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The equity premium
The equity premium is the difference between the return on a stock and the return on a bond. Typically, it’s positive—meaning stock returns are higher—although it can be negative when the stock market goes through some rough times. Over the long run, it’s definitively positive because bonds are senior to stocks in any liquidation: Bonds carry less risk and, therefore, less yield. Measuring the equity premium is tricky, though. To do it right, you must compare stocks and bonds from firms of similar quality and aggregate over many firms to smooth out anecdotal evidence and small-sample errors. Using broad ... (full story)