Session 7: Implied and Country Equity Risk Premiums

Thi's class was spent talking mostly 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 three different ways of estimating the equity risk premium. It is with this objective in mind that we computed an implied equity risk premium for the S&P 500, using the level of the index. If you want to try your hand at it, here is my February 2024 update:
www.stern.nyu.edu/~adamodar/pc...
Play with the spreadsheet. In fact, try it with today’s index level and T.Bond rate and see what the ERP is right now. I also noted the path of historical implied equity risk premiums, and how they have become more unstable and higher since 2008, mentioning a greater fear of catastrophic risks than ever before. If you are interested in this topic, I wrote a piece about it last week:
aswathdamodaran.blogspot.com/...
I then extended this approach into other markets, and talked about how to (and tried to) estimate equity risk premiums for other markets, using the country ratings (default spreads) as a building block. You can get my 2024 start-of-the-year equity risk premiums at this link:
pages.stern.nyu.edu/~adamodar...
As a final step, see if you can find the geographic revenue distribution for your company. You can then use my latest ERP update to get the ERP for your company. If you can find production exposure, even better. You will then have to decide whether you want ERPs based upon production, revenues or a composite of the two.
Slides: pages.stern.nyu.edu/~adamodar...
Post class test 1: pages.stern.nyu.edu/~adamodar...
Post class test 1 solution: pages.stern.nyu.edu/~adamodar...
(If these links don't work, try a different browser...)

[@apexmemator7239]

This was quite a stimulating lecture

[@vishalkapoor8517]

God Bless you more sir

[@harshc17]

ERP by geography makes sense for companies like Tata Motors & Disney which have currency risks for various geographies. But for Vale doesnt seems right given that majority of Iron Ore trade is settled in USD.

[@harshc17]

On slide 132, why is ERP of rest of world different for Vale & TATA Motors?

[@kuindersma]

Is there a reason we don't just skip the analyst forecasts and base it on the terminal rate? Index=CF/(r-rf)*(1+r) If we are using the S&P as the proxy for the economy, shouldn't it grow at the same rate as the economy?

[@VipulMehta817]

S&P can grow at a higher rate for a short period of time, eventually it can't grow beyond the economy growth.
Hence two different growth rates.

[@tania.cristina]

Are you planning to start a new training course ?

[@mumishen4819]

The caliber of the student body of this class at NYU is quite low, are these MBA students?

[@arnavdas1671]

Maybr they are new to this field? Possibly engineering grads doing an MBA

[@craigsbenedict]

This is their first time through finance. Be nice

[@mumishen4819]

@@craigsbenedict This shows that you may be at an even lower calibre than these students😄