Answer:
The expected annual HPR for the Big/Value portfolio is 14.67%.
Explanation:
Information provided from the question,
Historical risk premiums over the 1926-2016 period should be used as guide.
The current risk-free interest rate = 3 percent
To estimate the expected annual holding period return (HPR) on the Big/Value portfolio, we solve;
Since, the average risk premium for the period 1926-2016 = 11.67% per year.
11.67% would be added to the 3% risk-free interest rate,
Therefore, the expected annual HPR for the Big/Value portfolio =
3% + 11.67%
= 14.67%.
