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 greater the uncertainty, the higher the equity risk premium.
Comparing the equity risk premium of the US market with the one of the Euro zone shows that the US is well below its long- term average (at 3.
f] is the risk-free reference rate in a developed country, MMERP is the mature market equity risk premium, [[beta].
1) Can multifactor models be used for explanation of the equity risk premium for global indices?
If we fix t, and let k vary, we trace the term structure of the equity risk premium.
This stellar stock market rally was made possible by increased capital flows into Europe, a valuation rerating and a fall in the equity risk premium.
While we do not observe a negative equity risk premium during the sample period, the TP and the VP_VIX occasionally became negative.
Thus, in summary, a firm's cost of equity capital depends on the risk free rate--the higher this is, the higher the opportunity cost to the investor of assuming the risks of holding equities--and firm i's equity risk premium, which measures the sensitivity of firm i's returns to the market-wide systemic risks.
Given the upgrade to the MSCI EM Index and the relatively stable risk profile of several Qatari firms, we have opted to reduce our equity risk premium estimate.
5) The five years since the onset of the Great Recession stand out not only because of the exceptionally low real rate of interest, but also because of a historically high equity risk premium.
The long-term (114-year) equity risk premium for a US investor in emerging markets was 3.
Thus, we have decreased our equity risk premium by 154bps to reflect the lower concerns.