The South African Equity Risk Premium

This report estimates the expected equity risk premium for South African by comparing the historical realised risk premium between 1900 and 2004 against results for two fundamental models that use dividend and earnings growth as unbiased estimators of long term equity price growth. The dividend model result of 6.6% based on data for the 1960-2004 period is proposed as the best unbiased estimate of the expected average annual equity premium over the risk free rate. The evidence provided suggests a decline in the expected South African equity risk premium, and a lower expected premium for the future than in the past.