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There does not seem to be a clear relationship between interest rates and equity risk premiums. Damodaran (2019) has a great paper that goes into details of equity risk premiums. In this work, he writes: In much of valuation and corporate finance practice, we assume that the equity risk premium that we compute and use is unrelated to the level of ...


2

This one is far from straight-forward, although bear with me. It is possible to infer from first principles an ERP reasonably close to normative consensus expectations. The attached from Howard Marks at Oaktree is a classic: "Everything you wanted to know about the equity risk premium (and much more)". The simple point is that there are four different ...


1

In principal, nothing stops you from doing both, constructing equally weighted and value weighted portfolios and see how the results differ :) In principal, I'd advice to use value weighted portfolios though. As you say, size can have a significant influence on the cross section of stocks. Look at the RFS paper from Lu Zhang et al. (2018) which tests many ...


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