article thumbnail

The Price of Risk: With Equity Risk Premiums, Caveat Emptor!

Musings on Markets

If you have been reading my posts, you know that I have an obsession with equity risk premiums, which I believe lie at the center of almost every substantive debate in markets and investing. That said, I don't blame you, if are confused not only about how I estimate this premium, but what it measures.

article thumbnail

What Is Equity Risk Premium?

Andrew Stolz

Definition of Equity Risk Premium. It is the difference between expected returns from the stock market and the expected returns from risk-free investments. What Impacts the Equity Risk Premium? Dividends . How Do You Calculate Equity Risk Premium? Dividend model ? Earnings model ?

Insiders

Sign Up for our Newsletter

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Trending Sources

article thumbnail

Data Update 2 for 2023: A Rocky Year for Equities!

Musings on Markets

The first is the dividends you receive, while you hold stocks, a cash flow stream that provides a measure of stability to investors who seek it. It too requires estimate for inputs, but the range of error is magnitudes smaller than with historical premiums. Actual Returns Your returns on equities come in one of two forms.

Equity 93
article thumbnail

The Dividend Discount Model (DDM): The Black Sheep of Valuation?

Brian DeChesare

When I started offering financial modeling training , I never expected to get questions about a methodology like the Dividend Discount Model (DDM). Otherwise, the written version follows: Why Use a Dividend Discount Model? The main argument in favor of the DDM is that it best represents what happens in real life when you buy a stock.

article thumbnail

Data Update 2 for 2022: US Stocks kept winning in 2021, but…

Musings on Markets

When you augment this price change with the dividends on the index during 2021, the total return on the S&P 500 for 2021 was 28.47%. With equities, the cash flows take the form of dividends and buybacks, and in addition to estimating them using future growth rates, you have to assume that they continue in perpetuity.

article thumbnail

Reaping the Whirlwind: A September 2022 Inflation Update!

Musings on Markets

In a third post on July 1, 2022 , I pointed to inflation as a key culprit in the retreat of risk capital, i.e., capital invested in the riskiest segments of every market, and presented evidence of the impact on risk premiums (bond default spreads and equity risk premiums) in markets.

article thumbnail

Data Update 2 for 2024: A Stock Comeback - Winning the Expectations Game!

Musings on Markets

To capture the market's mood, I back out the expected return (and equity risk premium) that investors are pricing in, through an implied equity risk premium: Put simply, the expected return is an internal rate of return derived from the pricing of stocks, and the expected cash flows from holding them, and is akin to a yield to maturity on bonds.