The Relationship Between the Equity Risk Premium, Duration, and Dividend Yield

Based on the fundamental equations of equity valuation, we derive here the relationship between the equity risk premium, duration and dividend yield. Aside from providing a logical foundation for the difference between the ex-ante and ex-post measures of the risk premium, the work leads to other outcomes, namely, but not specifically, (1) that the current, effective dividend policy is a signalling process, conveying information on expected profits, (2) an alternative valuation relation, stemming from the above-mentioned dividend policy, (3) another proof to the notion that the forwardlooking equity risk premium is the expected dividend yield and, finally, (4) a straightforward, analytical explanation for the dividend puzzle, as well as for the observed decline in both, the dividend yield and the forward-looking equity risk premium.