Growth

Rich and Co.

The Equity Premium Disappears

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EQUITY PREMIUM PUZZLE
For wider financial markets, the giant industry’s gradual move away from stocks could hit equity risk premium — excess return of equities over risk-free securities which compensates investors for taking on the relatively higher risk.

This may reinvigorate an academic debate where some economic analysis suggests the equity risk premium should be small, in most cases less than half a percentage point, as opposed to the widely-used range of 4-6 percent.

  • Indeed, 10-year U.S. Treasuries gave higher total returns in the past 10 years on a rolling basis than world stocks. http://link.reuters.com/nyv53s
  • “The puzzle… is that for the past 20 years, there has been no net equity risk premium. With the recent sell-off in risk and the rally in bonds, I think there might have been a net premium on bonds,” Stephen Jen, managing partner at SLJ Macro Partners, said in a note to clients.

“This has turned financial theory on its head, and managers of pension funds and sovereign wealth funds need to think about this very carefully.

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Written by Rich and Co.

September 5, 2011 at 4:36 pm

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