equity risk premium


Also found in: Acronyms.

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 ?
By rule of thumb, when a market is perceived to be overvalued, the equity risk premium normally rises, which bring down stock prices.
Is the worst over for PH stock market?
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 3.5 per cent vs.
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Equity risk premium, functional forms of the alternative models and econometric issues are discussed in this part.
Cross-sectional returns with volatility regimes from a diverse portfolio of emerging and developed equity indices
If we fix t, and let k vary, we trace the term structure of the equity risk premium. Third, if expectations are rational, because the unexpected component [error.sub.t+k] has mean zero and is orthogonal to expected returns, the ERP is always less volatile than realized excess returns.
The equity risk premium: a review of models
So they are now thinking, 'How can I diversify away from the equity risk premium?' They're looking at various return drivers, including an illiquidity premium, a term premium, a credit premium, or a skill premium--for example, when you invest with a hedge fund manager who is hopefully going to bring you some skill."
How Companies Are Managing Pension Plan Assets
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. The same macro process happened in January and February 2015.
The bullish case for European equities
CAPM estimates the opportunity cost of investing in firm i, also known as firm i 's "cost of equity capital," as the sum of the risk free rate of return (RFR), normally measured as the return on US government bonds, and firm i 's equity risk premium. Formally, according to the CAPM, E([R.sub.i]), the expected cost of equity capital for firm i is
The opportunity cost of capital: Development of new pharmaceuticals
The first risk premium is the equity risk premium (ERP) that measures the additional compensation that investors demand for investing in stocks rather than bonds free from default risk.
Should monetary policy monitor risk premiums in financial markets?
Combined with a more benign bond environment, gearing, and an increase in equity risk premium, this saw a strong rally in the area.
Markets carry on regardless; Despite a quarter of geopolitical stress, the markets reported a good performance in most asset classes, reports CHARLES NICHOLSON
This seeming contradiction is explained by a phenomenon known as the equity risk premium: Over the long haul, equities have earned about 3% more per annum than bonds.
A Moving Target
"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.
Outlook mixed for Q2 earnings of Qatari stocks under coverage
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