Download or read book Revisiting the Equity Risk Premium written by Laurence B. Siegel and published by CFA Institute Research Foundation. This book was released on 2023-06-06 with total page 270 pages. Available in PDF, EPUB and Kindle. Book excerpt: In 2001, Martin Leibowitz organized an Equity Risk Premium (ERP) Forum for CFA Institute, in which the participants discussed issues related to the ERP and made estimates for the future. This forum was repeated by Leibowitz, Brett Hammond, and Laurence Siegel in 2011, setting a precedent for a decennial forum. Siegel organized and moderated the discussion in 2021, and the proceedings from that event make up the current book. The participants in 2021 were (in alphabetical order) Robert Arnott, Clifford Asness, Mary Ida Compton, Elroy Dimson, William Goetzmann, Roger Ibbotson, Antti Ilmanen, Martin Leibowitz, Rajnish Mehra, Thomas Philips, and Jeremy Siegel. Each participant made a presentation, which was then discussed by the whole group. Finally, a roundtable discussion involving all of the participants was moderated by Laurence Siegel. Ibbotson and Dimson discussed historical returns in different countries. Ibbotson focused on the United States, while Dimson took a global industrial-country view. The history goes back almost a century (Ibbotson) or more than a century (Dimson), providing a look at how returns have evolved over a wide variety of conditions. Ibbotson also presented his method for making probabilistic forecasts of returns. Dimson, who is British, showed that “American exceptionalism” is one way to understand the results. Asness looked at the effectiveness of Robert Shiller’s CAPE (cyclically adjusted price-earnings ratio) valuation measure for forecasting. Valuations rose over the period he studied, and a lively discussion was had about why this may have occurred. Arnott focused on the growth rate of dividends, which has been very slow in per-share terms, and argued (with much debate from the other participants) that buybacks are only a partial substitute for dividends. Leibowitz, also looking at valuation as the lodestone of return forecasts, set forth a “growth adjustment” that brought his forecast in line with those made by others. Compton, a consultant to pension plans, discussed the challenges of communicating lower expected returns to clients. She also emphasized that expected returns “don’t always come true,” they’re just someone’s best forecast. Ilmanen broke up the expected return into its component parts: dividends, real growth, inflation, and so forth. Doing this, he said, allows one to debate the estimates for each part and ascertain how accurate each of the estimates is. Philips started by presenting a method for forecasting bond returns. He then turned to equities, for which he compared forecasts with subsequent realizations using a variety of forecast methods. Mehra discussed a number of issues related to the existence of premiums (equity risk, value, small cap, and so forth) and concluded that, although some of these are unstable, the ERP is highly stable. Jeremy Siegel advocated a “back to basics” approach using dividend and earnings yields, dividend and earnings growth rates, payout ratios, and price-to-earnings ratios. He emphasized that earnings can be calculated in a number of different way, and said that accounting practices have become more conservative over the years. Goetzmann concluded the session by reporting that one company, a water mill in France, had almost 600 years of historical return data and that an asset pricing model could be tested using those data. According to this model, the stock price is the present value of expected future dividends and is supported by the evidence. In sum, because of high valuations and low interest rates, the participants expect lower total returns in the future than in the past. A forward-looking ERP of 4% to 5% was the consensus of the group.
Download or read book Revisiting the Supply Side Equity Risk Premium written by Gaurav Jetley and published by . This book was released on 2014 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: There is an ongoing debate regarding whether the observed historical equity risk premium is too high to serve as a benchmark for forward-looking equity risk premium. To obtain estimates of forward-looking equity risk premium, a number of models have been proposed that link equity returns to the production of the real economy - the supply-side equity risk premium models. The supply-side models do not take into account any expected growth in the price-to-earnings (“P/E”) ratio because the models assume that the growth in the multiple is not related to actual economic activity. We show that the measures of supply-side equity risk premium that ignore growth in the P/E ratio are likely to be biased downward. This is because a part of the evolution in the P/E multiple can be associated with changes in technological innovation in the economy. Using patent grants as a proxy for technological innovation, we find that a non-trivial fraction of P/E ratio growth can be attributed to the growth of technology innovation, which we posit contributes towards the generation of returns. We also investigate the extent to which the P/E ratio is mean reverting and find that the actual process is consistent with our finding of a relationship between changes in P/E and technological evolution. Our findings suggest that the supply-side equity risk premium should be used with caution as it eliminates a non-trivial portion of returns that seem related to the “supply-side” of the economy.
Download or read book Revisiting the Market Risk Premium written by James M. Sfiridis and published by . This book was released on 2011 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: Though the profound importance of the market risk premium to finance is unquestioned, its actual measurement has been problematic for both academics and analysts alike. What exactly is the magnitude of the ex post market risk premium? What is its relationship with the expected or ex ante premium? Though finance theory estimates an historical equity premium of 1-2%, simple arithmetic averaging of historical data gives a greater mean of 5-6%, an anomaly known as the equity premium puzzle. More recent findings provide a still greater equity premium point estimate. This paper explores the hypothesis that statistical misspecification of historical equity premium data may be an important contributing factor for such contradictions.
