Question

What are this three methods: historical risk premium, surveys of experts, and forward risk premiums.

What would you do if the three methods varied significantly?

Answer 1

In here we are discussing three methods. These methods have their own implication in defferent situations.
The three methods are

1)Historical risk premium method is more suitable in case of determining risk-return relationships of stocks in the financial market .example :in here they tell you the difference between the risk-free rate of return and expected the return of the investors.

2)Forward risk premium is more suitable in case of FOREX Market. It is a situation where the future exchange rate is more than spot exchange rate.

3) Surveys of experts is suitable for both of the above situations. In this method, the investor takes the help of experts rather investing own skills in financial market.

These are the three methods.

This three methods are varied significantly ,it is simply depends on psycology,perception, and preferences of the investor that which method would be more suitable because that is a subjective decision.