What Risk Premium is 'Normal'?

40 Pages Posted: 15 Jan 2002 Last revised: 30 Dec 2016

See all articles by Robert D. Arnott

Robert D. Arnott

Research Affiliates, LLC

Peter L. Bernstein

Peter L. Bernstein, Inc.; Journal of Portfolio Management

Multiple version iconThere are 2 versions of this paper

Date Written: January 10, 2002


The goal of this article is an estimate of the objective forward-looking U.S. equity risk premium relative to bonds through history — specifically, since 1802. For correct evaluation, such a complex topic requires several careful steps: To gauge the risk premium for stocks relative to bonds, we need an expected real stock return and an expected real bond return. To gauge the expected real bond return, we need both bond yields and an estimate of expected inflation through history. To gauge the expected real stock return, we need both stock dividend yields and an estimate of expected real dividend growth. Accordingly, we go through each of these steps. We demonstrate that the long-term forward-looking risk premium is nowhere near the level of the past; today, it may well be near zero, perhaps even negative.

Suggested Citation

Arnott, Robert D. and Bernstein, Peter L., What Risk Premium is 'Normal'? (January 10, 2002). Financial Analysts Journal, Vol. 58, No. 2, March/April 2002, pp. 64-85., Available at SSRN: https://ssrn.com/abstract=296854 or http://dx.doi.org/10.2139/ssrn.296854

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Peter L. Bernstein

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