Download or read book The Equity Risk Premium written by William N. Goetzmann and published by Oxford University Press. This book was released on 2006-11-16 with total page 568 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book aims to create a strong understanding of the empirical basis for the equity risk premium. Through the research and anaylsis of two scholars who are experts in this field, this volume presents the key issues that are paramount to investors, including whether or not to use historical data as a method of equity investing, and can the equity premium reflect changes in fundamental values and cash flows of the market.
Download or read book The Equity Risk Premium A Contextual Literature Review written by Laurence B. Siegel and published by CFA Institute Research Foundation. This book was released on 2017-12-08 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: Research into the equity risk premium, often considered the most important number in finance, falls into three broad groupings. First, researchers have measured the margin by which equity total returns have exceeded fixed-income or cash returns over long historical periods and have projected this measure of the equity risk premium into the future. Second, the dividend discount model—or a variant of it, such as an earnings discount model—is used to estimate the future return on an equity index, and the fixed-income or cash yield is then subtracted to arrive at an equity risk premium expectation or forecast. Third, academics have used macroeconomic techniques to estimate what premium investors might rationally require for taking the risk of equities. Current thinking emphasizes the second, or dividend discount, approach and projects an equity risk premium centered on 3½% to 4%.
Download or read book The Equity Risk Premium written by Bradford Cornell and published by John Wiley & Sons. This book was released on 1999-05-26 with total page 248 pages. Available in PDF, EPUB and Kindle. Book excerpt: Das Thema Risikoprämie für Aktien (Equity Risk Premium) wird hier zum ersten Mal verständlich erklärt. Die Risikoprämie für Aktien stellt einen Renditeausgleich dar für das erhöhte Risiko, das ein Anleger bei der Investition in Aktien eingeht, im Vergleich zu einer Investition in risikofreie Staatsanleihen. Die Risikoprämie ist zwar von der Theorie her einfach, jedoch in der Praxis ein sehr komplexes Phänomen. Für Finanzentscheidungen ist es von größter Bedeutung, daß man das Prinzip der Risikoprämie versteht und es anwenden kann. Cornell erläutert das Thema Schritt für Schritt sehr anschaulich und ohne terminologischen Ballast. Zunächst wird die Risikoprämie im Zusammenhang mit der Geschichte des Aktienmarktes betrachtet. Der Haussemarkt der 90er dient dabei als Fallstudie. Cornell zeigt, welche Rückschlüsse man durch die Analyse der Risikoprämie im historischen Verlauf für den Aktienmarkt ziehen kann, z.B. ob Aktienkurse steigen oder fallen oder ob sich der Aktienmarkt verändert. Vorausschauende Schätzungen der Risikoprämie werden anhand verschiedener konkurrierender Modelle analysiert, wobei die Vorzüge der jeweiligen Methode mitbewertet werden. 'Equity Risk Premium' ist das erste Buch, das dieses wichtige Prinzip der Risiko-Nutzen-Analyse erschöpfend behandelt. Es vermittelt einen tiefen Einblick und deckt alle Grundlagen ab, damit Investoren fundierte Finanzentscheidungen treffen können. Ein absolutes Muß für institutionelle Anleger, Geldmanager und Finanzvorstände, die auf eine fundierte Marktanalyse zurückgreifen müssen. (06/99)
Download or read book The Equity Risk Premium Puzzle Revisited written by Andrew J. Vivian and published by . This book was released on 2007 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Equity Premium Revisited written by Bradford Cornell and published by . This book was released on 2016 with total page 11 pages. Available in PDF, EPUB and Kindle. Book excerpt: The recent collapse of the stock market has refocused attention on the question of the equity risk premium. One of the most comprehensive studies of the equity premium, completed by Fama and French in 2000, is now significantly out of date and requires refreshing. This article provides that update. We find that various procedures for estimating the premium from historical data are now converging to an annual equity premium over short-term commercial paper on the order of four percent.
Download or read book Handbook of the Equity Risk Premium written by Rajnish Mehra and published by Elsevier. This book was released on 2011-08-11 with total page 635 pages. Available in PDF, EPUB and Kindle. Book excerpt: Edited by Rajnish Mehra, this volume focuses on the equity risk premium puzzle, a term coined by Mehra and Prescott in 1985 which encompasses a number of empirical regularities in the prices of capital assets that are at odds with the predictions of standard economic theory.
