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What Is Risk-Free Rate?

Andrew Stolz

Definition of Risk-Free Rate. The risk-free rate is the minimum rate of return on an investment with theoretically no risk. Government bonds are considered risk-free because technically, a government can always print money to pay its bondholders. Anticipated rate of inflation.

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In Search of Safe Havens: The Trust Deficit and Risk-free Investments!

Musings on Markets

In every introductory finance class, you begin with the notion of a risk-free investment, and the rate on that investment becomes the base on which you build, to get to expected returns on risky assets and investments. What is a risk free investment? Why does the risk-free rate matter?

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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? How Do You Calculate Equity Risk Premium? Why is the Equity Risk Premium Important?

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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. How, you may ask, can equity risk premiums be that divergent, and does that imply that anything goes?

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

Musings on Markets

In this post, I will begin by chronicling the damage done to equities during 2022, before putting the year in historical context, and then examine how developments during the year have affected expectations for the future. Actual Returns Your returns on equities come in one of two forms. Stocks: The What?

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What Is Cost of Equity?

Andrew Stolz

Definition of the Cost of Equity. To compensate for the risks that shareholders take, firms pay them in return. The theoretical return the firm pays its equity investors (shareholders) is known as the cost of equity. In other words, the cost of equity is the rate of returns a firm pays to its shareholders.

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

Musings on Markets

In a post at the start of 2021 , I argued that while stocks entered the year at elevated levels, especially on historic metrics (such as PE ratios), they were priced to deliver reasonable returns, relative to very low risk free rates (with the treasury bond rate at 0.93% at the start of 2021). The year that was.