The Equity Risk Premium and Six Decades of Risk and Return in Canadian Equity Markets (1958 – 2017)
17 Pages Posted: 7 Aug 2018
Date Written: July 17, 2018
We investigate the risk and return relationships of stocks, bonds and T-bills over the past six decades in Canada (1958 to 2017) and provide insights on some conventional folklore on a myriad of risk and return issues including investment duration. We also investigate the impact of NAFTA and the financial crisis on risk and returns as well as the impact of investment management fees on investor wealth. Our overall results indicate that the arithmetic risk premium in the Canadian equity market is 5.3% on short term T-bills and 3% on long term government bonds. The corresponding values for geometric average are 4.1% and 2.2%, respectively. The paper additionally presents many relevant stylized facts including the observation that the total shareholder return (TSR) is entirely attributable to the assumption about reinvestment of dividends.
Keywords: equity risk premium, market returns, financial crisis, NAFTA, investment horizon
JEL Classification: G10, G12, G15
Suggested Citation: Suggested Citation