The future equity risk premium for the UK market is set to be lower than the historical average, acc...
The future equity risk premium for the UK market is set to be lower than the historical average, according to the London Business School.
In its Global Investment Returns Yearbook 2002, the school finds that, factoring in current market volatility, the future equity risk premium for UK and world stock markets will be around 3.5% to 4%.
This compares with a historical average premium for equity risk in the UK of around 5.8% over the past 100 years and 5.9% for the world market.
The equity risk premium is defined as the difference between the return on stocks and bonds.
Elroy Dimson, professor of finance at the London Business School and one of the authors of the report, said the average risk premium for UK equities relative to bonds increased in the second half of the 20th century, rising from just 3.1% during the first 50 years to some 9.2% between 1950 and 2001.
Dimson said this increase was down to factors such as increased productivity, accelerating technological change and improved management and corporate governance.
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