Equity risk premium

The equity risk premium is the extra return an investor demands for buying shares instead of an asset considered risk-free, usually government debt. It is the piece of CAPM that turns risk into a required-return figure, so it feeds into WACC and ends up moving any discounted cash flow valuation. It cannot be observed directly: it is estimated, and two reasonable estimates can differ by more than a percentage point.

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Definition for informational purposes. It is not financial advice nor a recommendation to buy or sell.