EQUITY RISK PREMIUM B.CORNELL Księgarnia

ISBN: 0-471-32735-2
Hardcover
Published: May 1999
Copyright: 1999

The Equity Risk Premium-the difference between the rate of return on common stock and the
return on government securities-has been widely recognized as the key to forecasting future
returns on the stock market. Though relatively simple in theory, understanding and making
practical use of the equity risk premium concept has been dauntingly complex-until now.

In The Equity Risk Premium, financial advisor, author, and scholar Bradford Cornell makes
accessible for the first time an authoritative explanation of the equity risk premium and how it
works in the real world. Step-by-step, his lucid, nontechnical presentation leads the reader to a
new and more enlightened basis for making asset allocation choices.

Cornell begins his analysis by looking at the equity risk premium in the light of stock market
history. He examines the use of historical data in estimating future stock market performance,
including the historical relationship between stock returns and risk premium, the impact of
survival bias, and the effect of long-horizon stock and bond returns. Using the stock market
boom of the 1990s as a case study, Cornell demonstrates what equity risk premium analysis can
tell us about whether stock prices are high or low, whether the stock market itself may have
changed, and whether indeed a new economic paradigm of higher earnings and dividend growth
is now in place.

Cornell analyzes forward-looking estimates of the equity risk premium through the lens of
various competing approaches and assesses the relative merits of each. Among those
scrutinized are the Discounted Cash Flow model, the Kaplan-Rubeck study, the Welch survey,
and the Fama-French Aggregate IRR analysis. His insights on risk aversion theory, on the types
of risk that have been rewarded over time, and on changing investor demographics all supply
the sophisticated investor with important pieces of the risk premium puzzle.

In his invaluable summing up of the equity risk premium and the long-run outlook for common
stocks, Cornell weighs the evidence and assays the impact of a lower equity risk premium in
the future-and its profound implications for investments, corporate decision making, and
retirement planning.

The product of years of serious analysis and hard-won insights, The Equity Risk Premium is
essential reading for institutional investors, money managers, corporate financial officers, and
all others who require a higher level of market analysis.

"The Equity Risk Premium plays a critical role in legal and regulatory matters related to
corporate finance. Along with the cost of debt, it is the most important determinant of a
company's cost of capital. As such, it is an integral part of the decision-making process in
corporate finance. For instance, whether or not a major acquisition makes sense can depend on
the assumed value of the equity risk premium. In addition, the equity risk premium is an issue
that regulatory bodies consider when they set fair rates of return for regulated companies.
Cornell's book is an important contribution because it includes both an historical analysis of the
equity risk premium and provides tools for forecasting reasonable levels of the risk premium in
the years ahead."-Theodore N. Miller, Partner, Sidley & Austin.

"Estimating how well stocks will do in the future from how well they have done in the past is
like driving a car while looking in the rearview mirror. Brad Cornell provides us with an
important forward-looking view in this easily understood guide to the equity risk premium and
confounds the popular view that stocks will do well in the future because they have done well
in the past."-Michael Brennan, Past President of the American Finance Association and
Professor of Finance at the University of California at Los Angeles.

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