<p>只有我一个博士生在准备考finance field qualifier，无比茫然。找了点旧题练习，<br/>准备了回答如下。先做了关于EQUITY PREMIUM PUZZLE。<br/>但是不知道答题标准。怎样才算‘博士水平’的回答。考试时，6-7道题，3个小时，平<br/>均一道题只有20多分钟回答。<br/>请高手指点, <font lang="ZH-CN" face="MS Song">同学交流.</font>。<br/><br/>Question 1: <br/>(1) What is Equity Premium Puzzle? Implication? Further research <br/>suggestion?<br/>(2) if predict that the recent equity premium will be smaller, what is the <br/>implication? What’s your advice for investors?<br/><br/>Answer:<br/><strong>Equity Premium Puzzle</strong> ( Mehra, Prescott, 1985) <br/>In a representative agent setting, Mehra and Prescott (1985) use a variant <br/>of Lucas’ (1978) pure exchange model. They show that, for reasonable values<br/>of the discount factor and the coefficient of relative risk aversion, the <br/>implied equity premium is too low when the model is calibrated to reflect <br/>historically observed aggregate consumption growth rates.’ It is customary <br/>to refer to this enigma as the equity premium ‘puzzle’.<br/><br/><strong>Implication of Equity Premium Puzzle</strong><br/>1) Investors have overestimated their risk aversion. Long-term investors <br/>may increase the weight of stock in their portfolio.<br/>2) Compensation for risk-taking: security may not be as risk as people <br/>think. Stock-investors are overpaid and bond-investors are underpaid in long<br/>term.<br/>3) Intertemporal substitution of consumption: The simulated premium being<br/>so small implies that the households don’t mind holding risky equity <br/>relative to risk-less bonds. This means that variations in Ct due to changes<br/>in dt do not reduce utility that much. Therefore, consumption smoothing <br/>motive implied by time separable preferences is relatively small(Wang 2002). <br/><br/><strong>Further research suggestions:</strong><br/>To simultaneously rationalizes both historically observed large average <br/>equity return and the small average risk-free return, Mehra and Prescott (<br/>1985) suggested non-Arrow-Debreu economy models :<br/>1) heterogeneity of agents (Constantinides,1982);<br/>2)non-time additivity separable preference, eg, non-expected utility <br/>function in Epstein&amp; Zin (1991);<br/>3)Incomplete market for intertemporal trades among agents. <br/>Q: If predict that the recent equity premium will be smaller, what is the <br/>implication? What’s your advice for investors?<br/></p><p><br/><strong>Implication:</strong>
</p><p>1)The business condition is expected to be good and the <br/>business risk is estimated to be small ( Fama &amp; French (1989) ). <br/>2) The market is efficient and is correcting the too-large equity premium <br/>when many<br/>investors bid up the stock price to capture the large equity premium. <br/>3) <br/>Given the same starting amount and allocation ratio, investors will receive <br/>smaller return than the historical record. (Dividend Constant Growth Model<br/>: Stock Price = Div/(required return – growth rate)) <br/></p><p><br/><strong>Advice:<br/></strong>If this smaller equity premium is temporary, since the current stock market <br/>is over-priced, a current stock holder may sell part of their stock and <br/>increase the weight of risk-free asset. For an investor considering to enter<br/>the market, he can wait until the over-pricing is corrected and the equity <br/>premium is back to the expected level.</p><p><br/>If the smaller premium is expected to be permanent, long term investors <br/>planning for retirement need save more to invest if they hope to have the <br/>same fund available.<br/></p><br/><br/>