ThreeBearsBalancedWithText_2020
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riskpremia_historic
[discount_rates_problem] [long_term] [riskpremia_historic]

It has been common to assess equity risk premia (the return difference between returns on equities and bonds), allowing for all of the capital growth observed in the past. In fact, the main volatility in equity returns stems from capital growth rather than from dividends. The chart below looks at what the risk premia over periods of 15 years had been 50% OR 75% OR 100% of what had been observed. For periods of 15 years starting from 1962, the equity return capital component averaged 57% of the total return (standard deviation 15%). Interestingly, 50% was assumed throughout the 1980s by at least one major consultancy.

 

EquityPremia_15_UK_22Feb2022