Equity Risk Premium Calculator

Formula

The formula to calculate the Equity Risk Premium (ERP) is:

\[ ERP = Rm - Rf \]

Where:

\( Rm \) is the expected return on the market (%).
\( Rf \) is the risk-free rate (%).

Example

Let's say the expected return on the market (\( Rm \)) is 8%, and the risk-free rate (\( Rf \)) is 3%. Using the formula:

\[ ERP = 8 - 3 \]

We get:

\[ ERP = 8 - 3 = 5 \% \]

So, the Equity Risk Premium (\( ERP \)) is 5%.

What is an Equity Risk Premium?

The Equity Risk Premium is the excess return that an individual stock or the overall stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of equity investing. The size of the premium varies and depends on the level of risk in a particular investment or market. It is an important concept in financial investing and fundamental to the Capital Asset Pricing Model (CAPM).

Extended information about "Equity-Risk-Premium-Calculator"

Equity Risk Premium Formula

Formula: \( \text{Equity Risk Premium} = \text{Expected Market Return} - \text{Risk-Free Rate} \)

Equity Risk Premium: Additional return expected from investing in the stock market over a risk-free rate
Expected Market Return: Average return expected from the market
Risk-Free Rate: Return on a risk-free investment, such as government bonds

Example: \( \text{Equity Risk Premium} = 8% - 2% \)

Expected Market Return: 8%
Risk-Free Rate: 2%

Cost of Equity Formula with Equity Risk Premium

Formula: \( \text{Cost of Equity} = \text{Risk-Free Rate} + \beta \times \text{Equity Risk Premium} \)

Cost of Equity: Return required by equity investors
Risk-Free Rate: Return on a risk-free investment
(\beta): Beta, a measure of a stock's volatility relative to the market
Equity Risk Premium: Additional return expected from investing in the stock market

Example: \( \text{Cost of Equity} = 2% + 1.5 \times 6% \)

Risk-Free Rate: 2%
(\beta): 1.5
Equity Risk Premium: 6%

How to Find the Equity Risk Premium

Formula: \( \text{Equity Risk Premium} = \text{Expected Market Return} - \text{Risk-Free Rate} \)

Equity Risk Premium: Additional return expected from investing in the stock market over a risk-free rate
Expected Market Return: Average return expected from the market
Risk-Free Rate: Return on a risk-free investment, such as government bonds

Example: \( \text{Equity Risk Premium} = 7% - 1.5% \)

Expected Market Return: 7%
Risk-Free Rate: 1.5%

Estimated Equity Risk Premium

Formula: \( \text{Estimated Equity Risk Premium} = \text{Expected Market Return} - \text{Risk-Free Rate} \)

Estimated Equity Risk Premium: Additional return expected from investing in the stock market over a risk-free rate
Expected Market Return: Average return expected from the market
Risk-Free Rate: Return on a risk-free investment, such as government bonds

Example: \( \text{Estimated Equity Risk Premium} = 9% - 3% \)

Expected Market Return: 9%
Risk-Free Rate: 3%