NEWSWIRE - March 17, 1999

Topic: Risk and Return, Valuation

Source: "Stock Prices are Still Far Too Low," by James K. Glassman and Kevin A. Hassett, Wall Street Journal, Wednesday, March 17, 1999, page A26.

Synopsis of Articles:

The article argues that, as the Dow approaches 10000, the market is still grossly undervalued. The primary reason is a reduction in the market risk premium. As the Dow approaches 10000, the financial press is filled with articles discussing the milestone. Many in the mainstream argue that the market, with its historically high P/E ratios, is overvalued. This article offers a contrarian view, and provides a possible explanation for the continuing climb in the Dow. The article also offers the opportunity to review historical data on risk and return, and to review how the market risk premium impacts stock value.

Questions:

1. How is risk measured for stocks and bonds?

2. What does the historical evidence show for the risk on stocks and bonds? According to the article, how has this risk changed?

3. How would the decrease in the risk of stocks suggested by the article impact the value of stocks?

4. What impact does the decline in the market risk premium have on P/E ratios?