What is the first step in the Singer and Terhaar approach to determine risk premium in a fully integrated market?

The first step in the Singer and Terhaar approach to determine risk premium in a fully integrated market is to calculate the systematic risk premium using asset class data. This step is essential as it establishes the foundation necessary to understand the expected returns over the risk-free rate for the various assets in the market. The systematic risk premium reflects the additional return that investors require for taking on the risk associated with market movements, typically measured through the use of historical data on asset classes and their performance in relation to the overall market.

By starting with the systematic risk premium, the approach can effectively account for the inherent risks associated with different asset classes. This lays the groundwork for subsequent steps in the model, where factors such as integration level and liquidity premiums can be assessed. This sequence is particularly important in a fully integrated market context, where understanding the relative risks across various assets allows for more accurately estimating expected returns.