“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.”
In an earlier post, I criticized the concept of the “risk-free rate of return” as both illogical and not reflective of reality — and proposed renaming it the "lowest-available-risk expected rate of return." In this follow-up post, I offer some alternative bedrock rates of return for consideration. My preferred alternative: multifactor productivity growth.
There is no such thing as a risk-free rate of return, just as there is no such thing as our world without action. Yet, the concept of a bedrock expected rate of return is a good one in need of a better description that is more reflective of reality.
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