In this session, we started by doing a brief test on risk premiums. After a brief foray into lambda, a more composite way of measuring country risk, we spent the rest of the session talking 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 2019. Play with it when you get a chance.
Implied ERP for February 2019: http://www.stern.nyu.edu/~adamodar/pc/implprem/ERPFeb19.xlsx
Start of the class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/risktest.pdf
Post Class Test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session5test.pdf
Post Class Test Solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session5soln.pdf