Unusual US Equities Premium ? Or is it in NZ ?

3rd May 2019

From early on in our finance education students of CAPM are taught that the equities premium for the US is about 6%. In truth no one is 100% sure why. Bennett Stewart once wrote that the magic " 6 " was a bit like 22 over 7... or Pi. Just one of those numbers.

Aswath Damodaran - a grinding and inspired worker in this area - today published data showing the current (May2019) US premium to be around 5.62... up from 5.16 12 months ago. Damodaran uses the opyion method to estimate the premium which has the advantage of being forward looking and not just being a crude history re-run.

With the US riskfree rate down around 2.5 this makes the cost of capital some 8.12 (on average and for the S&P 500) in the US. Applied in an NZ context we might say the cost of capital is around 7.4 given the NZ rate for Rf.

Is the risk to be offset really that much lower in NZ ? If so why aren't we sprinting...?

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