Associate Professor Martin Lally presented Forward Looking Estimates of the Market Risk Premium at the half-day Regulatory Cost of Capital II: What is the Market Risk Premium? Copies of Martins underlying papers on the topics can be obtained by contacting him at martin.lally@vuw.ac.nz

In estimating a firm's cost of equity with the CAPM the standard procedure is to proxy the market portfolio by a share index. Since this index is not the market portfolio this may give rise to a bias in estimating the firm's cost of equity. This paper investigates this bias and concludes that it...

Lally (1998) shows that when the “market” portfolio against which equity betas are measured constitutes a share portfolio, which is the usual case, then equity betas are sensitive to market as well as firm specific leverage. This paper explores the application of this idea to the widespread...

This paper shows that, when as usual the market portfolio is proxied by a share portfolio, then the conventional Ibbotson (1999) estimator of the market risk premium violates Miller-Modigliani (1958 and 1963) propositions II and III. A new estimator of the market risk premium is proposed which...

This paper derives the relationship between a stock's beta and its weighting in the portfolio against which its beta is calculated. Contrary to intuition the effect of this market weight is in general very substantial. We then suggest an alternative to the conventional measure of abnormal...