24 andTreasurybondrates,butthisanalysiscouldhavebeen
done entirely in the local currency.
Theimpliedequitypremiumschangeovertimemuchmore
thanhistoricalriskpremiums.Infact,thecontrast between
thesepremiumsandthehistoricalpremiumsisbestillustrated
bygraphingouttheimpliedpremiumsintheS&P 500 going
back to 1960 in Figure 2.3. In terms of inputs, we used
smoothedhistoricalgrowthratesinearningsanddividendsas
ourprojectedgrowthratesandatwo-stagedividenddiscount
model. Looking at these numbers, we would draw two
conclusions.
FIGURE 2.3 Implied Premium for U.S. Equity
Market—1960–2005
1.Theimpliedequitypremiumhasseldombeenashigh as
thehistoricalriskpremium.Evenin1978,whentheimplied
equitypremiumpeaked,theestimateof6.50percentiswell
below what manypractitionersuseas theriskpremium in