Equity Risk Premium Template

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

The Formula:

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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