equity risk premium

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Equity Risk Premium

The return that an investor expects over and above the risk-free rate of return in exchange for investing in common stock instead of U.S. Treasury bonds. The equity risk premium may be calculated as the return such a stock actually earns over a given period. For example, if the interest rate on a Treasury bond is 4% and the stock returns 9%, the equity risk premium is 5%. Whether or not this is worth the investment depends on the cost of the stock, the risk relative to other stocks with similar returns, and the investor's own risk aversion. The equity risk premium is also called simply the equity premium.

equity risk premium

The extra return expected from investments in common stocks compared to the return from U.S. Treasury securities.
References in periodicals archive ?
In the United States, a majority of households do not invest directly in equity despite the sizable historical equity premiums.
Clearly, the benchmark economy generates several key features of asset pricing observed in the data, such as high equity premiums, a low and stable risk-free interest rate, and a relatively volatile SR.
Households that do not participate in the equity market forgo the large equity premium.
Mr Greenspan said the market value of assets has been rising faster than gross domestic product growth due to a significant decline in real equity premiums and the decline in real long-term interest rates.
14) The total number of observations used for the computation of the 6-month and 12-month expected equity premiums are 558 and 531, respectively.
Implication 1 states that the expected equity premiums constructed from survey forecasts are unbiased forecasts of the actual equity premium in the model of Campbell and Cochrane (1999).
Also, it may be argued that the difference between the actual and expected equity premiums stems from economists' consideration of frictions in the market.
The authors argue that, by this metric at least, such utility functions may be very attractive to financial economists: they can generate substantial equity premiums and, at the same time, make sensible predictions about attitudes toward monetary gambles.
Because the real riskless rate of return apparently did not change much during that five-year period, anything short of such an extraordinary permanent increase in the growth of structural productivity, and thus earnings, (4) implies a significant fall in real equity premiums in those years.
If all of the drop in equity premiums had resulted from a permanent reduction in cyclical volatility, stock prices arguably could have stabilized at their levels in the summer of 2000.
Some decline in equity premiums in the latter part of the 1990s almost surely would have been anticipated as the continuing absence of any business correction reinforced notions of increased secular stability.
Provided that earlier vintage CDOs continue to perform, the structuring fees, asset management fees and equity premiums (less related debt service costs) from the CDOs are anticipated to provide sufficient capital generation to support the business on a going forward basis.