The 2010 Equity Risk Premium from Academia

What is the current academic estimate of the annual premium over the risk-free rate demanded by equity investors. How has that estimate changed over the past year? In their May 2010 paper entitled “Market Risk Premium Used in 2010 by Professors: A Survey with 1,500 Answers”, Pablo Fernandez and Javier del Campo summarize the results of an April-May 2010 email survey soliciting the risk premium “that professors use to calculate the required return to equity” in 2010. Based on over 900 specific responses to the question from finance and economics professors around the world, they find that:

• The average risk premium reported by U.S. professors (6.0%) is higher than those reported from Europe, UK and Canada but lower than those reported from Australia and “Other.” Dispersion among responses within countries is high (see the chart below).
• For both the U.S. and worldwide, the average reported risk premium fell by 0.4% from 2009 to 2010. About 16% (29%) of respondents report raising (lowering) risk premium estimates for 2010 compared to 2009.
• The top four cited benchmarks for the equity risk premium are, in descending order: Damodaran, Morningstar/Ibbotson, historical data and personal judgment.

The following chart, taken from the paper, shows the distribution of required equity risk premiums for 462 survey responses from finance and economics professors in the U.S. The average is 6.0%, down from the average estimate of 6.4% (6.3%) in 2009 (2008).

In summary, U.S. finance and economics professors on average currently estimate that investors require an annual excess return from equities of 6%.

You May Also Enjoy...

• The 2008 Equity Risk Premium from Academia
• The 2010 Equity Risk Premium from Practitioners
• The 2011 U.S. Equity Risk Premiums from Academia and Practitioners
• The Prospective “Academic” Equity Risk Premium
• 2011 Country Equity Risk Premiums from Academia and Practitioners