Uploaded February 2025 | Updated September 2026, 1 week ago
In this session, we started by doing a brief test on the relationship between prices and risk premiums. We spent the rest of the class about the dynamics of implied equity risk premiums and what makes them go up, down or stay unchanged. We then moved to cross market comparisons, first by comparing the ERP to bond default spreads, then bringing in real estate risk premiums and then extending the concept to comparing ERPs across countries. Finally, I made the argument that you should not stray too far from the current implied premium, when valuing individual companies, because doing so will make your end valuation a function of what you think about the market and the company. If you have strong views on the market being over valued or under valued, it is best to separate it from your company valuation. I am attaching the excel spreadsheet that I used to compute the implied ERP at the start of February 2025. Play with it when you get a chance.
Start of the class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/ImplPremNew.pdf.pdf
Slides: nyu.box.com/s/ks89xqizlae0hrk1edrev64yu0hk8ngg
Post class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session6Atest.pdf
Post class solution: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/sessio6Asoln.pdf
In this session, we started by doing a brief test on the relationship between prices and risk premiums. We spent the rest of the class about the dynamics of implied equity risk premiums and what makes them go up, down or stay unchanged. We then moved to cross market comparisons, first by comparing the ERP to bond default spreads, then bringing in real estate risk premiums and then extending the concept to comparing ERPs across countries. Finally, I made the argument that you should not stray too far from the current implied premium, when valuing individual companies, because doing so will make your end valuation a function of what you think about the market and the company. If you have strong views on the market being over valued or under valued, it is best to separate it from your company valuation. I am attaching the excel spreadsheet that I used to compute the implied ERP at the start of February 2025. Play with it when you get a chance.
Start of the class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/ImplPremNew.pdf.pdf
Slides: nyu.box.com/s/ks89xqizlae0hrk1edrev64yu0hk8ngg
Post class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session6Atest.pdf
Post class solution: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/sessio6Asoln.pdf
