25 Pages Posted: 25 Jun 2008 Last revised: 6 Feb 2009
Date Written: February 2, 2009
I review 100 finance and valuation textbooks published between 1979 and 2008 (Brealey, Myers, Copeland, Damodaran, Merton, Ross, Bruner, Bodie, Penman, Weston, Arzac...) and find that their recommendations regarding the equity premium range from 3% to 10%, and that several books use different equity premia in different pages.
Some confusion arises from not distinguishing among the four concepts that the word equity premium designates: Historical equity premium, Expected equity premium, Required equity premium and Implied equity premium.
Finance professors should clarify the different concepts of equity premium and convey a clearer message about their sensible magnitudes.
Keywords: equity premium, required market risk premium, historical market risk premium
JEL Classification: G12, G31, M21
Suggested Citation: Suggested Citation
By Ivo Welch