What is the Equity Risk Premium?

The Equity Risk Premium (aka, Equity Premium) is the expected return of the stock market over the risk-free rate (U.S. Treasuries).

This number basically refers to the amount an investor should expect in exchange for accepting the risk inherent in the stock market. The size of the equity risk premium varies depending on the amount of risk of a portfolio, the market, or a specific holding investment, against the risk-free rate.

The more risk an investor takes, the higher the equity risk premium. As far as history goes, survey of academic economists gives an average equity risk premium range of 3-3.5% for a 1-year horizon, and 5-5.5% for a 30-year horizon.

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