|
|
Equity risk premium |
|
|
|
 Home Site Map Add Term Search About Us Contributors |
Equity risk premiumThe concept that justifies investment in stocks, where your capital is at risk, rather than gilt-edged bonds which are as safe an investment as you can get and where your capital is not at risk provided you hold the bond til maturity.The theory goes that it is only worth investing in stocks if the return you get exceeds the return you could get on gilts - otherwise, why would you take on the extra risk? The difference in returns is known as the equity risk premium.Every historical analysis of returns achieved by stocks compared to bonds shows that stocks outperform bonds in the long term. This is why you repeatedly hear pundits say that the stock market, while risky in the short term, is not risky in the long term. The key thing, as a private investor, is to leave your money in the market for long enough for the long term benefit to eradicate the short term risk. Stick your money in the market for two months, and it might go down 20% if you are unlucky. Stick it in a well-diversified portfolio for 30 years, and it should produce returns that comfortably exceed what you could have got from bonds.Similar MatchesPercentage premiumPercentage premiumApplies mainly to convertible securities. Premium over parity of a convertible bond divided by parity. Liquidity premiumLiquidity premiumForward rate minus expected future short-term interest rate. Tender offer premiumTender offer premiumThe premium offered above the current market price in a tender offer. Premium incomePremium incomeThe income received by an investor who sells an option. Risk premiumRisk premium1. The higher expected return (in the sense of mathematical expected value) that an uncertain asset must pay in order for risk averse investors to be willing to hold it. 2. The difference between the interest rate on a risky asset and that on a safe one. 3. In exchange markets the difference between the forward rate and the expected future spot rate. Further Suggestionssingle premium life insuranceConversion premium Call premium Premium insurance premium tax life assurance premium relief warrant premium Single Premium Deferred Annuity (SPDA) Unamortized premiums on investments Single premium life insurance Waiver of premium premium bonds insurance premium Default premium Risk premium Premium bond Forward premium Indemnity Guarantee Premium High premium convertible debenture Bond premium option premium Insurance premium waiver of premium Option premium premium |
|
|
|