The Consensus Estimate for the Equity Premium by Academic Financial Economists in December 2007

Abstract:     
A sample of about 400 finance professors estimates the 1-year equity premium and the 30-year geometric equity premium to be about 5%, as of year-end 2007. The sample interquartile range is 4% to 6%. The typical range recommended in their classes is a little higher (from 4% to 7%, with a mean of 6%). Since 2001, participants have become more bearish (by about 0.5%).

The participants estimate the 30-year arithmetic equity premium estimate to be about 75 basis points higher than its geometric equivalent; and they estimate the 30-year geometric expected rate of return on the stock market to be about 9%.

75% of finance professors recommend using the CAPM for corporate capital budgeting purposes; 10% recommend the Fama-French model; 5% recommend an APT model.

Keywords: equity premium

JEL Classifications: G1

Working Paper Series