Eugene Fama Interview

Professor Eugene Fama from the University of Chicago is regarded as a financial leader, with some of the most cited research in Finance. In a recent interview, Fama discusses a wide range of financial topics, including the ability of portfolio managers to beat the stock market, the equity risk premium, CAPM, and a discussion of underfunded pensions, among other topics. As for the equity risk premium, Fama argues that because of an increase in PE ratios, the equity risk premium going forward is about 4 percent, significantly lower than the approximately 7.5 percent historic risk premium since 1926. In the discussion of underfunded pension liabilities, Fama argues that "The sponsor should be discounting the liabilities at the expected return implied by the risk of the liabilities, not the expected return of the assets." To show the link between different areas of Finance, consider that while the interview discusses capital markets, this statement is a fundamental tenant of capital budgeting, that is, the cost of capital depends on the use of funds, not the source of funds.