Submission to the review of the rate of return guidelines
Thank you for the opportunity to respond to your invitation to make a submission to the Review of the rate of return guidelines. As an appendix we have attached a paper, The equity premium in Australia, that should be read in conjunction with this submission. This paper was prepared for the 2017 Conference of the Society of Heterodox Economists at the University of New South Wales.
This submission will mainly concentrate on the use of two premia; the inflation premium and the ‘equity premium’ as it is generally called in the economics literature. The issues paper uses the concepts, ‘market risk premium’ and ‘equity risk premium’ where the ‘market risk premium’ in the issues paper usage refers to the apparent overall risk premium investors want to obtain in order to invest in the market. The issues paper’s use of ‘equity risk premium’ refers an individual asset and adjusts that asset’s assumed premium by the extent to which that asset’s movements are correlated with total market movements. First we focus on the market risk premium.