Aswath Damodaran – Session 6: Equity Risk Premiums

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We started this class by tying up the last loose ends with risk free rates: how to estimate the risk free rate in a currency where there is no default free entity issuing bonds in that currency and why risk free rates vary across currencies. The key lesson is that much as we would like to believe that riskfree rates are set by banks, they come from fundamentals – growth and inflation. I have a post on risk free rates that you might find of use:…

The rest of today’s class was spent talking about equity risk premiums. The key theme to take away is that equity risk premiums don’t come from models or history but from our guts. When we (as investors) feel scared or hopeful about everything that is going on around us, the equity risk premium is the receptacle for those fears and hopes. Thus, a good measure of equity risk premium should be dynamic and forward looking. We looked at three different ways of estimating the equity risk premium.

Post class test:

Post class test solution:

Aswath Damodaran Equity Risk Premiums

Aswath Damodaran – Session 6: Equity Risk Premiums

See the full slides below.

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