Portfolio Theory

Equity Risk Premium

Definition

What is Equity Risk Premium?

The extra return investors require or expect from equities over a lower-risk reference.

Example in practice

A higher equity risk premium lowers the present value of risky company cash flows.

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A model linking expected return to the risk-free rate, market risk premium, and an asset's beta.

A line showing the CAPM relationship between expected return and beta.

The set of portfolios offering the highest expected return for each level of risk under stated assumptions.

A fraud that pays earlier participants using money from newer participants rather than genuine investment profits.

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