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The U.S. Risk PremiumThe U.S. Risk Premium

Campbell R. Harvey, Ph.D.,Professor,

Duke Universityhttp://www.duke.edu/~charvey

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U.S. Risk Premium

Survey Background

• Graham/Harvey: Survey CFOs every quarter• Q2 2000 through Q3 2002 (ten quarters)• Current survey attracts about 400 respondents

• Why CFOs? – We know from previous surveys and interviews that the

CFOs use the risk premium for their capital budgeting– Hence, they have thought hard about risk premium– Should not be biased the way that analyst forecasts might

be

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U.S. Risk Premium

One-Year Premium

• One-year risk premium quite variable. Currently, about 3%

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U.S. Risk Premium

Ten-Year Premium

• Ten-year risk premium is stable. Currently, about 4%

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U.S. Risk Premium

Asymmetry

• CFOs believe the downside is much more likely than the upside

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U.S. Risk Premium

Confidence Intervals: September 16, 2002

MeanStandard deviation

95% Confidence

Interval Median Min Max TotalOver the next 10 years, I expect the averageannual S&P 500 return will be: There is a 1-in-10 chance it will be less than: 3.65 2.35 3.40 - 3.89 4 -3 10 351

Over the next 10 years, I expect the averageannual S&P 500 return will be: Expected return: 7.81 2.19 7.58 - 8.03 8 0 15 373

Over the next 10 years, I expect the averageannual S&P 500 return will be: There is a 1-in-10 chance it will be greater than: 11.5 3.33 11.15 - 11.84 11 4 20 355

Over the next year, I expect the averageannual S&P 500 return will be: There is a 1-in-10 chance it will be less than: -2.98 6.86 -3.7 - -2.26 0 -20 10 348

Over the next year, I expect the averageannual S&P 500 return will be: Expected return: 4.95 2.78 4.66 - 5.24 5 0 12 345

Over the next year, I expect the averageannual S&P 500 return will be: There is a 1-in-10 chance it will be greater than: 9.96 4.56 9.47 - 10.44 10 0 20 343

Notes: 10-year bond yield 3.9%; 1-year bill yield 1.6%. Confidence interval based on standard deviation of the mean.