What is equity risk premium and how is it calculated

The equity risk premium is calculated as the difference between the estimated real return on stocks and the estimated real return on safe bonds—that is, by subtracting the risk-free return from the expected asset return (the model makes a key assumption that current valuation multiples are roughly correct).

What is equity risk premium?

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.

How do you calculate the risk premium?

The risk premium formula is very simple: Simply subtract the expected return on a given asset from the risk-free rate, which is just the current interest rate paid on risk-free investments, like government bonds and Treasuries.

What is equity risk premium in CAPM?

What is Equity Risk Premium in CAPM? For an investor to invest in a stock, the investor has to be expecting another return than the risk-free rate of return; this additional return is known as the equity risk premium because this is the additional return expected for the investor to invest in equity.

How do you calculate equity risk premium in Excel?

For example, you can enter the risk-free rate in cell B2 of the spreadsheet and the expected return in cell B3. In cell C3, you might add the following formula: =(B3-B2). The result is the risk premium.