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Exercise

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.

Instructions

100 XP
  • Calculate the difference between the stock return and the bond return each year.
  • Take the average or mean of the annual differences.