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Analysts may adjust a historical ERP to remove biases that could be present in the sample.Forward Estimates for ERP: this is an ex-ante approach where the ERP is based on current data about expected future returns.

When investing in foreign stocks, the domestic investor introduces currency risk to the portfolio, as exchange rate movements will impact returns.One example is the BIRR Five Factor model, which applies the following five factors on top of the risk free rate: confidence risk, time horizon risk, inflation risk, business cycle risk, and market timing risk.Build-up Method The build-up method can be used for privately held companies.An investor’s required return on equity (or common equity as it is sometimes stated) is the total amount of return that an investor will demand in order to make the stock investment that is under consideration.Generically, this amount reflects the risk free rate plus the appropriate equity risk premium.

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