What is equity risk premia

Key Takeaways. An equity risk premium is an excess return earned by an investor when they invest in the stock market over a risk-free rate. This return compensates investors for taking on the higher risk of equity investing.

What is risk premia investing?

Risk premia refers to the amount by which the return of a risky asset is expected to outperform the known return on a risk-free asset. Equity market exposure is the best-known risk premium, rewarding investors for taking exposure to long-only equity investments.

What does higher risk premia mean?

Risk premia strategies aim to capture the risk premium associated with inefficiencies in the market, where 'risk premium' refers to the excess return that can be expected from an investment above the return which could be generated from a risk-free asset.

Is risk premia the same as risk premium?

The equity risk premium helps to set portfolio return expectations and determine asset allocation. A higher premium implies that you would invest a greater share of your portfolio into stocks. The capital asset pricing also relates a stock's expected return to the equity premium.