equity risk premium

(redirected from Equity premium)

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 relation to high rates of return for power project sponsors, the rate of return that was required to attract equity investors to huge infrastructure projects in Pakistan including the power sector was dependent on the factors including country risk premium, benchmark equity premium and technology premium.
About the high rate of return, Mansoor said the rate of return required to attract equity investors to huge infrastructure projects including power projects depended on some factors which included country risk premium, benchmark equity premium and technology premium.
Our benchmark model generates a high and volatile equity premium with a 7.26 percent mean and a 15.63 percent standard deviation, as well as a low and stable risk-free return with a 0.95 mean and a 1.45 percent standard deviation-estimates quite close to those in the assetpricing literature.
Denmark had the smallest equity premium, of 3.8%, while Japan's was the largest at a whopping 9.89%.
Prescott, "The Equity Premium: A Puzzle," Journal of Monetary Economics, 15(2), (1985), pp.
The resulting model captures the dynamics of security returns including time-varying risk aversion, small relative risk aversion and an equity premium compatible with the actual equity premium, thus explaining many of the asset-pricing puzzles.
We examine the time-series relation between aggregate bid-ask spreads and conditional equity premium. We document that average marketwide relative effective bid-ask spreads forecast aggregate market returns only when controlling for average idiosyncratic variance.
Damodaran (2015) argued that there are several reasonable methods, but that his implied equity premium (a conditional estimate whose foundation is intuitive) would be preferable as it is "market neutral" (p.
Most of the explanation for the equity premium derives from RE, although LRR makes a moderate contribution.
It was a "remarkable" performance that "cannot be repeated" because interest rates are near zero or negative in many developed markets and stocks historically earn about 3% more in "equity premium," wrote Gross.
The problem, called the "equity premium puzzle", is that observed rates of return on equity are "excessive", i.e.
IRON Funds has launched IRON Equity Premium Income Fund (NSDQ: CALLX, CALIX) with an objective to generate competitive option premium income, the company said.