Calculate Historical Equity Risk Premium
One way to calculate the Equity Risk Premium (ERP) is to use historical data. First, we calculate the annual difference between the stock market return and the US Treasury return. Second, we take the average of these annual differences. In this exercise, you will calculate the historical ERP using data from 1928 to 2016. For this exercise, we use the stock market return (sp_500
) and US Treasury return (tbond_10yr
) from Professor Damodaran's website. Both these variables are stored in the object damodaran
.
This exercise is part of the course
Equity Valuation in R
Exercise instructions
- Calculate the difference between the stock return and the bond return each year.
- Take the average or mean of the annual differences.
Hands-on interactive exercise
Have a go at this exercise by completing this sample code.
# Review the first six rows of damodaran
head(damodaran)
# Calculate annual difference between stocks and bonds
diff <- ___
# Calculate ERP
erp <- ___
erp