Aswath Damodaran 102
! Application Test: A Market Risk Premium
! Based upon our discussion of historical risk premiums so far, the risk
premium looking forward should be:
a) About 7. 92 %, which is what the arithmetic average premium has been since 1928 ,
for stocks over T.Bills
b) About 4. 84 %, which is the geometric average premium since 1928 , for stocks
over T.Bonds
c) About 3. 7 %, which is the implied premium in the stock market today
There is no right answer, but it will lead to very different costs of equity and
capital, and corporate financial decisions down the road.
