BUSINESSWEEK ONLINE : DECEMBER 25, 2000 ISSUE
WHERE TO INVEST -- STRATEGIES FOR STOCKS Debate over the Equity Risk Premium Stocks have trounced Treasury bills by 9% a year over the past 75 years. Academics cite the ''equity risk premium''--the idea that investors demand a higher return from stocks to compensate for their higher volatility. But they have trouble explaining such a big performance gap. What comes next? The Bulls: JAMES GLASSMAN and KEVIN HASSETT, authors of Dow 36,000, argue that investors will soon realize that stocks are no riskier than bonds, so they won't demand an equity risk premium anymore. Stocks will make a one-time leap to Dow 36,000. At that point, their expected future returns will be no higher than those of bonds. The Bears: ROBERT ARNOTT, managing partner of asset manager First Quadrant, argues that investors have already bid up stocks to levels where there's no remaining premium for the genuine extra risk of holding stocks. He thinks stocks will underperform bonds over the next 20 years, and that Dow 3,600 is more likely than Dow 36,000 over the next decade. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Economics: How Risky Is the Risk Premium? TABLE: Debate over the Equity Risk Premium INTERACT E-Mail to Business Week Online

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