Risk Premium Analysis by Major Sectors on Canadian Stock Market for SIAS Fund

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This thesis research examined what factors impact on the equity risk premium (ERP) of the Canadian large-cap equity market, inspired by the opportunity to receive hands-on experiences of equity valuations for the Simon Fraser University’s Student Investment Advisor Service (SIAS) endowment fund. With the given investment policy statements (IPS) of the SIAS fund, this study will focus on the large-cap Canadian equity markets. The methodology of the practice was driven by the study conducted by Dimson, Marsh, and Staunton where the research identified Geometric Mean Dividend Yield, Real Dividend Growth Rate, Expansion in the P/D Ratio, and Change in Real Exchange Rate to determine general U.S. equity market return. The findings from this thesis research had determined three additional factors that can impact on the Canadian equity market return, which included Crude Oil Price Return, Global PMI Return, and US CPI Growth. In addition, similar practices were attempted for the major three sectors of the Canadian equity market, namely energy, material, and financial sectors; and the factors that impact these sectors varies. We have demonstrated an ERP of 3.57% for S&P TSX 60 Index from our own model; where we have 1.66%, 1.70%, 0.79% of ERPs for the energy sector, material sector, and financial sector, respectively.
MSc of Finance Project-Simon Fraser University
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