[lbo-talk] NYT on equity risk premium

Doug Henwood dhenwood at panix.com
Sun Feb 26 09:56:41 PST 2006


Jim Devine wrote:


>Why Do Stocks Pay So Much More Than Bonds?

Ha - the Dow 36,000 guys claimed that the market was overestimating the risk of stocks, to the premium was unjustified. Now it's back again!

What I never understood was why the market plays along with the risk premium. Why, if stocks are more volatile than bonds, should they return more? What is the mechanism by which the market conforms to finance theory? Are investors like little kids who say "I won't buy stocks unless they go up!" Or is it just that everyone believes this to be so, so they just buy stocks out of habit, and they conform to theory by going up?

Doug



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