Equity risk premium (ERP)
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
The expected excess return of equity markets over the risk-free rate; a key CAPM input, typically estimated at 4-6% in mature markets.
Equity risk premium (ERP) in plain English
The equity risk premium (ERP) is the EXTRA reward investors expect for putting money in the stock market instead of somewhere super-safe. The 'risk-free rate' is what you'd earn on an ultra-safe investment like a government bond; stocks are bumpier, so people demand a bonus on top — usually estimated around 4-6% per year in stable economies. It's the 'hazard pay' for enduring the ups and downs. This number is a key ingredient in formulas (like CAPM) that estimate what return a stock SHOULD offer, so it quietly shapes how businesses and investors value almost everything.
Also called: ERP
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