Equity Premium
Governments are largely insulated from market forces. Companies are not. Investments in stocks therefore carry substantial risk in comparison with holdings of government bonds, notes or bills. The marketplace presumably rewards risk with extra return. How much of a return premium should investors in equities expect? These blog entries examine the equity risk premium as a return benchmark for equity investors.
January 2, 2026 - Equity Premium, Strategic Allocation
As of November 2025, the MSCI All Country World Index (ACWI) allocates about 65% to U.S. stocks. Is this allocation to a single country crazy high? In the November 2025 revision of their brief paper entitled “How Much Is Too Much? Part 1: Why 60% in US Equities Isn’t as Crazy as It Might Sound”, Arnaud Battistella and Nicholas McLoughlin assess this allocation by deriving the expected returns implied by ACWI allocations across regions (U.S., Europe ex UK, UK, Japan, Pacific ex Japan and Emerging Markets). Using mid-2025 ACWI allocations and monthly returns for specified regions in U.S. dollars during December 1987 through May 2025, they find that:
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December 26, 2025 - Equity Premium, Sentiment Indicators, Volatility Effects
In response to our inquiry about Goldman Sachs Panic Index data, Grok responded that the data are proprietary and unavailable. However, Grok offered “several high-quality public proxies and near-replicas…built by traders and quants using only freely available data. These reconstructions correlate extremely closely (often 0.90–0.98) with the snippets Goldman has shown clients over the years.” For one of these proxies, the percentile rank of VIX within its trailing 2-year window (0-100 scale), Grok provided a Python script to generate an historical daily series. Is it predictive of U.S. stock market returns? To investigate, we run the script to generate daily Panic Index Proxy data from the end of 2015 through November 2025 and relate the series to contemporaneous daily S&P 500 Index (SP500) returns. Using these two series, we find that: Keep Reading
December 23, 2025 - Equity Premium, Individual Investing
Should measures of long-term investment performance incorporate ways in which typical individual investors handle their portfolios over a lifetime rather than an idealized perspective such as buy-and-hold with all distributions reinvested? In his December 2025 paper entitled “Measuring Investor Outcomes”, Hendrik Bessembinder argues that investment performance measures should be realistic and discusses alternative measures of returns. Using monthly performance data for the broad U.S. stock market from the end of 1926 through 2022, he finds that: Keep Reading
December 12, 2025 - Equity Premium, Fundamental Valuation
Is U.S. equity market valuation outrunning its productive value? For perspective, we compare the trajectories of S&P 500 (SP500) index, earnings and dividends over recent decades and look at some potential explanations for divergences. Using quarterly SP500 data and 10-year U.S. Treasury note (T-note) yield during March 1988 through September 2025 and Shiller data as available through November 2025, we find that: Keep Reading
December 11, 2025 - Equity Premium
The equity premium is conventionally the return on stocks minus the risk-free rate (for short-term government bills). What should be the risk-free asset for equities, arguably expected to grow in real terms and never to mature? In the November 2025 draft of their paper entitled “Purifying the Equity Premium”, Christopher Polk and Tuomo Vuolteenaho argue that the risk-free asset as applied to equities should be a long-term inflation-indexed bond and therefore decompose the equity premium into two components:
- Pure equity premium – stock market return minus the yield on duration-matched inflation-indexed bonds, such as Treasury Inflation-Protected Securities (TIPS). See the chart below.
- Real term premium – yield on duration-matched inflation-indexed bonds minus the yield on short-term bills.
The conventional equity premium is the sum of these two components. Using value-weighted stock market and U.S. Treasury bonds/bills data for the U.S. since February 1997 and comparable data for the UK since August 1987, along with relevant economic data, all through June 2025, they find that: Keep Reading
November 28, 2025 - Equity Premium
“Nixed: The Upside of Getting Dumped”, flagged by a subscriber, finds that “index deletions…could add an abnormal upside to a portfolio when the current growth-dominated bubble starts to deflate.” The authors have quantified findings as the Research Affiliates Deletions Index (NIXT), constructed by:
- Starting with deletions due to market capitalization changes from the 500 and 1,000 largest U.S. stocks by market capitalization.
- Removing the bottom 20% of deletions based on firm quality assessments.
- Holding the equal-weighted remaining deletions up to five years (or until they rejoin a top market capitalization index), rebalancing annually at the end of May.
Do index deletions inherently underperform? To investigate we look at stocks deleted from the S&P 500 Index due to market capitalization changes over the past few years and compare their average performance during the 5, 10, 21, 63, 126 and 252 trading days after deletion to the average performance of date-matched positions in SPDR S&P 500 ETF Trust (SPY). Using dividend-adjusted prices for 61 S&P 500 deletions at closes on deletion dates and corresponding dividend-adjusted prices for SPY during April 2020 through early November 2025, we find that: Keep Reading
November 20, 2025 - Equity Premium, Investing Expertise
How do exchange-traded-funds (ETF) that employ artificial intelligence (AI) to pick assets perform? To investigate, we consider ten such ETFs, eight of which are currently available:
We use SPDR S&P 500 ETF Trust (SPY) for comparison, though it is not conceptually matched to some of the ETFs. We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly total returns for the ten AI-powered ETFs and SPY as available through October 2025, we find that: Keep Reading
November 12, 2025 - Equity Premium, Momentum Investing
Are stock and sector momentum strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider nine momentum-oriented equity ETFs, all currently available, in order of longest to shortest available histories:
We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). We assign broad market benchmark ETFs according to momentum fund descriptions. Using monthly dividend-adjusted returns for the nine momentum funds and respective benchmarks as available through October 2025, we find that: Keep Reading
November 7, 2025 - Equity Premium, Gold, Technical Trading
A reader requested a test of the following hypothesis from the article “Gold’s Bluff – Is a 30 Percent Drop Next?” [no longer available]: “Ironically, gold is more than just a hedge against market turmoil. Gold is actually one of the most accurate indicators of the stock market’s long-term direction. The Dow Jones measured in gold is a forward looking indicator.” To test this assertion, we examine relationships between the spot price of gold and the level of the Dow Jones Industrial Average (DJIA). Using monthly data for the spot price of gold in dollars per ounce and DJIA over the period January 1971 through September 2025, we find that: Keep Reading
October 21, 2025 - Animal Spirits, Equity Premium
How do exchange-traded-funds (ETF) focused on supplying renewable energy perform? To investigate, we consider nine of the largest renewable energy ETFs, all currently available, as follows:
We use SPDR S&P 500 (SPY) as a benchmark, assuming investors look at renewable energy stocks to beat the market and not to beat the energy sector. We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly returns for the nine renewable energy ETFs and SPY as available through September 2025, we find that: Keep Reading
