Abstract:
The average Market Risk Premium (MRP) used in 2008 by professors in the USA (6.3%) was higher than the one used by their colleagues in Europe (5.3%). We also report statistics for 18 countries: the average MRP used in 2008 ranges from 4.1% (Belgium) to 10.5% (India).
The dispersion of the MRP used was high: the average MRP used by professors of the same institution range was 3.5% and the one of the same country was 6.9%.
The average MRP used in 2007 was 1.5% lower than the one used in 2000. 15% of the professors decreased their MRP in 2008 (1.5% on average) and 24% increased it (2% on average). 66% of the professors used a lower MRP in 2007 than in 2000 (22% used a higher one).
Most surveys have been interested in the Expected MRP, but this survey asks about the Required MRP. The paper also contains the references that professors use to justify their MRP, and comments from 180 professors that illustrate the various interpretations of what is the required MRP and explain the confusion of students and practitioners about its concept and magnitude.
We also report 416 answers from the field: the average MRP used by European Companies in 2008 was 6.4%.
Monday, May 18, 2009
How Big is the Equity Risk Premium?
We've blogged a couple of times on the equity risk premium, or the amount of compensation investors receive for holding risky stocks rather than risk-free bonds. Not everyone agrees what the number is though. Pablo Fernandez, a finance professor from IESE Business School in Barcelona, Spain surveyed finance professors around the world about the market risk premium they use.
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Capital Asset Pricing Model (CAPM) defined by www.businessdictionary.com: One of the two leading capital market theories of 1960s and 1970s, it is based on the idea of risk aversion. It states (1) whatever the rate of return on an investment, it should be achieved with the lowest possible level of risk, and (2) a high-level of risk should be accompanied by a correspondingly high-level of return. CAPM (like its contemporary theory, arbitrage pricing theory or APT) works only in a market in equilibrium and makes other restrictive assumptions such as equal access to information, no information or transaction costs, and rational investors.
ReplyDeleteWhat is the risk assessment tool used and how is the annualized risk assesment/return curve plotted?
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