This is from level 3 schweser 2008 and im not familiar with this calculation of risk premium and index value: Index Value Div(0) E(growth) Rf E(risk premium) Singapore 3750 90 6.0% 2.4% ? Taiwan ? 450 4.5% 2.7% 110% Sing Anybody know how to solve for the two question marks? Schweser defines ERP as a measure of standard deviation and correlation with the market.
I think you would use the GGM to solve for D1 / K - g… so for Singapore I get an ERP of something like 6.14%. Then multiply this by 1.1 to get Taiwan’s ERP and solve for the index value using (450 * 1.045) / (.0675+ .027 - .045) = index value of 9,500.
Yeah that seems right, but what do you use for k?
K, the required return = the ERP + RF rate. You have to use the GGM. The first equation looks something like: 3750 = ( 90 * 1.06) / ( ERP - .024- .06).