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The goal of this article is an estimate of the objective forward-looking U.S. equity risk premium relative to bonds through history—specifically, since 1802. For correct evaluation, such a complex topic requires several careful steps: To gauge the risk premium for stocks relative to bonds, we need an expected real stock return and an expected real bond return. To gauge the expected real bond return, we need both bond yields and an estimate of expected inflation through history. To gauge the expected real stock return, we need both stock dividend yields and an estimate of expected real dividend growth. Accordingly, we go through each of these steps. We demonstrate that the long-term forward-looking risk premium is nowhere near the level of the past; today, it may well be near zero, perhaps even negative.

About the Author(s)

Robert Arnott
Robert D. Arnott

Rob Arnott is founder and chairman of Research Affiliates, LLC, and a former editor of the Financial Analysts Journal. He pioneered several portfolio strategies that are now widely used, including tactical asset allocation, global tactical asset allocation, tax-advantaged equity management, and the Fundamental Index® approach to indexation. Previously, Mr. Arnott served as chairman at First Quadrant, LP; as global equity strategist at Salomon Brothers; as founding president and CEO at TSA Capital Management (now part of Analytic Investors, LLC); and as vice president at The Boston Company. He is a frequent contributor to financial journals and books and is the co-author of The Fundamental Index: A Better Way to Invest. Mr. Arnott has published in such journals as the Journal of Portfolio Management, the Harvard Business Review, and the Financial Analysts Journal. He has received seven Graham and Dodd Scroll Awards from the Financial Analysts Journal and three Bernstein Fabozzi/Jacobs Levy Awards from the Journal of Portfolio Management. Mr. Arnott holds a degree in economics, applied mathematics, and computer science from the University of California, Santa Barbara.

Peter L. Bernstein