what is equity risk premium 
equity risk premium refers to an excess return that investing in the 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 portfolio it also changes over time as market risk fluctuates understanding equity risk premiumstocks are generally considered high risk investments investing in the stock market comes with certain risks but it also has the potential for big rewards so as a rule investors are compensated with higher premiums when they invest in the stock market whatever return you earn above a risk free investment such as a u s treasury bill t bill or a bond is called an equity risk premium an equity risk premium is based on the idea of the risk reward tradeoff it is a forward looking figure and as such the premium is theoretical but there s no real way to tell just how much an investor will make since no one can actually say how well equities or the equity market will perform in the future instead an equity risk premium is an estimation as a backward looking metric it observes the stock market and government bond performance over a defined period of time and uses that historical performance to the potential for future returns the estimates vary wildly depending on the time frame and method of calculation because equity risk premiums require the use of historical returns they aren t an exact science and therefore aren t completely accurate 