The Magnitude and Concept of the Equity Premium in 150 Textbooks

20 Pages Posted: 29 Jul 2011

Date Written: July 16, 2011

Abstract

We 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, Arza 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.

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

JEL Classification: G12, G31, M21

Suggested Citation

Fernandez, Pablo, The Magnitude and Concept of the Equity Premium in 150 Textbooks (July 16, 2011). Available at SSRN: https://ssrn.com/abstract=1898167 or http://dx.doi.org/10.2139/ssrn.1898167

Pablo Fernandez (Contact Author)

IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

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

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