Sincethepremium isaweighted averageof thepremiums
demandedbyindividualinvestors,oneapproachtoestimating
thispremiumistosurveyinvestors abouttheirexpectations
forthefuture.Itisclearlyimpracticaltosurveyallinvestors;
therefore, most surveys focus on portfolio managers who
carrythemostweightintheprocess.Morningstarregularly
surveysindividualinvestors aboutthereturntheyexpectto
earninvestinginstocks.MerrillLynchdoesthesamewith
equityportfoliomanagersandreportstheresultsonitsweb
site.Whilenumbersdoemergefromthesesurveys,veryfew
practitionersactuallyusethesesurveypremiums.Thereare
three reasons for this reticence:
- There are no constraints on reasonability; survey
respondents could provide expected returns that are lower
than the risk-free rate, for instance. - Survey premiums are extremely volatile; the survey
premiumscanchangedramatically,largelyasa functionof
recent market movements.
3.Surveypremiumstendtobeshort-term;eventhelongest
surveys do not go beyond one year.
Historical Premiums
Themostcommonapproachtoestimatingtheriskpremiums
used in financial asset pricing models is to base them on
historicaldata.IntheAPMandmultifactormodels,theraw
dataonwhichthepremiumsarebasedishistoricaldataon
assetpricesover verylongtimeperiods.IntheCAPM,the
premiumiscomputed tobethedifferencebetweenaverage