This equity risk premium template shows you how to calculate equity risk premium given the risk-free rate, beta of stock, and expected return on the market.
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Equity Risk Premium is the difference between returns on equity/individual stock and the risk-free rate of return. The risk-free rate of return, for example, can be benchmarked to longer-term government bonds assuming zero default risk by the government. It is the excess return a stock pays to the holder over and above the risk-free rate for the risk the holder is taking. It is the compensation to the investor for taking a higher level of risk and investing in equity rather than risk-free securities.
Calculating Equity Risk Premium
Equity Risk Premium (on the Market) = Rate of Return on the Stock Market − Risk-free Rate
Here, the rate of return on the market can be taken as the return on the concerned index of the relevant stock exchange – i.e., the Dow Jones Industrial Average in the United States. Often, the risk-free rate can be taken as the current rate on long-term government securities.
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