CFA Institute: Research Foundation Publications: Table of Contents

Rethinking the Equity Risk Premium: An Overview and Some New Ideas

cfapubs@cfainstitute.org (P. Brett Hammond et al) — Fri, 20 Jan 2012 21:20:27 GMT

Research Foundation Publications Dec 2011, Vol. 2011, No. 4: 1-17.
In 2001 a small group of academics and practitioners met to discuss the equity risk premium (ERP). Ten years later, in 2011, a similar discussion took place, with participants writing up their thoughts for this volume. Opinions, not surprisingly, vary. Perhaps it is time we embrace variability and acknowledge that one facet of the ERP may be that the unique circumstances of each investor affect the premium expected.

The Equity Risk Premium

cfapubs@cfainstitute.org (Roger G. Ibbotson) — Fri, 20 Jan 2012 21:20:29 GMT

Research Foundation Publications Dec 2011, Vol. 2011, No. 4: 18-26.
The equity risk premium is a long-run equilibrium concept that estimates the future excess return of the stock market over and above the bond market. In this paper, I compare the various ways of estimating the equity risk premium and discuss some of the other premiums in the capital markets.

Reflections After the 2011 Equity Risk Premium Colloquium

cfapubs@cfainstitute.org (Clifford Asness) — Fri, 20 Jan 2012 21:20:37 GMT

Research Foundation Publications Dec 2011, Vol. 2011, No. 4: 27-31.
Disagreement about long-term predictability of the equity risk premium continued in the 2011 forum. It is admittedly hard to be confident about the relationship between prices and long-term returns. Individual prior beliefs will still drive how one views predictability. However, despite the varying views, going through the thought process of forecasting a long-term real equity return is beneficial.

Equity Premiums around the World

cfapubs@cfainstitute.org (Elroy Dimson et al) — Fri, 20 Jan 2012 21:20:30 GMT

Research Foundation Publications Dec 2011, Vol. 2011, No. 4: 32-52.
The authors update the long-term realized equity risk premium for 19 different countries for 1900–2010. For the 19-country World index, the annualized geometric mean real return on equities was 5.5 percent, and the annualized equity premiums relative to Treasury bills and to long-term government bonds were 4.5 percent and 3.8 percent, respectively. The expected equity premium relative to bills is lower, around 3–3.5 percent annualized.

A Supply Model of the Equity Premium

cfapubs@cfainstitute.org (Richard C. Grinold et al) — Fri, 20 Jan 2012 21:20:31 GMT

Research Foundation Publications Dec 2011, Vol. 2011, No. 4: 53-70.
In 2002, Grinold and Kroner proposed a model of the equity risk premium (ERP) that linked equity returns to GDP growth. In this shortened and updated version of Grinold and Kroner’s 2002 paper, we assess their expected ERP estimate and calculate a new estimate for the next 10 years.

Equity Risk Premium Myths

cfapubs@cfainstitute.org (Robert D. Arnott) — Fri, 20 Jan 2012 21:20:33 GMT

Research Foundation Publications Dec 2011, Vol. 2011, No. 4: 71-100.
Several myths about the equity risk premium have existed for quite a while, so the time is ripe to separate myth from fact. Once these myths have been debunked, it is much easier to see what the natural limits for the risk premium are.

Time Variation in the Equity Risk Premium

cfapubs@cfainstitute.org (Antti Ilmanen) — Fri, 20 Jan 2012 21:20:39 GMT

Research Foundation Publications Dec 2011, Vol. 2011, No. 4: 101-116.
What is considered to be the best source of information about the future equity risk premium has shifted from historical average returns to forward-looking valuation indicators. Thus, the dividend discount model provides a useful framework for decomposing and debating the values of key components of future premiums. From this analysis, the ERP may stay unchanged from the current 3 percent.

Will Bonds Outperform Stocks over the Long Run? Not Likely

cfapubs@cfainstitute.org (Peng Chen) — Fri, 20 Jan 2012 21:20:35 GMT

Research Foundation Publications Dec 2011, Vol. 2011, No. 4: 117-129.
Bonds have outperformed stocks over the past decade and almost matched the returns of stocks in the past 40 years, but analysis of the past indicates that this performance is unlikely to continue. Stock returns, although more volatile in the period, were in line with the long-term historical average. The Ibbotson Associates model foresees a compounded equity risk premium of 3.34 percent, which is 82 bps lower than the historical equity risk premium of 4.16 percent from 1926 to 2010. This 3.34 percent equity risk premium estimate implies that stocks will likely outperform bonds in the next 40 years.

Price-to-Earnings Ratios: Growth and Discount Rates

cfapubs@cfainstitute.org (Andrew Ang et al) — Fri, 20 Jan 2012 21:20:36 GMT

Research Foundation Publications Dec 2011, Vol. 2011, No. 4: 130-142.
We decomposed the market-level P/E into a no-growth component, which depends only on future discount rates, and a growth component, the present value of growth opportunities. In valuing both components, we allowed for time-varying risk-free rates, predictable cash flows, stochastic payout ratios, and changing discount rates. Growth opportunities account for approximately 95 percent of the variation and 80 percent of the level of historical P/Es.

Long-Term Stock Returns Unshaken by Bear Markets

cfapubs@cfainstitute.org (Jeremy J. Siegel) — Fri, 20 Jan 2012 21:20:41 GMT

Research Foundation Publications Dec 2011, Vol. 2011, No. 4: 143-147.
Stock markets have suffered through two major bear markets since 2001, and the returns for stocks, bonds, and Treasuries over the past decade reflect the struggles. With updated return data, forecasts made in 2001 are analyzed, and updated projections for the next decade are offered.

The Equity Premium Puzzle Revisited

cfapubs@cfainstitute.org (Rajnish Mehra) — Fri, 20 Jan 2012 21:20:40 GMT

Research Foundation Publications Dec 2011, Vol. 2011, No. 4: 148-154.
Since the 1985 publication of the original article on the equity premium puzzle, much research and controversy has surrounded the topic. A look at three assumptions used in that original article can help explain that most of the premium comes from factors other than risk.

Rethinking the Equity Risk Premium

Fri, 20 Jan 2012 21:20:38 GMT

Research Foundation Publications Dec 2011, Vol. 2011, No. 4: 1-154.
In 2001, a small group of academics and practitioners met to discuss the equity risk premium (ERP). Ten years later, in 2011, a similar discussion took place, with participants writing up their thoughts for this volume. The result is a rich set of papers that practitioners may find useful in developing their own approach to the subject.