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The Risk Premium Factor, + Website: A New Model for Understanding the Volatile Forces that Drive Stock Prices Hardcover – October 4, 2011

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The Risk Premium Factor, + Website: A New Model for Understanding the Volatile Forces that Drive Stock Prices + Rethinking the Equity Risk Premium
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Check out an essay [PDF] from the author titled "Demystifying the Market," which outlines three factors driving stock prices.

Product Details

  • Hardcover: 182 pages
  • Publisher: Wiley; 1 edition (October 4, 2011)
  • Language: English
  • ISBN-10: 1118099052
  • ISBN-13: 978-1118099056
  • Product Dimensions: 6.2 x 0.7 x 9.3 inches
  • Shipping Weight: 15.2 ounces (View shipping rates and policies)
  • Average Customer Review: 4.5 out of 5 stars  See all reviews (2 customer reviews)
  • Amazon Best Sellers Rank: #2,537,203 in Books (See Top 100 in Books)

Editorial Reviews

From the Inside Flap

Knowing what to look for in the stock market can give you acompetitive edge, but understanding the system itself—rightdown to the booms, busts, and bubbles of the pasthalf-century—changes everything.

In The Risk Premium Factor: A New Model for Understanding theVolatile Forces That Drive Stock Prices, Stephen D. Hassettpresents a radical new theory—the "factor" that explainstheentire stock market, providing a definitive link between lossaversion theory, the equity risk premium, and stock price, andshows how you can make the most of the connection.

Where others have tried and failed to find a link between lossaversion and the processes that control how investors set prices inthe stock market, The Risk Premium Factor succeeds.Demonstrating that the equity risk premium is proportional tolong-term Treasury yields, the book establishes for the first timea quantitative connection between loss aversion and equity riskpremium.

This remarkable new concept can be used to explain stock pricesfrom 1960 through to the present day, including the 2008 financialmeltdown, not through theories and simulations, but with historicaldata that bear out the truth. It shows how the S&P 500 hasconsistently reverted to predicted values and solves the equitypremium puzzle by showing that it is consistent with findings onloss aversion. Putting you back in the driver's seat when it comesto investing, the book clearly demonstrates the stock market'sreptilian-like response to three factors drive valuation and stockprice: earnings, long-term growth, and interest rates. This bookalso includes a companion website with historical data,calculators, and links to additional apps and readings.

Dispelling the notions that the stock market is a mysteriousarbiter of value, when, in fact, it is easy to understand the RiskPremium Factor Valuation Model is a game-changer for anyone whoworks in investments—from professional investors to corporatedecision makers to private individuals. After all, if you don'tunderstand how the market values businesses, you don't reallyunderstand the market at all.

From the Back Cover


"Stephen Hassett is onto something. His notion that the riskpremium on stocks is not constant, but varies with the risk freerate, helps to explain an enduring puzzle: why actual stock pricesvary from the estimates that analysts' models imply. This book willoffer fresh and provocative insight to careful students of thestock market. Read it and grow wiser."—Robert F. Bruner, Deanand Charles C. Abbott Professor of Business Administration, DardenGraduate School of Business, University of Virginia

"The equity risk premium is a key input to the cost of capital.During periods of economic stability, practitioners typically usedan estimate of the long-term average equity risk premium, typicallyadjusting the estimate once a year. But all that changed as thecrisis in late 2008 unfolded. In these uncertain economic times, wehave found the Risk Premium Factor Valuation Model to be a powerfultool for adjusting our equity risk premium estimate as we movethrough the rapidly changing business cycle. We recommend thatpractitioners use the Risk Premium Factor Valuation Model to betterunderstand the economic interrelationships that drive the pricingof the broad stock market and the equity risk premium."—RogerJ. Grabowski, Managing Director, Duff & Phelps LLC and coauthorof Cost of Capital: Applications and Examples

"Understanding and accurately estimating the cost of capital isfundamental to making decisions that create value. StephenHassett's Risk Premium Factor Valuation Model provides aneasy-to-understand approach to estimating the cost of equitycapital that is accessible and insightful to those with a basicunderstanding of finance and expert practitioners alike. Further,it demystifies the drivers of market valuation and provides acompelling and often under-appreciated linkage between growth andstock price. It will enrich the perspective of any investor ormanager."—David M. Kostel, Managing Director and Co-Head ofHealthcare Mergers & Acquisitions, Credit Suisse

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Most Helpful Customer Reviews

3 of 3 people found the following review helpful By nowen on October 15, 2011
Format: Hardcover Verified Purchase
Full disclosure: I am a friend of the author and have worked with him in the past. From that experience I know that Steve does his homework. He's been working on this concept for some time and I'm impressed with this book.

Cost of capital is perhaps the most important factor in value creation that is the least understood. A good model for analyzing cost of capital allows you to test all the assumptions in that model. This capability is crucial for investors and financial analysts. The RPF model allows you to ask good questions. Not "Are analysts' estimates too rosy?" but "Are analysts' estimate too rosy by 20%?" That is a very powerful difference.

The one weakness in the book I believe will be alleviated by future studies: what causes the RPF to shift? The author offers up some ideas, but I would like to see more in-depth analysis. However, the RPF seems to have shifted only twice in 50 years - making it a very stable.

I look forward to using the RPF model as part of my investment strategy going forward and I highly recommend this book.
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0 of 1 people found the following review helpful By Hubert Marleau on August 8, 2014
Format: Hardcover Verified Purchase
Excellent book and imaginative and worthy of consideration
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More About the Author

Stephen D. Hassett is a corporate development executive with Sage North America, a subsidiary of The Sage Group plc, a leading global supplier of business management software and services.

He is the author of the "The Risk Premium Factor: A New Model for Understanding the Volatile Forces that Drive Stock Prices" (Wiley 2011) and has also published in the Journal of Applied Corporate Finance, Ad Age, and is a regular contributing author for the Seeking Alpha investment website.

He has written two companion apps for the Risk Premium Factor for iPhone ( and Android (

Previously, he was an executive at the Weather Channel, software entrepreneur and consultant with Stern Stewart & Co. He holds an MBA from the Darden School of Business at the University of Virginia and a B.S. from Rensselaer Polytechnic Institute.

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