3 Practice activities – equity risk premium (ERP)
The following pages contain a range of activities to help you get to grip with equity risk premiums.
Find a risk-free rate
In Activity 1: Finding a risk-free rate, you will see how to find a risk-free rate for use at home (local projects in a local or home currency) and abroad (projects in a foreign location in a foreign currency).
In Activity 4: Finding an equity risk premium, you use Bloomberg to explore the ERP in different locations (the US, China and Indonesia).
Bloomberg is the name given to a software system that provides financial news and information, both historic and real-time. It also provides the basis for a trading system for financial transactions, such as buying and selling bonds.
Bloomberg estimates an ERP using financial data from stock markets. That is, finding an implied ERP from the stock market yield, the consensus view of growth rates and the risk-free rate. Evaluate the Bloomberg approach in Taking on the market.
Key people in corporate finance
 | The equity risk premium Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University and has produced a number of finance texts. He also maintains a website with a wealth of financial spreadsheets and seminar presentations on corporate finance techniques, particularly valuation topics. Damodaran’s website provides his views on the current risk-free rate and equity risk premium, which he regularly updates. He calls himself first and foremost a teacher and advocates a ‘dose of common sense’ when working with corporate finance techniques and concepts. If you have time and are interested, visit Damodaran's website and/or carry out a wider internet search. |