The return on the S&P500 was some 25 percent in 2024, including dividends, notes APG’s Chief Economist Thijs Knaap in the latest Decoder. If you held your savings in cash instead, your interest amounts to 5 percent. That puts the excess return for holding equity at a handsome 20 percent, a compensation for the fact that not every year is like last year, and investors put their capital at risk when buying equity. How high these excess returns are on average is the topic of much discussion. This is related to, but not the same as, the discussion about the expected or required equity risk premium (ERP) looking forward.
In a Decoder, Knaap dives into some recent evidence about historical returns. It is tempting, but probably not correct, to use the historical average excess return as an estimate for the expected ERP in future periods. In a second Decoder on the topic, Knaap explores a number of other methods for working out the expected ERP and presents his own estimate.
Historical excess returns and expected returns: What they tell us about the equity risk premium
Published on:
13 January 2025