CFA CFA Level 2 Bias, Equity Index and Equity Risk Premium

Bias, Equity Index and Equity Risk Premium

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    • Avatar of ec_testec_test
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        Hi! @wannabe1988

        The reason is that if you were counting the dead companies, you would add a zero and divide by such company. For example, 

        Stock Company #1 Return – 5%
        Stock Company #2 Return – 7%
        Stock Company #3 Return – 9%
        Stock Company #4 Return – 0% (dead company)

        Average return with dead company (5+7+9+0)/4=5.25%
        Average return without dead company (5+7+9)/3=7.00% – This one is biased upward. 

        Hope it helps!  😀

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