TABLE2.2HistoricalRiskPremiumsfortheUnitedStates,
1928–2004
Notethatthepremiumscanrangefrom3.47percentto8.60
percent, depending on the choices made. In fact, these
differences are exacerbated by the fact that many risk
premiums that are in use today were estimated using
historicaldatathree,four,oreventenyearsago.Ifwefollow
thepropositionsaboutpickingalong-termgeometricaverage
premiumoverthelong-termTreasurybondrate,thehistorical
risk premium that makes the most sense is 4.84 percent.
Historical Premiums in Other Markets
Whilehistoricaldataonstockreturnsiseasilyavailableand
accessibleintheUnitedStates,itismuchmoredifficulttoget
this data for foreign markets. The most detailed look
estimatedthe returnsyou wouldhaveearned on 17 equity
marketsbetween 1900 and 2001 andcomparedthesereturns
with those you would have earned investing in bonds.
16 Figure2.2presentstheriskpremiums(i.e.,theadditional
returns)earnedbyinvestinginequityoverTreasurybillsand
bonds over that period in each of the 17 markets.
FIGURE 2.2Equity Risk Premiums by Country