Using historical risk premiums over the 1926-2016 period as your guide, what would be your estimate of the expected annual HPR on the Big/Value portfolio if the current risk-free interest rate is 3%.

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%.