Question: During the 1980s and 1990s, changes in the S&P 500 (a broadly diversified index of U.S. stocks) were about 50% correlated with the MSCI EAFE

During the 1980s and 1990s, changes in the S&P 500 (a broadly diversified index of U.S. stocks) were about 50% correlated with the MSCI EAFE Index (a broadly diversified index of European and other major industrialized countries’ stock markets). In recent years, the correlation has increased to more than 90%. Why? If an analyst wishes to calculate the cost of equity, which index should he or she use in estimating the equity risk premium?

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