The existence of a historical equity risk premium is well documented. The future of equity risk premiums is not so widely accepted. A Journal of Financial Planning article focuses on the debate (www.fpanet.org/journal/articles/2002_Issues/jfp0402-art7.cfm).
A research report by Stern Stewart & Company provides another perspective on the subject. The report is entitled "The Equity Risk Measurement Handbook" and can be found at www.eva.com/content/evaluation/info/032001.pdf.
A popular data source for the equity risk premium is Ibbotson Associates, which sells price data. Go to www.ibbotson.com/search.asp and search for "risk premium." Read the resulting articles published by Ibbotson Associates.
Using information provided by both Stern Stewart and Ibbotson Associates, answer the following questions.

1. What range of estimates for the risk premium do the reports indicate are currently being used by investors?
2. What factors do the reports suggest might argue for using a shorter estimation period over which to estimate the market risk premium?
3. Use data available from these Web sites, the Web links provided in the chapter, or other sources to calculate a risk premium for the United States equity market.
4. Now calculate an equity risk premium for indexes of some other countries.

Estimating required rates of return always begins with selecting a risk-free rate. There are many risk-free rates to choose from. Regardless of the rate selected, the factors that feed into that rate are similar. The primary factor is inflation.
The Federal Reserve Bank of St. Louis has several sources of information available on interest rates and economic conditions. One publication called "Monetary Trends" contains graphs and tabular information relevant to assess conditions in the capital markets. This report can be read at research.stlouisfed.org/publications/mt.
Read the report in the context of a portfolio manager trying to determine an appropriate cost of capital. Consider what you have learned about risk-free rates and answer the following questions.

1. What is the current level of three-month and long-term Treasury yields?
2. Have nominal interest rates increased, decreased, or remained the same over the last three months?
3. Have real interest rates increased, decreased, or remained the same over the last two years?
4. Examine the information comparing recent U.S. inflation and long-term interest rates with the inflation and long-term interest rate experience of Japan. Are the results consistent with theory?