The equity premium puzzle refers to the inability of an important class of economic models to explain the average equity risk premium (ERP) provided by a diversified portfolio of U.S. equities over that of U.S. Treasury Bills, which has been observed for more than 100 years. There is a significant disparity between returns produced by stocks compared to returns produced by government treasury bills. The equity premium puzzle addresses the difficulty in understanding and explaining this disparity. This disparity is calculated using the equity risk premium: The equity risk premium is equal to the difference between equity returns and returns from government bonds. It is equal to around 5% to 8% in the United States. The risk premium represents the compensation awarded to the equity holder for taking on a higher risk by investing in equities rather than government bonds. However, the 5% to 8% premium is considered to be an implausibly high difference and the equity premium puzzle refers to the unexplained reasons driving this disparity. Description The term was coined by Rajnish Mehra and Edward C. Prescott in a study published in 1985 titled The Equity Premium: A Puzzle. An earlier version of the paper was published in 1982 under the title A test of the intertemporal asset pricing model. The authors found that a standard general equilibrium model, calibrated to display key U.S. business cycle fluctuations, generated an equity premium of less than 1% for reasonable risk aversion levels. This result stood in sharp contrast with the average equity premium of 6% observed during the historical period. In 1982, Robert J. Shiller published the first calculation that showed that either a large risk aversion coefficient or counterfactually large consumption variability was required to explain the means and variances of asset returns. Azeredo (2014) shows, however, that increasing the risk aversion level may produce a negative equity premium in an Arrow-Debreu economy constructed to mimic the persistence in U.S. consumption growth observed in the data since 1929. The intuitive notion that stocks are much riskier than bonds is not a sufficient explanation of the observation that the magnitude of the disparity between the two returns, the equity risk premium (ERP), is so great that it implies an implausibly high level of investor risk aversion that is fundamentally incompatible with other branches of economics, particularly macroeconomics and financial economics. The process of calculating the equity risk premium, and selection