Forum Archive Index - May 2004

["Fiona Phibbs" <fibz@xtra.co.nz>]

Hi Snoopy

 There is undeniable logic here in your reply.  Do you have any idea why
some institutions may be using a higher than realistic premium? ( I did go
back and checked my interpretations - that it was an actual risk premium and
not an expected return for the market.  I was interpreting it correctly.)
You certainly give food for thought.

cheers Dean

ps thanks for your candid replies, I will get around to answering your
questions in the other posts in due course

----- Original Message -----
From: <tennyson@caverock.net.nz>
To: <sharechat@sharechat.co.nz>
Sent: Monday, 24 May 2004 20:19
Subject: [sharechat] NZvsUS & Equity Risk (was Sailing with Norgate)


> Hi Dean,
>
> >
> >>As a consequence I think you need to reassess whether using a
> figure
> >>some 5 percentage points higher than the 15 year trend figure is
> >>going to give you realistic results.
> >
> >Like I explained earlier I did obtain the risk premium of 7.5% for NZ
> >from the Price waterhouse coopers website - so admittedly it was not
> >calculated by me.  However I did reconcile it against the long run
> >historical geometric risk premium from the US market between 1926 -
> >2001 of 6% (from a study by Ibbotson-Sinquefield) and considered
> that
> >it was a reasonable assumption that our market was more risky than
> >theirs, and thus 7.5% seemed fair enough to me.
> >
>
> There seems to be a conundrum in thinking here.
>
> If we take it that the US market has been more 'successful' than New
> Zealand in the period 1926-2001 there is an argument that you should
> be looking for a higher return from your individual New Zealand
> investments to compensate for that lack of success of the New
> Zealand market.     However, the New Zealand sharemarket is only the
> sum of market performance of the individual companies that make it.
> If you accept that the New Zealand market is 'inferior' then over the
> long term, then your quest to always find higher performing
> investments to compensate is ultimately doomed.
>
> Therefore you should always invest in the US and never New Zealand
> :-).  My conclusion about 'that conclusion' is that it creates some doubt
> over the assumptions that spawned it.
>
> Your second point is that my assumed risk premium on equities vs
> bonds in general is too low.   I'll address that in another post.
>
> SNOOPY
>
> --
> Message sent by Snoopy
> on Pegasus Mail version 4.02
> ----------------------------------
> "You can tell me I'm wrong twice,
> but that still only makes me wrong once."
>
>
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