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Equity Risk Premium
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Equity risk premium is a premium return of the stock market that it above the rate of Treasury bills. By definition, equity risk premium offsets the overall market risk by providing the extra return over a risk free investment. In other terms, equity risk premium is a quantitative difference between the rate of return on stocks and Treasury bills. Equity risk premium figures are particularly important when it comes to risk determination and investment strategy. Thus, for instance, a higher equity risk premium would favor a stock oriented asset allocation. Calculating equity risk premium with great accuracy remains challenging. Professionals often employ a supply-side model to arrive at diligent equity risk premium parameters. The measure of equity risk premium may likewise be applied to individual stocks, not merely the overall market.
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