Does the negative risk premium really exist
Structural changes in the bond market in recent years have led some rate-of-return analysts to reject the premise that common-equity capital always has greater investor risk than the fixed-income securities of the same company. This article reviews the traditional use of the risk-premium approach to estimating a utility's cost of equity capital and also the reasons why its validity has been questioned by some analysts. In particular, the author demonstrates that the interest-rate risk of bonds can be neutralized by investors, but there is no way for them similarly to minimize the effects of interest-rate risk on their common-equity holdings. He thus concludes that recent challenges to the positive-risk-premium concept are without theoretical or empirical justification. 18 references, 2 figures.
- Research Organization:
- Univ. of Idaho, Moscow
- OSTI ID:
- 5154132
- Journal Information:
- Public Util. Fortn.; (United States), Vol. 110:1
- Country of Publication:
- United States
- Language:
- English
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