Equity Risk Premium
The additional return investors require for holding equities rather than the risk-free asset.
Formula
Equity Risk Premium = Expected Market Return - Risk-Free Rate
Unit
%
In depth
The premium is the compensation for bearing equity risk and is the single most contested input in finance — estimates for India range from about 4% to 8% depending on method and period. Historical estimates suffer from survivorship bias, since the markets whose long histories are studied are the ones that did not close. Forward-looking estimates derived from dividend yields and growth assumptions typically produce lower figures than historical averages. The premium is not constant: it widens after crashes, when investors demand more to hold equities, which is mechanically why expected returns are highest when confidence is lowest.
Worked example
A risk-free rate of 7% and an assumed premium of 5.5% imply an expected equity return of 12.5%. Assuming 7% instead gives 14%, and that 1.5-point difference changes every discounted valuation materially.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Equity Risk Premium” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.