The US market is expensive. Less expensive than it was a few days ago before the yield curve inverted and the S&P500 had several days of large losses, but expensive still. But how expensive is it really? The Cyclically Adjusted Price Earnings (CAPE) or Shiller PE ratio is 28.5. Although this is down from January […]
Category archives: Equity Risk Premium
Unbelievable Risk Discounts Rates
Setting discount rates is a crucial and subjective exercise. This is true for life insurance embedded values too. Many researchers are comfortable with a range for Equity Risk Premiums of between 3% and 5%. Many corporate finance practitioners use a range from 5% to 8% or even higher. My nearly eight-year-old blog post on mis-estimating […]
ERP update – delayed response to a blog reader
I reader asked why so many practitioners use high Equity Risk Premiums in their valuations and fairness opinions. In particular, he mentioned a specific assumption set he had seen including: ERP of 6.8% company specific risk premium of 4% He also commented on how haphazard the use of risk premiums can be and referenced a […]
Modelling one side of a two-sided problem
Ah models, my old friends. You’re always wrong, but sometimes helpful. Often dangerous too. A recent article in The Actuary magazine addressed whether “de-risking in members’ best interests?” I say “recent” even though it’s from August because I am a little behind on my The Actuary reading. In the article, the authors demonstrate that by […]
Credit Suisse annual update on market performance
Credit Suisse has for several years now put out an annual Credit Suisse Global Investment Returns Yearbook 2013 is out now. It’s worth reading in its entirety for the insights. I don’t agree with everything there, and I certainly don’t agree with the widely held view (not among the authors) that the universe of countries included […]
Surveys, papers and books on the ERP
Some interesting papers on the ERP: Market Risk Premium used in 56 countries in 2011: a survey with 6,014 answers Interesting not least because it is a survey of required Equity Risk Premiums (or Market Risk Premiums) rather than expected. The rates are higher than I use, although this is also useful information when attempting […]
Your ERP estimate is still too high
I recently had a conversation with a colleague who had been told that “Credit Suisse recommended an Equity Risk Premium of 7%”. I’m curious to know whether they truly view that as an appropriate ERP. If your ERP is 7%, it’s still too high. The authors of Triumph of the Optimists have joined forces with […]
Pension funds don’t have enough junk
Junk Bonds are debt instruments issued by corporates that have relatively low credit ratings. They pay interest at high rates as a result. Typically viewed as risky investments, the junk bonds boom of the 80s showed that there is more to junk than just a risky investment. Locally, our pension funds and other retirement savings […]