Pablo Fernandez is a professor at the business school at the Universitad de Navarra, a Spanish institution. One of his area of research is how finance is taught. The idea is that students pick up concepts in class that then carry over to how they interpret finance on the job. For example, he conducts a survey of finance instructors all over the world to see what they use for an equity risk premium in their classes, and how they arrived at it. I’m one of the many, many people surveyed.
And I have a bad tendency to assume that the risk-free rate is 5 percent and the risk premium is 7 percent because, well, that was pretty much what it was in the olden days, when I went to business school. Remember in the olden days, when stocks returned 12 percent a year, on average?
Professor Fernandez has released a new working paper entitled Ten Badly Explained Topics in Most Corporate Finance Books, and I love it. It has some ideas that I can incorporate into my explanations for students, and it helps clarify many of the things that investment professionals understand but textbook authors do not.
If you’re geeky about financial theory, download and read it!