UK Accounting Glossary
Equity risk premium is a premium return of the stock market that is above the rate of Treasury bills. By definition, equity risk premium offsets the overall market risk by providing the extra return over a risk-free investment.
In other terms, equity risk premium is a quantitative difference between the rate of return on stocks and Treasury bills. Equity risk premium figures are particularly important when it comes to risk determination and investment strategy. Thus, for instance, a higher equity risk premium would favour a stock oriented asset allocation. Calculating equity risk premium with great accuracy remains challenging. Professionals often employ a supply-side model to arrive at diligent equity risk premium parameters. The measure of equity risk premium may likewise be applied to individual stocks, not merely the overall market.
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This glossary post was last updated: 9th February 2020.