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Risk and Return in the 20th and 21st Centuries

Posted: 5 Mar 2001  

Elroy Dimson

University of Cambridge - Judge Business School; London Business School

Paul Marsh

London Business School - Institute of Finance and Accounting

Mike Staunton

London Business School - Institute of Finance and Accounting

Abstract

The single most important contemporary issue in finance is the equity risk premium. This drives future equity returns, and is the key determinant of the cost of capital. The risk premium, the expected reward for bearing the risk of investing in equities, rather than in low-risk investments such as bills or bonds, is usually estimated from historical data. This article starts by summarising new evidence on historical returns in twelve major world markets from the authors' recent book, 'The Millennium Book: A Century of Investment Returns'. The authors show that the historical equity risk premium has been lower than previously believed, and argue that the future risk premium is likely to be lower still. They discuss what this implies for the cost of capital, stock market values, and companies' target rates of return. They suggest that many companies are seeking too high a rate of return and thus run the risk of under-investing.

Suggested Citation

Dimson, Elroy and Marsh, Paul and Staunton, Mike, Risk and Return in the 20th and 21st Centuries. Business Strategy Review, Vol. 11, No. 2, Summer 2000. Available at SSRN: https://ssrn.com/abstract=241356

Elroy Dimson (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 20 7000 8212 (Phone)
+44 700 607 7390 (Fax)

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom
44 20 7000 7000 (Phone)
44 700 607 7390 (Fax)

Paul Marsh

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Mike Staunton

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

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