Investing 101

The ERP measures the excess return granted for owning a stock, when compared to a risk-free asset like a government bond.

The ERP is a measure of cross-asset valuation. It tells you if equities are cheap relative to bonds. High means value, low means cheap.

The ERP is a cross-asset valuation measure comparing the return available for equities with that available for bonds. It applies to single stocks and by extension to equity indexes, and works well for most industries with some relevant exceptions.

The ratio is calculated as the ratio between the share price and the earnings per share. The latter can be trailing earnings or forward earnings.

The chart below shows the trailing PE for SPX in the last 40 years.

Remembering that “low = expensive” you can see that during the 80s and 90s, all the way up to the dot.com bubble, the market was expensive if compared to bonds. For context, this was a period of high PE ratios combined with very attractive Treasury yields in the 6-8% range on the 10y bond. Conversely, the picture shifted in favour of Equities in the age of Quantitative Easing. During the period from 2011 onwards, equities have become meaningfully cheaper than bonds.

![spx equity risk premium on forward EPS](https://storage.googleapis.com/toggle-webcm-prod/https://storage.googleapis.com/toggle-webcm/spx_erp_d180b65e65/spx_erp_d180b65e65.png)

The ERP is a measure of cross-asset valuation. It tells you if equities are cheap relative to bonds. High means value, low means cheap.

Equity Risk Premium

Fundamental Valuation Indicators

**For equities**: Refers to the total monetary value of a company’s shares, calculated as number of outstanding shares * per share market price. Essentially, market cap explains the market value of a company. It is also used to describe the size of a public company, relative to other publicly traded companies. Companies can be segmented into the following categories based on their market capitalization: small-cap ($300M - $2B), medium-cap ($2B - $10B), large-cap ($10B - $300B) and mega-cap ($300B and more). Examples of mega-cap companies include Amazon and Apple. 

**For crypto**: The USD sum value of all the coins that have been mined for a specific cryptocurrency. It’s computed as current supply * priceUSD and based on the daily close price

Market capitalization can be considered a rough gauge for how stable a coin is likely to be - a larger market cap is more likely to be a more stable investment than one with a much smaller market cap. Moreover smaller cap coins are more susceptible to turbulent markets and can see huge gains or losses in such periods. 

There are 3 classifications of crypto currencies by market capitalization: 
Large-cap: coins with a market capitalization > $10 billion. Investors consider these to be lower risk investment because they have a sustainable record of growth and higher liquidity 
Mid-cap: coins with a market capitalization between $1 billion and $10 billion. These  coins are considered to have more untapped potential upside but also come with higher risk 
Small-cap: coins with a market capitalization of less than $1 billion. Such coins are most immune to dramatic price swings in turbulent markets. 

A free-float market cap is the total value of the cryptocurrency, excluding units that are not trading (e.g. lost or locked). Similar to regular market cap, a locally high market cap shows healthy activity and that the overall value of the coin is close to its local highs. A locally low market cap shows the overall value of the coin is depressed.


Market Capitalization

Equity Risk Premium