The equity risk premium is the difference between the return one should earn on stocks and the return earned
on safe investments like bonds.
Yet with
yields on safe investments so low, and longevity continuing to increase, the risk is still material, according to a new C.D. Howe Institute report.
Yet with yields
on safe investments so low, and longevity continuing to increase, the risk is still material, according to a C.D. Howe Institute report.
However, if investors are so uncomfortable with zero interest
rates on safe investments that they drive security prices far higher than 12 - 16 % above historical valuation norms (and at present, stocks are more than double those norms on the most reliable measures), they're doing something beyond what's justified by interest rates.
What quantitative easing has done is to exploit the discomfort that investors have with earning
nothing on safe investments, making them feel forced to extend their risk profile in search of positive expected returns.
When central banks dropped interest rates to near zero during the 2008 market meltdown, yields
on safe investments like Treasury bills fell close to zero as well.
Spiegel said Silicon Valley today is prone to easy money — Snapchat alone has raised more than $ 800 million -; thanks to low interest rates, which reduces the
return on safer investments.
There is some concern in recent years that, as a result, true individual investors are being crowded out of the P2P market and losing out
on the safest investments, leaving only high - risk borrowers that big banks aren't interested in.
Look for a cap rate significantly higher than the interest rate on the mortgage, and higher than the returns
on safer investments.