25. Based on Exhibit 1 and the method used by Li’s team, the expected return for the consumer
credit industry in 2012 was closest to:
A. 12.2%.
B. 12.8%
C. 13.7%.
Answer = A
“Capital Market Expectations,” John P. Calverley, Alan M. Meder, Brian D. Singer, and Renato
Staub
2013 Modular Level III, Vol. 3, Reading 18, Section 3.1.3.3
Study Session 6–18–c
Demonstrate the application of formal tools for setting capital market expectations, including
statistical tools, discounted cash flow models, the risk premium approach, and financial
equilibrium models.
A is correct. The bond-yield-plus-risk-premium method (Equation 8) sets the expected return to
the yield to maturity on a long-term government bond plus the equity risk premium (12.2% =
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