Monday, July 09, 2007

Book Value
The Equity Risk Premium
William N. Goetzmann and Roger G. Ibbotson

What do you call ‘the expected return of the stock market minus the expected return of a riskless bond’? Answer is The Equity Risk Premium, also the title of an informative book of ‘essays and explorations’ by William N. Goetzmann and Roger G. Ibbotson of Yale School of Management ( ).

“One of the earliest and most succinct expressions of the concept of the equity risk premium came from John Stuart Mill in his 1848 classic Principles of Political Economy,” narrate the authors.
Mill wrote thus, about a farmer considering investment in land: “… he will probably be willing to expend capital on it (for an immediate return) in any manner which will afford him a surplus profit, however small, beyond the value of the risk, and the interest which he must pay for the capital if borrowed, or can get for it elsewhere if it is his own.”

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