Highly valued stock markets would create a poor forward -
looking equity risk premium while extremely cheap equity valuations would suggest a positive one.
Not exact matches
We recommend a close
look at the
equity risk premium.
As a forward -
looking quantity, the
equity -
risk premium is theoretical and can not be known precisely, since no one knows how a particular stock, a basket of stocks, or the stock market as a whole will perform in the future.
Let's take a
look at the performance relationships between the stocks and the bonds by using the S&P 500 Energy Total Return and the S&P 500 Energy Corporate Bond Index Total Return to see how the market views the
equity risk premium, or in other words how strongly the market believes oil stocks will rise (
equity performance) or fall (bond performance.)
In fact, when
looking at the earnings yield relative to real bond yields — the
equity risk premium (ERP)-- investors are still being well compensated for
risk in many corners, we believe.
Merryn: One of the chapters in your book, or part of one of the chapters, is about the
equity risk premium, and you suggested it's higher than it should be, rationally, simply because of people thinking that stocks are much riskier than they actually are, because they
look at short - term returns rather than long - term returns.
By this measure, however, both Canadian indexes
look more fairly valued than the S&P 500, whose
equity risk premium stands at about 2.6 per cent.