For years, researchers have used historical returns as proxies for estimating equity risk premium. This approach is problematic, however, because the resulting estimates don't vary from one year to the next, even though equity market returns can be wildly divergent from year to year. Katsunari Yamaguchi, CFA, has developed a new method for estimating equity premiums.
“I’ve always been fascinated by and somewhat skeptical of the connection between economic growth and security returns,” William J. Bernstein says. “When you look at the broad sweep of history, it seems that both the equity risk premium and the risk-free rate have been decreasing over the past couple of centuries.”
When I was asked, “What do you believe but can’t prove in investing?” the Donald Rumsfeld quote about knowns, known unknowns, and unknown unknowns came to mind. Where in that context do unprovable beliefs fit? My first thought is that they’re known unknowns. If we have an unprovable belief, then we have a strong opinion that could be wrong, which would seem to place us squarely in the known unknowns.
David Larrabee, CFA, rounds up the most interesting reads for equity investors from the last couple weeks.
Well-known blogger Joshua Brown, a.k.a The Reformed Broker, recently offered five reasons why Americans are fleeing the stock market. While he makes some sound points, he neglected to account for one key factor affecting stock market performance in the last few decades: the bubble in demand for equities created by Baby Boomers.
Ten years ago investment community luminaries met to discuss the equity risk premium. Now in a new Research Foundation of CFA Institute monograph state of the art thinking about the equity risk premium is presented for the benefit of investors worldwide.