The survey has two questions and it takes less than two minutes to complete. The targeted respondents were MBAs, finance and economics professors, bankers, financial managers of companies… This survey has been done each year since 2008. It is interesting to analyze the evolution of the averages and of the dispersions of MRP and RF for different countries
Due to “Quantitative Easing”, many respondents use for European countries in 2019 an RF rate higher than the yield of the 10-year government bonds. The coefficient of variation (CV)(standard deviation/average) of the RF rate is, on average, 2,8 times higher than the CV of the MRP for the Euro countries.
Much confusion arises from not distinguishing among the four concepts that the phrase equity premium designates: Historical equity premium, Expected equity premium, Required equity premium and Implied equity premium. 129 of the books reviewed by Fernandez (2009) identify expected and required equity premium and 82 books identify expected and historical equity premium.
Finance textbooks should clarify the MRP by incorporating distinguishing definitions of the four different concepts and conveying a clearer message about their sensible magnitudes.
Our previous surveys have been interested in the expected MRP, but this survey asks about the required MRP.
This survey links with the Equity Premium Puzzle which may be explained by the fact that many market participants (equity investors, investment banks, analysts, companies…) do not use standard theory for determining their required equity premium, but rather, they use historical data and advice from textbooks and finance professors. Consequently, ex-ante equity premia have been high, market prices have been consistently undervalued, and the ex-post risk premia has been also high. Many investors use historical data and textbook prescriptions to estimate the required and the expected equity premium. The undervaluation and the high ex-post risk premium are self-fulfilling prophecies.