Posts Tagged ‘Equity Risk Premium’

Abnormal Returns has a great post, Blind Men And The Equity Risk Premium, with links to various estimates of the equity risk premium. Tadas says the equity risk premium is sensitive to recent performance, and mean reverting:

A recent post at Systematic Relative Strength shows just how different the equity market can look given recent history.  They show the flip-flop in trailing 10-year total returns for the S&P 500 from June 30th, 2010 and June 30th, 2000:  -0.8% vs. 17.8%.  This reversal in fortune not surprisingly affects the way individuals think about the stock market.  They do not however that:

Performance in a given asset class over the last 10 years doesn’t guarantee returns over the next 10 years.  Given the tendency for markets to revert to the mean, it is quite possible that the returns of the S&P 500 over the next 10 years will be very good.  Giving up on equities may prove to be a very poor decision over the next decade.

This idea of mean reversion is also found over at EconomPic Data.  The chart below shows that historically the US stock market has bounced back after periods of low real returns.

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