Professor Aswath Damodaran (NYU Stern School of Business) has just updated the implied equity risk premium (ERP) for the S&P 500 to 6.04% at the start of 2012, up from 5.20% at the start of last year. “The key factor behind the rise was the increase in cash flows (dividends and buybacks on the index) and the drop in the risk-free rate,” Damodaran explains in his first newsletter of 2012. “For those of you who prefer historical risk premiums, the updated geometric average risk premium for stocks over treasury bonds stands at 4.10% from 1928 to 2011, down from 4.36% last year.”
Damodaran tracks the monthly ERP on his website’s data page, where his annual update is nearly complete. “I used the same sources as last year—Cap IQ and Bloomberg for non-U.S. companies and Value Line for U.S. companies,” he explains. “The industry averages are reported, as [are] the raw data on individual companies (about 41,000+, this year).” Although “flattered” by the wide use of his data, Damodaran cautions against potential misuse. “I have put down my thoughts on what the data [are] best suited for and some caveats that users should keep in mind here.”
Finally, although Facebook scares the Professor for its “chaos of interactions,” he is currently on a self-described mission “to become the Lady Gaga of Finance,” and invites analysts to follow his monthly “tweet” of the ERP by joining his Twitter list.
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