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

14 Pages Posted: 17 Jan 2008 Last revised: 22 Jul 2009

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Date Written: January 18, 2008

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 Classification: G1

Suggested Citation

Welch, Ivo, The Consensus Estimate for the Equity Premium by Academic Financial Economists in December 2007 (January 18, 2008). Available at SSRN: https://ssrn.com/abstract=1084918 or http://dx.doi.org/10.2139/ssrn.1084918

Ivo Welch (Contact Author)

University of California, Los Angeles (UCLA) ( email )

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HOME PAGE: http://www.ivo-welch.info

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