Equity Premium Puzzle - Essay Example

Only on StudentShare

Extract of sample
Equity Premium Puzzle

Equity premium is meant to cushion stock investors against the risk of losing their investment portfolios (Siegel and Thaler, 1997, p. 195). However, variations in gain between government bonds and stocks are quite vast and yet government bonds also bear some risk especially the risk associated with inflation (Ben-Haim, 2006). People invest their money to benefit from the gain in the value of their assets. However, many people continue to invest in government bonds where there is such small gain than in stock. This has resulted to a dilemma to the economists who have been unable to understand why many people still prefer government bonds despite the huge returns in stocks as compared to bonds (Siegel and Thaler, 1997, p. 192). The investment decision is influenced b perceived risk, investors’ ability to bear risk, investment period, investor satisfaction and utility behaviour. As stated earlier equity premium is the difference in gains between stocks and risk-free assets such as governments’ bond or security bills. The government bonds are believed to bear no risk while ordinary stocks are rated as the most risky venture (Glyn, 2006, p.153). Due to this perception of risk, many people opt to invest their money in government securities where they have guarantee for small gains rather than investing in stocks with prospect for enormous gains but bearing vast risk. ...Show more

Summary

Equity Premium Puzzle Name Institution Tutor Date According to Siegel and Thaler (1997, p. 192), equity premium puzzle is the inadequacy of agreeable justification by the economists as to why there is an enormous difference between gains by investments in the governments bonds and those of ordinary stocks…
Author : mooreisabel
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Equity Premium Puzzle"
with a personal 20% discount.
Grab the best paper

Related Essays

Equity
It is recommended that an investor should purchase a stock if the market price of the stock is below its fair price. If the market price of the stock is above its fair price, then it is recommended that the stock is sold to obtain profits. The firm whose stock potential is being analyzed is Owens & Minor Inc.
4 pages (1000 words) Essay
Home Bias Puzzle
The benefits of diversification into foreign markets are explained by the standard portfolio theory of the finance and investment economics. This theory provides evidence of the apparent economic gains associated with investing in foreign equities. The systematic risk of foreign investment is lower.
3 pages (750 words) Research Paper
Conclusion on Private Equity
Every year, new companies are joining the money markets and in to the private equity business; hence this is making the private equity markets become a lucrative source of income for several people and organizations. Private equity firms look for companies that are facing closure due to financial crisis and then they make buyouts to these companies.
4 pages (1000 words) Essay
Lehman brothers
The cash in from the said “sale” is used to offset debts, a move which allows the company to temporarily pay down its liabilities, thus significantly reducing its leverage. The temporal pay trick is usually long enough to reflect the said “sales” on the company’s published balance sheet, but after the company has declared its financial report, it later borrows money and repurchases its original assets.
8 pages (2000 words) Literature review
Equity premium puzzle
For so many years in the United States, there has been a great difference in average real returns on stocks and average real returns on treasury bills. Market and economic factors related to investment choices and expected returns are engulfed in fair play dilemma of equity premium and risk free rate, with economists developing various models to resolve them.
5 pages (1250 words) Assignment
Hedging an Equity Portfolio
As a result, of this hindrance, market players are constantly adopting to adjustments that will enable a dynamic approach in risk management of foreign exchange.
7 pages (1750 words) Essay
Hedging An Equity Portfolio
Explanation and discussion of how a zero cost collar could be used in this scenario 5 4.1 Explanation and discussion of the zero cost collar 5 4.2 Application of the zero collar cost shown with an example 6 5. Considerations of additional risks and considerations to be taken into account when using options to hedge a portfolio.
8 pages (2000 words) Essay
Private Equity Funds
Private Equity Funds. Private Equity is the source of capital that is raised outside the public equity market in order to make investment in any asset or organization (Yong, 2012). The funds raised from the private equity market are generally sourced from those investors who are known as ‘limited partners’ which are then assigned to the respective investments with the help of the fund managers (also called ‘general partners’).
6 pages (1500 words) Essay
32) Ketsche, P., Custer, B., Adams, E.K., Debate Topic: Tax Deductibility of Employer Sponsored (Group) Health Insurance. SAGE Debates on Health Care (R)
In addition, this tax regime disrupts efficiency of market labor, reduces efficiency of health insurance, and provision of health care services. Conclusion: changing the tax exclusion is critical in increasing retention although this also reduces job mobility and
1 pages (250 words) Article
Foreign Security Analysis
This leads to a lower margin call. Also, on the same point, a diversified portfolio helps to mitigate the chances of a margin call. If the margin call is received, it means that the investor losses a 48% of his cash investments and he or
2 pages (500 words) Coursework
Find out how much would it cost
to get a custom paper written by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT