Hi guys,
I have a question about ERP.
From my understanding, ERP is the premium which compensates for risk over the RFR.
However, the EOC question # 8 for Ch 37 says the ERP would be biased downwards if we include the 2004-2006 time period (which is a high risk time).
I would assume that since there is an increased volatility, including this time would mean greater risk and hence higher ERP.
Am I missing something? I just don’t get the logic.
Thanks