PSX Clarity
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Glossary · PSX term

Equity risk premium.

The equity risk premium is the extra return investors expect from stocks over the risk-free rate.

Definition

It compensates for the higher risk of equities versus safe government securities and feeds into valuation models. A higher premium implies investors demand more reward to hold stocks.

Worked example

If stocks are expected to return 16% and T-bills yield 8%, the equity risk premium is about 8%.

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