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Glossary > Glossary - Pg. 170

170 GLOSSARY Risk-free rate (R f ): A riskless or nearly riskless investment. For long-term invest- ments, it is usually the 10- or 30-year Treasury yields. Risk premium: Return in excess of the risk-free rate that an investment is expected to yield; premium to compensate investors for bearing risk. RPF shifts: Changes in the risk premium factor; historically, an infrequent occur- rence. RPF or risk premium factor: Factor applied to risk-free rate (R f ) to determine equity risk premium (ERP). As of 2010, the RPF was 1.48. RPF Model or Risk Premium Factor Valuation Model: RPF and simplifying as- sumptions for growth applied to the constant growth equation: P = E/(R f × (1 + 1.48) - R f + 2.0 percent - 2.6 percent) or P/E = 1/(R f × (1 + 1.48) - R f + 2.0 percent - 2.6 percent) where 2 percent is assumed long-term real interest rate and 2.6 percent is the assumed long-term real growth rate for the S&P 500. S&P operating earnings: Reported earnings for the S&P 500 Index with certain charges reversed to exclude certain corporate or one-time expenses.