Equity Risk Premium (ERP)

Definition

The incremental return that investors require for holding equities over risk-free government bonds, reflecting the additional risk associated with equity ownership. The ERP is a critical input to cost of equity estimation under both CAPM and build-up methods. Historical ERP estimates typically range from 4% to 7%, though forward-looking (implied) estimates derived from current market valuations and earnings expectations are increasingly preferred by valuation practitioners.