Definition of "Equity risk premium"
Equity Risk Premium is the excess return above the risk free rate that investors demand for holding risky securities. It is calculated as â€œMarket rate of Return (MRR) minus Risk Free Rateâ€. Market rate may be calculated from the movement of share market indices over a period of an economic cycle basing on moving average to smooth out abnormalities. Many of them do not calculate the MRR but on an ad-hoc basis they assume 8% to 12% as the equity risk premium.