The Equity Risk Premium in 2018

Abstract

We analyze the history of the equity risk premium from surveys of U.S. Chief Financial Officers (CFOs) conducted every quarter from June 2000 to December 2017. The risk premium is the expected 10-year S&P 500 return relative to a 10-year U.S. Treasury bond yield. The average risk premium is 4.42% and is somewhat higher than the average observed over the past 18 years. We also provide results on the risk premium disagreement among respondents as well as asymmetry or skewness of risk premium estimates. We also link our risk premium results to survey-based measures of the weighted average cost of capital and investment hurdle rates. The hurdle rates are significantly higher than the cost of capital implied by the market risk premium estimates.

Keywords: cost of capital, financial crisis, equity premium, WACC, hurdle rate, long-term market returns, stock return forecasts, long-term equity returns, expected excess returns, disagreement, individual uncertainty, skewness, asymmetry, survey methods, TIPs, VIX, credit spreads

JEL Classification: G11, G31, G12, G14