Question

Explain the equity premium puzzle and describe at least one potential explanation in detail.

Answer 1

Answer) Equity premium puzzle is a concept read and put forth by Mr.Mehra and Mr.Prescott in 1985 which showed huge difference amongst return associated with equity/stocjs and government bonds,that is the stock holders made 6% or so extra and to explain such high premium for government bonds was a puzzle.

One potential explanation could be how different generations view risks,probably this generation gap can help us explain such high premium as older generation was much more risk aversive and in process letting go of higher rewards,moreover better financial education and awareness took place in last 20-30 years only contributing to the cause.

Answer is complete. Thank you!