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Discussion Questions

  • Right now, is the market risk premium sufficient for you to invest in the stock market?

To answer that question:

  • How much do you think the stock market will return over and above the Treasury10-year bond rate?
  • As an investor, is that an important question to answer before you invest in the stock market?
  • Do you think it will return enough to justify the added risk?
  • Do you think this premium will vary for different countries or for the same country over different time spans?

Note, when you are calculating the WACC for your company, you will need to answer similar questions.

  • Your text gives you three methods: historical risk premium, surveys of experts, and forward risk premiums. Which method do you prefer and why?
  • What would you do if the three methods varied significantly?

Four papers are available for your perusal:

Market risk premium in 2012 in U.S.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2020091

Market risk premium in 2014 in U.S.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2422008

Market risk for 56 countries in 2011

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1947301

Market risk for 82 countries in 2012

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2084213