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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 “Market rate of Return (MRR) minus Risk Free Rate”. 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.

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