Equity Risk Premiums: Will History Hold True?

by: Value Expectations

Using Applied Finance Group's Market Derived Discount Rate methodology, we decided to look at how equity risk premiums have moved across time. If you have followed the market, the chart below on equity risk premium confirms what you have been noticing in the market. Where as risk aversion wasn't in style for the past few years, risk aversion has now become the hottest flavor in town.

Investors are pricing in much higher risk than they have at any time in the last 18 years. However if history holds true, risk premiums should come down closer to historic levels fairly quickly.

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