In addition, a decline in the equity premium temporarily increases the return to shareholders.
When the decline in the equity premium halts so too does the momentum, perhaps sending share prices tumbling.
The true level of the equity premium is not merely an academic debate.
Another way of measuring the equity premium which is, after all, the extra return on equity that investors require is to ask them.
If the equity premium is overstated, managers may be overlooking profitable investments, from new factories to drug research to investments in poor countries.
If these markets were taken into account, the historical equity premium would be even lower.
The equity risk premium is usually viewed as the extra return that investors demand for holding equities rather than risk-free bonds.
The first step is to define the equity risk premium more exactly.
Or put it this way: The equity risk premium says that stocks have compounded four times as fast as bonds in real (inflation-adjusted) terms.
After adjusting for these factors, the authors argue that the best estimate of the equity risk premium worldwide in future is 4-5 percentage points.
The equity risk premium can be calculated only after the event.
Currently the equity yield premium is almost 5%, which is much closer to the historic maximum than it is the historic average (which is a little less than 1%).
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This difference in valuations is called the equity risk premium, and the more pessimistic the growth prospects for the future, all other things being equal, the higher that premium should be.
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IR The puzzle of the equity-risk premium (Economics focus, July 15th) highlights a topic that we have been researching and it poses, but does not answer, an important question: how can one reconcile high investor expectations with a declining equity premium?
"They've been unfairly tarnished with the Italian equity-risk premium, " he says.
According to the ETF Finder at ETF Channel, IRC makes up 3.38% of the KBW Premium Yield Equity REIT Portfolio ETF ( AMEX: KBWY )which is trading higher by about 0.8% on the day Thursday.
According to the ETF Finder at ETF Channel, LXP makes up 3.31% of the KBW Premium Yield Equity REIT Portfolio ETF ( AMEX: KBWY )which is trading lower by about 0.3% on the day Monday.
According to the ETF Finder at ETF Channel, FPO makes up 3.69% of the KBW Premium Yield Equity REIT Portfolio ETF ( AMEX: KBWY )which is trading lower by about 0.1% on the day Monday.
Given the history of the risk premium, what will the future reward for equity investors be?
According to a 2002 study by two economists at Indiana University, enforcing insider-trading laws reduced the cost of equity in the countries they looked at because investors did not demand a premium for the risk of trading with a crooked counterparty.
Fettig could be right and the company may in fact be bought by private equity for a premium price, but as far as value-focused investors are concerned, the buying opportunity has likely passed.
They do so by figuring out for all their candidates an "equity risk premium"--the amount of return (appreciation plus dividends) they want over safe ten-year Treasury bonds, based on their best guess.
Mark Meland, a lawyer representing the bondholders, said the deal has led to a 20.0% drop in the value of the debt securities, while equity investors have been offered a premium.
Mark Meland, a lawyer representing the bondholders, said in May the deal had led to a 20.0% drop in the value of the debt securities, while equity investors had been offered a premium.
To capitalize this entrepreneurial approach, the banks should be able to sell these higher-yield, lower-risk mortgages to be bundled into bonds that investors would find attractive because of the premium yield, stable revenue stream, and equity kicker.
Translate the premium into an annual rate and you have the cost of equity.
Their dividends are variable, their cash flows less certain and therefore an equity risk premium should exist which compensates stockholders for their junior position in the capital structure.
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Because the company is trading at a 47% premium to NAV it's unlikely to attract the attention of any private equity firms.
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