Equity Risk Premium

Equity risk premium is the excess return in the stock market that is above the return offered by government securities. Equity risk premium offsets the overall market risk by providing the extra return over a risk-free investment; it compensates the investors for taking higher risk. The equity risk premium helps in ascertaining portfolio returns and in selection of securities. A higher risk premium would imply that the portfolio is skewed towards stocks with higher risk. The primary premise of the equity risk premium comes from the risk-return trade-off

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