Also called ERP
Equity risk premium
The extra return investors demand for holding stocks instead of Treasuries. Beta scales it up or down for one particular company.
Updated 2026-09-03
How it is calculated
Equity risk premium = market return − risk-free rate
The equity risk premium is the extra return investors demand for owning stocks rather than government bonds. It is the price of bearing equity risk at all, before adjusting for how risky any particular stock is.
expected market return = risk-free rate + equity risk premium
Angie uses a fixed 5 percent, the mainstream forward figure. It floats with risk-free rate but no longer swings with market history.
Why it is fixed rather than measured
It used to be derived from the trailing five-year realised return of the S&P 500. That is backward-looking and regime-dependent, and after a strong run it produced an implied premium of about 6.3 percent. Beta then multiplies it, so every high-beta company was punished by a number that was really just a description of the recent past: Nvidia was being discounted at 17.3 percent and Tesla at 16.5 percent, against roughly 10 to 11 percent in ordinary practice.
See also
- Cost of equity — The return shareholders demand for owning this particular company. Known as CAPM, the capital asset pricing model.
- Beta — How much the stock moves relative to the S&P 500. A beta of 1.0 moves with the market, higher is more volatile, and higher volatility raises the discount rate.
- Market return — The expected long-run return of the broad market. Subtract the risk-free rate from it and what remains is the equity risk premium.
- Risk-free rate — The 10-year Treasury yield, standing in for the return available with essentially no risk. Every other rate in the model is built on top of it.
Educational content, not investment advice. Angie explains how a valuation is built so you can judge it yourself. What you do with that is your call.
