin.

Expected Value

The predicted value of a variable, calculated as the sum of all possible values each multiplied by the probability of its occurrence.

Expected Value

An average value determined by weighing all potential outcomes of a random variable according to their likelihood of happening.