What Professionals Get Wrong About the Equity Risk Premium

Why It Matters

Accurate, long‑run ERP data reshapes valuation and investment strategies, giving analysts a reliable benchmark for pricing risk across markets.

Key Takeaways

• Century‑long US equity data shows over 1,000× return.
• Total‑return indices require compounding dividends for accurate risk premium.
• Four ERP measurement methods create confusion among practitioners.
• International data reveals lower US equity premium versus global markets.
• New CFA‑accessible dataset will cover stocks, bonds, and yield curves.

Summary

The panel, featuring Roger Ibbotson, Elroy Dimson and Carla Nunes, examined the equity risk premium (ERP) through a century‑plus of U.S. stock and bond data and announced a forthcoming, CFA‑hosted data platform. Ibbotson described rebuilding the historic “I‑indices” after licensing issues forced the original series to shut down, emphasizing total‑return calculations that compound dividends and bond yields over 100 years. Key insights included the dramatic 1,000‑fold real return of large‑cap equities, the importance of distinguishing geometric versus arithmetic averages, and the four possible ERP comparisons—geometric or arithmetic equity returns against short‑ or long‑term bond yields. Dimson’s international work showed U.S. premiums are not universally higher, while Nunes highlighted how bond risk has risen as stock risk has fallen, suggesting a potentially lower future ERP. Ibbotson referenced Jeremy Siegel’s iconic chart and noted that, when plotted on a log scale, the early and later halves of the equity market align on a straight line, reinforcing the stability of long‑run premiums. He also joked about survey respondents confusing ERP definitions, underscoring the practical challenges analysts face when communicating risk‑return concepts. The new dataset will integrate mega‑cap to micro‑cap equities, full Treasury yield curves, and forward‑rate‑derived bond returns, making granular, high‑quality historical data publicly available to CFA members. This resource promises more precise cost‑of‑capital calculations, better valuation models, and clearer guidance for both long‑term investors and corporate finance professionals.

Original Description

How do professionals actually estimate returns and why do they often disagree?

This panel shifts from theory to practice, showing how the equity risk premium is used in real-world investing, valuation, and portfolio construction, as part of the CFA Institute Research and Policy Center and CFA Society New York celebration of the Financial Analysts Journal’s 80th anniversary and CFA Institute Research Foundation 60th Anniversary event.

The discussion expands globally, highlighting how U.S. performance may be the exception rather than the rule, and why relying purely on historical averages can lead to flawed assumptions.

You’ll also hear how practitioners deal with uncertainty and why most rely on ranges, not precise forecasts.

Watch the full session and continue with Part 4.

Learn more about the topics discussed:

- Financial Analyst Journal – Stocks for the Long Run? Sometimes Yes, Sometimes No: https://cfainst.is/4mbehbR

- Enterprising Investor – Stocks for the Long Run? Setting the Record Straight: https://cfainst.is/4v7jFRA

- Research Foundation - Stocks for the Long Run? New Evidence, Old Debates: https://cfainst.is/4m9rTo8

- Research Foundation - Stocks for the Long Run Revisited: Dividends and “The Return Nobody Got”: https://cfainst.is/4lYTkAZ

Participants:

- Laurence B. Siegel, CFA Institute Research Foundation

- Roger G. Ibbotson, Yale School of Management

- Elroy Dimson, Cambridge Judge Business School

- Carla Nunes, CFA, Kroll

Chapters & Key Moments:

- 00:00 Panel introduction

- 01:00 100 years of return data explained

- 07:00 Compounding & wealth creation

- 12:00 Measuring the equity premium

- 18:35 Global vs US performance

- 22:45 Why US markets are exceptional

- 26:50 Global equity premium ranges

- 31:35 Why future returns may be lower

- 32:13 Corporate finance perspective

- 38:34 Historical vs forward-looking ERP

- 43:00 Practical challenges in valuation

- 48:00 Audience Q&A begins