Equity risk premium trend

What do you guys think about the BofA forecast? Seems that historically speaking (or at least since 1987) we currently have quite a reasonable equity risk premium (although lower than post-GFC).


1 Like

Sorry to be a bit slow.

Do you mind explaining this a little as it looks interesting?

The charts shows a normalized (making comparing data easier) history of the equity risk premium and a forecast for 2021.

The equity risk premium is the excess expected return from investing in stocks compared to the risk-free rate. The risk-free rate is the theoretical return one would expect to earn without taking on any risk (it’s not possible to have something completely risk free so often government bonds are used as a measure).

In short, a higher value for the equity risk premium corresponds with a higher expected return for stocks in excess to the risk-free rate.