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 if the capital return component had been 50% (“CapGrow_050%”) OR 75% OR 100% of what had been observed. On average, between 1962 and 2022, the capital component of the total equity return over 1 year was two-thirds.
For periods of 15 years starting from 1962, the equity return capital component averaged 56% of the total return (standard deviation 15%). Interestingly, 50% was assumed throughout the 1980s by at least one major consultancy.
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