The Equity Premium in 150 Textbooks

24 Pages Posted: 14 Sep 2009 Last revised: 26 May 2019

See all articles by Pablo Fernandez

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: May 23, 2019

Abstract

I review 150 textbooks on corporate finance and valuation published between 1979 and 2009 by authors such as Brealey, Myers, Copeland, Damodaran, Merton, Ross, Bruner, Bodie, Penman, Arzac… and find that their recommendations regarding the equity premium range from 3% to 10%, and that 51 books use different equity premia in various pages. The 5-year moving average has declined from 8.4% in 1990 to 5.7% in 2008 and 2009.

Some confusion arises from not distinguishing among the four concepts that the phrase equity premium designates: the Historical, the Expected, the Implied and the Required equity premium (incremental return of a diversified portfolio over the risk-free rate required by an investor). 129 of the books identify Expected and Required equity premium and 82 identify Expected and Historical equity premium.

Finance textbooks should clarify the equity premium by incorporating distinguishing definitions of the four different concepts and conveying a clearer message about their sensible magnitudes.

Keywords: equity premium, equity premium puzzle, expected equity premium

JEL Classification: G12, G31, M21

Suggested Citation

Fernandez, Pablo, The Equity Premium in 150 Textbooks (May 23, 2019). Available at SSRN: https://ssrn.com/abstract=1473225 or http://dx.doi.org/10.2139/ssrn.1473225

Pablo Fernandez (Contact Author)

University of Navarra - IESE Business School ( email )

Camino del Cerro del Aguila 3
28023 Madrid
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/

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