A Portfolio becomes balanced with debt in it. It is a well understood fact that investments locked in for a longer period pay more than short term instruments. This is illustrated in the bond market & also in the bank certificate of deposit.

The stock market is indeed priced as the present value of expected dividends. Equity premium is mostly due to business cycle risk.

To understand the risk factors that cause the equity premium we decompose the equity premium into three components inflation, risk, business cycle risk & fear based risk premia.


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