The equity risk premium is usually viewed as the extra return that investors demand for holding equities rather than risk-free bonds.
The first step is to define the equity risk premium more exactly.
Or put it this way: The equity risk premium says that stocks have compounded four times as fast as bonds in real (inflation-adjusted) terms.
After adjusting for these factors, the authors argue that the best estimate of the equity risk premium worldwide in future is 4-5 percentage points.
The equity risk premium can be calculated only after the event.
Their dividends are variable, their cash flows less certain and therefore an equity risk premium should exist which compensates stockholders for their junior position in the capital structure.
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This calculation yields a number called an equity risk premium.
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This difference in valuations is called the equity risk premium, and the more pessimistic the growth prospects for the future, all other things being equal, the higher that premium should be.
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They do so by figuring out for all their candidates an "equity risk premium"--the amount of return (appreciation plus dividends) they want over safe ten-year Treasury bonds, based on their best guess.
"They've been unfairly tarnished with the Italian equity-risk premium, " he says.
IR The puzzle of the equity-risk premium (Economics focus, July 15th) highlights a topic that we have been researching and it poses, but does not answer, an important question: how can one reconcile high investor expectations with a declining equity premium?
Given the history of the risk premium, what will the future reward for equity investors be?
According to a 2002 study by two economists at Indiana University, enforcing insider-trading laws reduced the cost of equity in the countries they looked at because investors did not demand a premium for the risk of trading with a crooked counterparty.
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