In the Capital Asset Pricing Model, the market risk premium is estimated over a long period of time because: more data is always better than less. a longer holding period gives a more reliable estimate because it is, in effect, a larger sample size. almost all investors hold stocks for many years, so it matches their investment horizon. historical returns are the best indicators of future returns.
Mark, Alisha, Jasmine -- please use the same name for your posts.
Also -- your questions and answer choices would be a lot easier to read if you put each choice on a separate line and identified them as a, b, c, d.
In the Capital Asset Pricing Model, the market risk premium is estimated over a long period of time because:
A. more data is always better than less.
B. a longer holding period gives a more reliable estimate because it is, in effect, a larger sample size.
C. almost all investors hold stocks for many years, so it matches their investment horizon.
D. historical returns are the best indicators of future returns.
B.
http://www.investopedia.com/terms/c/capm.asp
In the Capital Asset Pricing Model (CAPM), the market risk premium refers to the additional return demanded by investors for holding a risky asset compared to a risk-free asset. It is an essential component in estimating the expected return of an investment.
One reason why the market risk premium is estimated over a long period of time is that "more data is always better than less." By analyzing a longer time period, you have a larger sample size and a more comprehensive view of historical market returns. This helps to reduce the influence of short-term fluctuations and provide a more accurate estimate.
Another reason is that a longer holding period gives a more reliable estimate because it is, in effect, a larger sample size. Since investors typically hold stocks or other assets for many years, estimating the risk premium over a long period aligns with their investment horizon. This approach accounts for the varying market conditions and economic cycles that may occur over an extended period.
Moreover, historical returns are often considered as the best indicators of future returns. While past performance cannot guarantee future results, examining historical data provides valuable insights into the behavior and performance of the market. By analyzing long-term historical data, researchers can identify trends, patterns, and relationships that can help estimate the market risk premium.
In summary, the market risk premium is estimated over a long period of time in the CAPM because more data provides a better estimate, a longer holding period matches investors' investment horizon, and historical returns are considered as useful indicators of future returns.