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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: pater tenebrarum who wrote (146299)1/28/2002 12:06:18 AM
From: Wyätt Gwyön  Read Replies (2) of 436258
 
hi Heinz,
i'd be curious for your take on this article...
efficientfrontier.com
the author argues that real expected returns on equities (SPX) are 4.5%, and that the risk free real return (T-bill yield) is 0%, so expected equity risk premium is 4.5%, which seems "about right for our times".

personally, i have a very hard time believing that expected real returns are 4.5%, since that assumes a 3% real div yield growth, which is about 50% higher than historical norm; which might itself be too high a benchmark going forward. also, the div yield could be subject to further "slippage".

the other side of the equation--risk free return--i am skeptical about defining the market as fairly priced or not based only on the T-bill yield, which seems rather subject to manipulation. and there are others that argue the real TIPS yield of 3.4% or so is the real risk-free benchmark against which to compare equities, in which case there is not much of a risk premium to the SPX even using the 4.5% figure.

to me it is disturbing if the T-bill yield can be the ultimate arbiter of the risk premium, because by extension that could mean Greensp*n could dictate the fair market value of the stock market, imho.
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