Estimating a market risk premium is challenging due to many reasons. None can predict the future! So we default to historical market risk premiums. Even when we agree that we can look to the past to arrive at an estimate of the market risk premium, there is significant disagreement on the time frame to be used. There is disagreement on the frequency to be used: daily, weekly? There is also disagreement on the method to be used: geometric average or arithmetic average as well as the market to be considered: US or London market or another one? Given these issues with market risk premium, do we have an alternative?

We address this question here: “Given the issues in estimating a market risk premium, can you suggest an alternative metric or method to arrive at risk premiums?”

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