Equity Risk Premium Model
Latest Update: November 5, 2019
Updated by: John Moschella
Model Summary: This model uses the Fed Funds rate, 10-year U.S. Treasury rate, implied volatility, equity market returns, and the Constant Sharpe Approach, to estimate the Equity Risk Premium (ERP). The ERP and the Capital Asset Pricing Model (CAPM) are used together to calculate the required return on equity for our DCF-based share valuation models.
Summary of Forecast Approach and Latest Data Changes in the ERP Model: Each quarter the new interest rate, market return, and volatility results must be input into the Equity Risk Premium model. In addition, new estimates must be entered for each metric. This section clarifies the approach used to form the future expectations in the “base-case” version of the ERP model.
Planned ERP Model updates:
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