Friday, February 13, 2009

Risk Free - Equity Risk = Free Equity?

Felix Salmon notes how Moody's is now splitting their sovereign Triple-A ratings into 3 categories... Resistant, Resilient and Vulnerable... and that the US is only in the middle bunch (along with the UK... Some special relationship, eh?!)

So now there's something less risky than risk-free!

Great news for those still using the Equity Risk Premium to justify high stock price valuations... pick your own risk-free rate!

------------

It's always mystified me that the ERP was seen as the return "required" above the risk free rate historically, and therefore a justification for current or future prices. Isn't it basically a circular argument? Or at best just a tool for relative value trades or reversion-to-mean type calls?

.
::


Posted by at
Labels:

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)

------------------------- Disclaimer -------------------------

Information and analysis on this site is provided for informational purposes or entertainment only. Nothing herein should be interpreted as personalized investment advice. Under no circumstances does this information represent a recommendation to buy, sell or hold any security. None of the information on this site is guaranteed to be correct, and anything written here should be considered subject to independent verification. You, and you alone, are solely responsible for any investment decisions you make.
Good luck!
Hedge Thing