I have this regression equation:
$$ R_{stock} = 3,28\% + 1,65*R_{market} $$
Where $R_{stock}$ is the expected return on a stock and $R_{market}$ being the market risk premium.
I have a one-year T-bill rate of 4,8% and a 30-year T-bond rate of 6,4%.
- What is the expected return on the stock the nearest year?
- Would the expected return change if we were to compute the discount rate to value cash flow, and if so, how?
I do not know if I just assume an $R_{market}$ rate?
Swap the 3,28% for the T-bill rate in (1) and the T-bond rate in (2) to get an expected return.
So how do you estimate $R_{market}$, just by assuming or is there a way to find out? And do I let $\beta$ (1,65) go to 1 as we calculate with a T-bond rate for 30 years and $\beta$ is assumed to fluctuate around 1 in the long term.