A number of prominent observers expect the equity risk premium in the future to be:
A)Considerably lower than that of the past
B)Considerably higher than that of the past
C)Very similar to the historical average
D)No change is expected from recent years

Question

Quizplus · Accepted Answer

There are a few reasons why the equity risk premium is expected to be lower in the future. First, interest rates are currently at historically low levels, which reduces the discount rate used to value future cash flows and ultimately lowers the required return on equity investments. Second, the global economy has become more interconnected over the past few decades, which has increased competition and reduced firm-specific risks, leading to lower expected returns. Finally, demographic shifts, particularly the aging of populations in developed countries, may lead to lower stock valuations as investors become more risk-averse and demand for equities decreases.

A Number of Prominent Observers Expect the Equity Risk Premium