week2 - equity risk premium overstates the expected equity...

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Week2 Expected equity risk premium
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Expected equity risk premium The premium investors expect to earn from investing in risky equities compared to the return from riskless investment (government securities) The expected equity risk premium: is forward-looking; changes over time; is not directly observable
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Measuring the expected equity risk premium Historical (realized) equity risk premium Statistical forecasts Implied equity risk premium from valuation estimates
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Historical equity risk premium Ibbotson historical database (1926-2009) Long-horizon historical equity risk premium Short-horizon historical equity risk premium Real (inflation-adjusted) equity risk premium Some reasons to think that the historical
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Unformatted text preview: equity risk premium overstates the expected equity risk premium Equity premium puzzle Historical equity risk premium Historical equity risk premium over longer historical period Historical equity risk premium in other countries Statistical forecasts of expected equity risk premium Market valuation ratios as forecasts of future market return Dividend-to-price (D-P) ratios Price-to-earnings (P-E) ratios Implied market return from valuation models Current market index = PV of expected future cash flows Given expected current price and estimates of future cash flows, solve for discount rate to get implied expected market return...
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week2 - equity risk premium overstates the expected equity...

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