Download or read book The Risk Premium Factor written by Stephen D. Hassett and published by John Wiley & Sons. This book was released on 2011-08-31 with total page 210 pages. Available in PDF, EPUB and Kindle. Book excerpt: A radical, definitive explanation of the link between loss aversion theory, the equity risk premium and stock price, and how to profit from it The Risk Premium Factor presents and proves a radical new theory that explains the stock market, offering a quantitative explanation for all the booms, busts, bubbles, and multiple expansions and contractions of the market we have experienced over the past half-century. Written by Stephen D. Hassett, a corporate development executive, author and specialist in value management, mergers and acquisitions, new venture strategy, development, and execution for high technology, SaaS, web, and mobile businesses, the book convincingly demonstrates that the equity risk premium is proportional to long-term Treasury yields, establishing a connection to loss aversion theory. Explains stock prices from 1960 through the present including the 2008/09 "market meltdown" Shows how the S&P 500 has consistently reverted to values predicted by the model Solves the equity premium puzzle by showing that it is consistent with findings on loss aversion Demonstrates that three factors drive valuation and stock price: earnings, long term growth, and interest rates Understanding the stock market is simple. By grasping the simplicity, business leaders, corporate decision makers, private equity, venture capital, professional, and individual investors will fully understand the system under which they operate, and find themselves empowered to make better decisions managing their businesses and investment portfolios.
Download or read book Rethinking the Equity Risk Premium written by P. Brett Hammond and published by . This book was released on 2011-12 with total page 154 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Equity Risk Premium and the Risks of Equity Investing written by Stuart Doole and published by . This book was released on 2007 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: The equity risk premium arises from the link between equities as an asset, and corporate profitability and growth. In this paper, we review the concept and measurement of the equity risk premium against a background of recent practitioner debate concerning the suitability of equities for long-term institutional investors. We consider the competing versions of the equity risk premium that are quoted by academics and practitioners, highlight issues of estimation and consider how they can be addressed robustly.We conclude that equities as an asset class offer a robust return premium over long-dated bonds of the order of 2.5% to 3% per annum globally. This is an estimate which adjusts for the experienced changes in market valuations, and is based on detailed empirical analysis of many equity markets over more than 100 years. Diversified exposure to a basket of global equity markets is most likely to deliver this estimated risk premium over time, rather than a concentrated single-country portfolio.Against the same background, we also revisit the debate over time-diversification i.e. the term-structure of the volatility of asset classes with investment horizon. We conclude that the mean-reversion in equity market valuations drives that of equity returns and this mean-reversion directly ensures that the volatility of equities decreases with longer investor time horizons. Hence, in practice, the 'shortfall' risk of equities is less serious than often thought by investors and especially compared with other assets such as bonds when investing for the long-term i.e. over full business or economic cycles.
Download or read book Rethinking the Equity Risk Premium written by P. Brett Hammond and published by . This book was released on 2016 with total page 164 pages. Available in PDF, EPUB and Kindle. Book excerpt: In 2001, a small group of academics and practitioners met to discuss the equity risk premium (ERP). Ten years later, in 2011, a similar discussion took place, with participants writing up their thoughts for this volume. The result is a rich set of papers that practitioners may find useful in developing their own approach to the subject.
Download or read book Equity Risk Premiums ERP written by Aswath Damodaran and published by . This book was released on 2009 with total page 370 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Equity Risk Premium in 2015 written by John R. Graham and published by . This book was released on 2015 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze the history of the equity risk premium from surveys of U.S. Chief Financial Officers (CFOs) conducted every quarter from June 2000 to March 2015. The risk premium is the expected 10-year S&P 500 return relative to a 10-year U.S. Treasury bond yield. We show that the equity risk premium has increased more than 50 basis points from the levels observed in 2014. The current 10-year risk premium is 4.51%. Similarly, measures of risk such as investor disagreement and perceptions of volatility have increased. Interestingly, the increased premium and risk are not reflected in market-based measures of risk, such as the VIX and credit spreads. We also link our survey results to measures survey-based measures of the weighted average cost of capital and investment hurdle rates. The hurdle rates are significantly higher than the cost of capital implied by the market risk premium.
Download or read book The Equity Risk Premium written by Fernando Duarte and published by . This book was released on 2017 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: The authors estimate the equity risk premium (ERP)--the expected return on stocks in excess of the risk-free rate--by combining information from twenty models for the period 1960-2013. They begin their analysis by categorizing the models into five classes: trailing historical mean, dividend discount, cross-sectional estimation, regression analysis using valuation ratios or macroeconomic variables, and surveys. They find that an optimal weighted average of all models places the one-year-ahead ERP in June 2012 at 12.2 percent, close to levels reached in the mid- and late 1970s, when the ERP was highest in the study sample. The authors note, however, that there is considerable uncertainty in ERP point estimates. The interquartile range across models is 11.6 percent on average, although it reached 6.8 percent in 2012, the lowest level in the study sample. By employing differences across models, the authors argue that the ERP in 2012 is elevated mainly because Treasury yields are low, not because the expected future cash flows from stocks are high.
Download or read book The Equity Risk Premium written by Rajnish Mehra and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
