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Basic Question 6 of 8
Survivorship bias tends ______ historical estimates of the equity risk premium.
B. to deflate.
C. not to affect.
A. to inflate.
B. to deflate.
C. not to affect.
User Contributed Comments 4
| User | Comment |
|---|---|
| kodali | Doesn't the survivor bias underestimate the risk premium |
| prabhur08 | The companies that survive over the long term have on average outperformed the market (the reason why they have survived!). The fact that the under performers or the companies that failed and no longer exist are not included in the average, makes the average look even better. Thus the survivorship bias tends to inflate the average equity returns. |
| gregsob2 | gregsob2 |
| thebkr777 | thanks prabhur08 |
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Learning Outcome Statements
explain historical and forward-looking approaches to estimating an equity risk premium;
CFA® 2025 Level II Curriculum, Volume 3, Module 18.