Heard on the street: Greenspan view on stock risk is contradicted
Alan Greenspan seems to think investors aren't worrying enough about stock- market risk these days. But some Wall Street experts say Mr. Greenspan may be worrying too much about the risks.</br></br>They maintain that there are some very good reasons why the so-called risk premium that investors expect to receive when they put money into stocks has been shrinking in recent years.</br></br>Academics usually define the "equity risk premium" as the extra return investors demand for holding stocks instead of less-risky government bonds. Although the premium can be measured a number of ways, most experts agree that it has declined substantially in recent years, contributing to the stock market's climb to its highest prices relative to earnings in decades.</br></br>In testimony to Congress Wednesday, Mr. Greenspan, the Federal Reserve chairman, said investors' optimism about strong profits has led to lower risk premiums in the stock and bond markets and warned of "unwarranted expectations."</br></br>But William Dudley, director of U.S. economic research at Goldman Sachs, argues that longer-lasting, less-volatile business cycles have led to more stable and predictable corporate profits and declining volatility in stock prices relative to bond prices.