Value Investing, Videos

Aswath Damodaran – Session 6 (Undergraduate): Risk free Rates and Risk Premiums (Part 1)

Aswath Damodaran – Session 6 (Undergraduate): Risk free Rates and Risk Premiums (Part 1)

Published on Feb 10, 2016

We started on the question of risk free rates and how to assess them in different currencies. In particular, we noted that government bonds are not always risk free and may have to be cleansed of default risk. The rest of today’s class was spent talking about equity risk premiums. The key theme to take away is that equity risk premiums don’t come from models or history but from our guts. When we (as investors) feel scared or hopeful about everything that is going on around us, the equity risk premium is the receptacle for those fears and hopes. Thus, a good measure of equity risk premium should be dynamic and forward looking. We looked at two different ways of estimating the equity risk premium.
1. Survey Premiums: I had mentioned survey premiums in class and two in particular – one by Merrill of institutional investors and one of CFOs. You can find the Merrill survey on its research link (but you may be asked for a password). You can get the other surveys at the links below:
CFO survey: http://papers.ssrn.com/sol3/papers.cf…
Analyst survey: http://papers.ssrn.com/sol3/papers.cf…
2. Historical Premiums: We also talked about historical risk premiums. To see the raw data on historical premiums on my site (and save yourself the price you would pay for Ibbotson’s data…) go to updated data on my website:
http://pages.stern.nyu.edu/~adamodar/…
Slides: http://www.stern.nyu.edu/~adamodar/po…
Post class test: http://www.stern.nyu.edu/~adamodar/pd…
Post class test solution: http://www.stern.nyu.edu/~adamodar/pd…

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