Musings on Markets

JANUARY 19, 2022

In a post at the start of 2021 , I argued that while stocks entered the year at elevated levels, especially on historic metrics (such as PE ratios), they were priced to deliver reasonable returns, relative to very low risk free rates (with the treasury bond rate at 0.93% at the start of 2021).

Risk Premium 80

Risk Premium Risk-free Rate Start-ups Equity 80

Musings on Markets

JANUARY 27, 2022

The treasury curve became steeper, but only at the shortest end of the spectrum, with the slope rising for the 2-year, relative to the 3-month, but not at all, when comparing the 10-year to the 2-year rate.

Risk-free Rate 84

Risk-free Rate Treasury Price to Book Start-ups 84

Musings on Markets

JULY 1, 2022

The first is the return that can be earned on guaranteed investments , i.e., US treasury bills and bonds, for instance, if you are a investor in US dollar, since it is a measure of what someone who takes no or very low risk can expect to earn. That pullback has had its consequences, with equity risk premiums rising around the world.

Marketability 88

Marketability Risk Premium Start-ups Equity 88

Musings on Markets

MARCH 19, 2022

The overriding message in all of this data is that Russia/Ukraine war has unleashed fears in the bond market, and once unleashed that fear has pushed up worries about default and default risk premia across the board.

Start-ups 100

Start-ups Risk Premium Equity Market Capitalization 100

Musings on Markets

JANUARY 17, 2024

To capture the market's mood, I back out the expected return (and equity risk premium) that investors are pricing in, through an implied equity risk premium: Put simply, the expected return is an internal rate of return derived from the pricing of stocks, and the expected cash flows from holding them, and is akin to a yield to maturity on bonds.

Risk Premium 77

Risk Premium Start-ups Equity Treasury 77

Musings on Markets

JANUARY 8, 2022

Risk Premiums : You cannot make informed financial decisions, without having measures of the price of risk in markets, and I report my estimates for these values for both debt and equity markets. I extend my equity risk premium approach to cover other countries, using sovereign default spreads as my starting point, at this link.

Risk Premium 91

Risk Premium Start-ups Market Capitalization Corporate Finance 91

Simply Treasury

AUGUST 2, 2022

The definition of "net equity" is as follows: equity of the company = sum of subscribed capital, share premiums, revaluation reserves, reserves and retained earnings, minus the tax value of the company's holdings in associated companies and the tax value of its own shares. risk premium if the company is an SME as defined by European law).

Equity 52

Equity Risk Premium Banking Finance 52

Musings on Markets

JANUARY 21, 2023

The premium that investors demand over and above the risk free rate is the equity risk premium , and practitioners in finance have wrestled with how best to estimate that number, since it is not easily observable (unlike the expected return on a bond which manifests as a current market interest rate).

Equity 70

Equity Risk Premium Start-ups Dividends 70

Musings on Markets

JANUARY 9, 2021

The macro variables that I track on my site relate to the price of risk, a key input into valuation, in both equity and debt markets: US Equity Risk Premiums : The equity risk premium is the price of risk in equity markets.

Risk Premium 52

Risk Premium Market Capitalization Equity Start-ups 52

Musings on Markets

MARCH 25, 2021

The first has been the steep rise in treasury rates in the last twelve weeks, as investors reassess expected economic growth over the rest of the year and worry about inflation. The Stocks Story As treasury rates have risen in 2021, equity markets have been surprisingly resilient, with stocks up during the first three months.

Equity 52

Equity Risk-free Rate Treasury Start-ups 52

Musings on Markets

AUGUST 15, 2023

With this investment, you face price risk , since even though you know what you will receive as a coupon or cash flow in future periods, since the present value of these cash flows, will change as rates change. For an investment to be risk free then, it has to meet two conditions.

Risk-free Rate 80

Risk-free Rate Treasury Risk Premium Start-ups 80

Musings on Markets

JULY 17, 2023

In my third post at the start of 2023, I looked at US treasuries, the long-touted haven of safety for investors. In 2022, they were in the eye on the storm, with the ten-year US treasury bond depreciating in price by more than 19% during the year, the worst year for US treasury returns in a century.

Marketability 95

Marketability Risk Premium Start-ups Treasury 95

Musings on Markets

JANUARY 20, 2021

Note that nothing that I have said so far is premised on modern portfolio theory, or any academic view of risk premiums. It is true that economists have researched risk aversion for centuries and concluded that investors are collectively risk averse, and that the level of risk aversion varies across age groups, income levels and time.

Risk Premium 52

Risk Premium Risk-free Rate Equity Dividends 52

Musings on Markets

FEBRUARY 15, 2023

As I have argued in all four of my posts, so far, about 2022, it was year when we saw a return to normalcy on many fronts, as treasury rates reverted back to pre-2008 levels, and risk capital discovered that risk has a downside.

Equity 52

Equity Start-ups Risk Premium Risk-free Rate 52

Musings on Markets

MAY 24, 2021

Interest rates : To understand the link between expected inflation and interest rates, consider the Fisher equation, where a nominal riskfree interest rate (which is what treasury bond rates) can be broken down into expected inflation and expected real interest rate components.

Treasury 55

Treasury Start-ups Risk Premium Price to Book 55

ThomsonReuters

MAY 6, 2021

Discounted cash flow approaches are also utilized within other functions of an organization, such as treasury, budgeting, financial planning and analysis, and tax planning. The adjustment added to the risk-free rate to arrive at the risk-adjusted rate is often referred to as the “risk premium.”

Discounted Cash Flow 52

Discounted Cash Flow Risk-free Rate Risk Premium Intangible Assets 52

Musings on Markets

JANUARY 27, 2021

In my last post , I described the wild ride that the price of risk took in 2020, with equity risk premiums and default spreads initially sky rocketing, as the virus led to global economic shutdowns, and then just as abruptly dropping back to pre-crisis levels over the course of the year. 06) and 10-year T.Bonds (-0.48).

Start-ups 52

Start-ups Marketability Equity Treasury 52

Musings on Markets

MAY 11, 2021

Historical Stock Returns: Pre and Post-tax At the start of every year, I update a dataset , where I look at historical returns on stocks over time, and compare these returns to returns on treasury bonds/bills, corporate bonds and gold. It is one more reason that blindly using historical risk premiums can lead to static and strange values.

Dividends 52

Dividends Start-ups Risk Premium Treasury 52

Musings on Markets

JULY 25, 2023

Equity Risk across Countries Default risk measures how much risk investors are exposed to, when investing in bonds issued by a government, but when you own a business, or the equity in that business, your risk exposure is not just magnified, but also broader.

Risk Premium 52

Risk Premium Equity Start-ups Risk-free Rate 52

Valutico

OCTOBER 20, 2022

Rf = Risk-free Rate. Rm – Rf) = Equity Market Risk Premium. Cp = Cost of Equity Premium. Risk free rate (can use 10y Treasury). The details of how the CAPM works is beyond the scope of this article but in short, the formula is as follows: Ce = Rf + B x (Rm – Rf) + Cp. Ce = Cost of Equity.

Discounted Cash Flow 52

Discounted Cash Flow Terminal Value Weighted Average Cost of Capital Net Present Value 52