The Price of Risk: Equity Risk Premiums and Market Valuation
This article examines equity risk premiums (ERP)—the price of risk investors demand for holding equities—and explains why different estimation approaches yield vastly different values (ranging from negative to 5%+). Damodaran compares four major ERP estimation methodologies (historical, EP-ratio based, Fed model earnings yield, and implied ERP) and argues that the implied ERP approach best predicts long-term stock returns. The article demonstrates that ERP is central to corporate finance, valuation, and investment decisions, but that market-timing predictions using ERP remain subject to significant statistical noise.
Metrics in this report
-18percent
2022 annual performance
66.7percent
Share of total cash returned to shareholders in 2022
5.00percent
US S&P 500 at start of July 2023 (implied ERP approach)
4.44percent
US S&P 500 at start of August 2023 (implied ERP approach)
0.41percent
US S&P 500 at start of August 2023 (Fed model / earnings yield approach)
1.1percent
US equity market estimate per Wall Street Journal
2.2percent
US equity market estimate per Reuters
6.64percent
average
US stocks vs. 10-year treasury bonds; range 2.34%-10.94% at 95% confidence
19.73percent
2022 full year
17.04percent
average
Last 10 years
9.35percent
minimum
2008, worst year this century
4.0percent
Current level as of 2023
-20percent
S&P 500 negative risk premium vs. treasury bills in 2022