Re-assessing the Equity Risk Premium
نویسنده
چکیده
Estimates of the historical equity risk premium in the UK are in the range 7% to 9% per annum. Until recently, portfolio investors and industrialists have been encouraged to use a premium of this order in making investment decisions. The purpose of this paper is to review the risk premium debate and to re-inforce the case for rejecting historical experience in formulating future investment plans. A simulation of historical investor expectations suggests that a disciplined appraisal would have identified an average risk premium of less than 2% per annum. A forward-looking assessment of reasonable expectations suggests that a risk premium assumption of around 2.5% would be realistic at present. ACKNOWLEDGEMENT Thanks are due to Andy Adams for his useful comments on an earlier draft of this paper.
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