Practical analysis for investment professionals

equity risk premium

Equity Risk Premium Forum: MMT, Looking Back, Looking Ahead

"There’s one aspect of MMT that I have some sympathy for: the notion that what we spend money on is far more important than how we finance it." — Cliff Asness

Equity Risk Premium Forum: The Stock/Bond Correlation Switch-Up

"Has the hedge property overtaken the investment property of fixed-income assets?"

Equity Risk Premium Forum: Gloom Looms?

“How many here think the next 10-year equity returns are going to be below the long-run average? I certainly do. Is there anyone here who doesn’t?”

Equity Risk Premium Forum: Term Structure, Mean Reversion, and CAPE Reconsidered

Does the equity risk premium (ERP) vary depending on the term structure? Does reversion to the mean dictate that it will decrease the longer the time horizon?

Building a CAPM That Works: What It Means for Today’s Markets

The capital asset pricing model (CAPM) is a marvel of economic scholarship. The problem is that it doesn’t always work in practice. So, we fixed it.

Equity Risk Premium Forum: The Deficient Market Hypothesis

"If we thought of the equity premium as a fear premium," Rob Arnott says, "a lot of the so-called anomalies that we’ve talked about would not be anomalies at all."

Equity Risk Premium Forum: Don’t Bet Against a Bubble?

Cliff Asness, Rob Arnott, Roger G. Ibbotson, and other luminaries explore the nature of bubbles and the momentum factor.

Estimating Variations in the Equity Risk Premium: A New Approach

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.

The Paradox of Wealth: Economic Growth Lowers Security Returns (Podcast)

“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.”

Unknown Unknowns in Investing

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.