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 ?
The decline in safe government bond yields has the effect of increasing equity risk premiums, though this is offset by the increased recession risk in major economies such as the the U.S.
Although a weaker dollar can be positive for corporate earnings and lower rates can be favourable for corporate borrowing, equity risk premiums remain wide because of the uncertainty expressed by low bond yields and negative term premiums.
(2015), "Equity Risk Premiums (ERP): Determinants, Estimation and Implications - The 2015 Edition," Mimeo, NYU.
This approach seems to better reveal global factors than regressions on single stocks and enables equity risk premiums for countries to be assessed separately.
"All financial assets are ultimately priced based upon the short-term interest rate." It follows logically then, writes Gross, that if an investor loses money owning a German government bond because it pays a negative interest rate, that same investor or another will earn less than historical returns in his or her stock portfolio and may even lose money."Yields have been at 0% or negative for years now across most developed markets, and to assume that high-yield bond and equity risk premiums as well as P/E ratios have not adjusted to this Star Trek interest rate world is to believe in - well to believe in Zeno's paradox," writes Gross, referring to the writings of a Greek philosopher.
"Equity Risk Premiums (ERP): Determinants, Estimation, and Implications--The 2012 Edition." Unpublished paper, New York University.
Extraordinary accommodative policies from major Central Banks of Advanced Economies since the Global Financial crisis have contributed to a compression of risk premiums across a range of markets including sovereign bonds and corporate credit, as well as a compression of liquidity and equity risk premiums. The Policymakers should adopt strategies to deal with sudden shifts in market liquidity.
This is not a coincidence -- financial engineers cannot create something out of nothing -- markets laws (risk free rates, equity risk premiums, options pricing etc) apply to structured products as well.
We see continued support for the UAE banks from the strong dividend outlook and enhanced asset quality and liquidity, accompanied by a surge in lending (Expo 2020 to add 1 per cent pa), increased FOLs, MSCI inclusion and a reduction in very high equity risk premiums. We add UNB and ENBD to our Core Buy portfolio on the increased growth outlook and low valuations, and put NBAD in our Core Sell portfolio as we expect its RoRWA to contract further (despite less stringent caps on single- party exposures).
"We see continued support for the UAE banks from the strong dividend outlook and enhanced asset quality and liquidity, accompanied by a surge in lending (Expo 2020 to add one per cent pa), increased FOLs, MSCI inclusion and a reduction in very high equity risk premiums.
"We see continued support for the UAE banks from the strong dividend outlook and enhanced asset quality and liquidity, accompanied by a surge in lending (Expo 2020 to add one per cent per annum), MSCI inclusion and a reduction in very high equity risk premiums," said Arqm.
"The recent rally was primarily driven by a justified reduction in equity risk premiums and we feel that the continuous improvement in earnings growth prospects of companies will provide the next major trigger for markets.