Session 5: Implied Equity Risk Premiums

In this session, we started by looking at the implied equity risk premium as of September 21 and I am attaching the implied premium spreadsheet for you to experiment with. After a brief foray into lambda, a more composite way of measuring country risk, we spent the rest of the session talking about the dynamics of implied equity risk premiums and what makes them go up, down or stay unchanged. We then moved to cross market comparisons, first by comparing the ERP to bond default spreads, then bringing in real estate risk premiums and then extending the concept to comparing ERPs across countries. Finally, I made the argument that you should not stray too far from the current implied premium, when valuing individual companies, because doing so will make your end valuation a function of what you think about the market and the company. If you have strong views on the market being over valued or under valued, it is best to separate it from your company valuation. Start of the class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/ERPtest2016.xls Slides: http://www.stern.nyu.edu/~adamodar/podcasts/valfall16/valsession5.pdf Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session5test.pdf Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session5soln.pdf Learn more about your ad choices. Visit megaphone.fm/adchoices