Hey everyone, I'm currently going through the WSO Technical Guide (super helpful by the way), and came across a question asking about the market risk premium. From a conceptual standpoint, I understand that the market risk premium is calculated as the average market return minus the yield on a 10-year treasury note, but the guide denotes an approximated 12.6% average market return. My big question is where does this 12.6% average market return come from and, as a follow up, is it subject to change over time? I'm using an older version of the guide that was passed down to me so I'm curious as to what might be a more accurate figure for current recruiting.
Thanks!
Yeah it's subject to change overtime, the one given is most probably just an example. The expected market return is lower now due to the global macro environment.
That makes sense, thanks!
I was always taught the ERP (equity risk premium) was the earnings yield on the market over a 10y bond. so for US, it'd be S&P500 earnings yield minus the 10y treasury, for Germany it'd be the DAX minus the bund, etc. I'm not doing the homework for you but I'll say that multpl.com and the wall street journal have reliable market data.
in your case, I'm guessing they chose some arbitrary time period for their investment return.
That makes sense. Thanks for your help!
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