The Equity Risk Premium: The Long-Run Future of the Stock Market
by admin / July 27th, 2010
Product Description
The Equity Risk Premium—the difference between the rate of return on common stock and the return on government securities—has been widely recognized as the key to forecasting future returns on the stock market. Though relatively simple in theory, understanding and making practical use of the equity risk premium concept has been dauntingly complex—until now. In The Equity Risk Premium, financial advisor, author, and scholar Bradford Cornell makes accessibl… More >>
The Equity Risk Premium: The Long-Run Future of the Stock Market
July 27th, 2010 at 8:46 am
This book combines historical perspective with current academic thinking to outline what the long-run future returns are likely to be in the American stock market. It is not a pop investment book, so be prepared to put in some effort. However, that effort is well rewarded with new insight into the workings of the market.
The surprising, and well supported, conclusion? In the years ahead stocks will perform significantly worse than they have historically when compared to the returns on bonds.
Rating: 5 / 5
July 27th, 2010 at 10:39 am
The author, Professor Bradford Cornell, gives an analytical, yet very readable, explanation and forecast of the decline of the stock market during the past couple of years. In this regard Professor Cornell makes a similar conclusion about the value of equtiies and slightly earlier than did Robert J. Shiller in his book, Irrational Exuberance. It is unfortunate that Professor Cornell and his book did not get the same attention that was accorded to Professor Shiller at the start of the stock market decline.
The thesis of the book is that the equity risk premium for stocks, which is the compensation given to equity investors for holding shares of risky common stocks, was below, perhaps much below, what was historically normal. This implied that investors came to view common stocks as being a much less risky investment than stocks had been in the past. Indeed, a quite common view of many investors before the recent fall in the stock market was the view that common stock were an appropriate vehicle for “savings” rather than just for “investment.” The implication of this perception by some investors is that equities in general were likely to continue to rise in price over time and thus represented a “safe” or at least low risk vehicle for discretionary income that was not spent.
However, periods of relative low perceived risk usually do not last and are followed by periods of relatively higher perceived risk. The current period we are now in appears to be one in which the uncertainties regarding the stock market have increased and thus investors are now demanding greater compensation, that is, a higher risk premium, for bearing those uncertainties.
The reason the book does not get five stars is that the book misspecifies the constant dividend growth model equation that forms the basis for the author’s explanation of the adjustment in the equity risk premium. However, this oversight should not prevent the reader from getting a great explanation of how the prices of common stocks adjust to risks from this fine book.
Rating: 4 / 5
July 27th, 2010 at 11:51 am
I read this to help me with my professional career in valuation of closely-held businesses. For those who want to understand a great deal more about the equity risk premium, it is a really helpful work.
One problem — The index is pathetic.
Rating: 4 / 5
July 27th, 2010 at 1:01 pm
The book seems to be targeted towards University researcher types more than people interested in learning about investing. If you are looking for a book that helps to explain how to value individual stocks for investment, skip this book.
There is a lot of detailed analysis of past history or stock market performance and other fundamentals. There is a comparison of dividend trends and lots of other stuff. Almost all of the book treats the entire market as a whole rather than analyzing individual stocks. I believe the conclusion of the book is that the stock market as a whole is over priced based on the extensive research performed by the author.
Rating: 3 / 5
July 27th, 2010 at 2:43 pm
Recently Alan Greenspan said that the equity risk premium is the key to the future of the stock market. This, not Dow 36000, is the best book on the subject. Balanced and complete, not polemic. Every serious investor should read it.
Rating: 5 / 5