Equity Risk Premium Calculator
Estimate the excess return investors demand for holding equities over risk-free assets.
Frequently Asked Questions
What is Equity Risk Premium?
ERP is the extra return investors expect from stocks compared to risk-free bonds. Historically it averages 4-6% annually, but varies with market conditions.
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What is this tool?
The Equity Risk Premium (ERP) is the excess return that investors expect from equities over a risk-free benchmark (typically government bonds). It compensates shareholders for bearing the higher risk of stocks versus bonds. ERP is a foundational input for the Capital Asset Pricing Model (CAPM) and discounted cash flow (DCF) valuations. Historical ERP for the US market averages 4-6% annually, but forward-looking estimates vary based on market conditions and investor sentiment.
How to use
- 1
Enter market data
Input the current equity market return and risk-free rate.
- 2
Set time horizon
Choose the historical period or forward-looking estimate method.
- 3
View ERP results
See the calculated ERP, historical comparison, and CAPM application.
Frequently Asked Questions
What is the Equity Risk Premium?
ERP is the additional return investors demand for holding risky stocks instead of safe government bonds. It represents the reward for bearing market risk. If stocks return 9% and bonds return 3%, the ERP is 6%. ERP varies over time — it tends to rise during bear markets (investors demand more compensation) and fall during bull markets.
How is ERP used in valuations?
ERP is the key input in CAPM for calculating the cost of equity: Cost of Equity = Risk-Free Rate + Beta × ERP. It is also used directly in DCF models to discount future cash flows. A higher ERP means a higher discount rate, resulting in lower valuations. Getting ERP right is critical — a 1% change in ERP can change a company's valuation by 10-20%.
What ERP should I use for emerging markets?
Emerging markets carry higher risk, so you add a country risk premium (CRP) to the base US ERP. Typical CRP ranges from 1-4% depending on the country's political stability, currency risk, and market depth. India might add 1-2%, while Turkey could add 4-5%. Use sovereign CDS spreads or rating agency data to estimate CRP.