Professor Aswath Damodaran (Stern School of Business, New York) has recently updated his article titled “Equity Risk Premiums (ERP): Determinants, Estimation and Implications.” The 94-page 2011 edition provides a detailed picture of ERPs. He provides highlights of the article on his blog, Musings on Markets. Some of his thoughts and findings on the subject include:
- “The equity risk premium is neither a mathematical number nor is it a statistical number. Instead, it is a reflection of what investors are feeling in their gut: if investors feel more worried about the future, the equity risk premium will rise.”
- “Pragmatically, though, there are only three ways of estimating the equity risk premiums.”
- “The big question, of course, is which of these equity risk premium estimates is the right one to use in corporate finance and valuation.”
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