Equity Risk Premium Calculator
Excess equity return above Treasury yield.
Calculate the equity risk premium as expected stock return minus the prevailing Treasury yield — what investors demand for taking equity risk.
What this tool does
The equity risk premium is the excess return that investors demand for holding stocks over safer Treasury instruments. This calculator estimates that premium by taking your expected stock market return and subtracting the current Treasury yield. The result displays both the absolute percentage point difference and the relative premium as a proportion of the Treasury yield itself. The difference between your two inputs drives the entire calculation—higher expected stock returns or lower Treasury yields increase the premium. This tool works for comparing market conditions across time periods or evaluating whether current equity valuations reflect appropriate compensation for stock volatility. Note that the calculator assumes your expected stock return estimate is realistic; results are educational illustrations and do not account for inflation adjustments, tax effects, or individual portfolio composition.
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Formula Used
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Calculations or display — let us know.
Disclaimer
Results are estimates for educational purposes only. They do not constitute financial advice. Consult a qualified professional before making financial decisions.
8% expected stock return, 3% Treasury yield: 5% equity risk premium. Historical ERP 4-6% for developed markets. Higher ERP implies greater compensation for risk; lower ERP means stocks relatively expensive vs bonds.
Run it with sensible defaults
Using expected stock return of 8%, treasury yield of 3%, the calculation works out to 5.00%. The defaults are meant as a starting point, not a recommendation.
The levers in this calculation
The inputs — Expected Stock Return and Treasury Yield — do not pull with equal force. Not every input has equal weight. Adjusting one input at a time toward extreme values shows which ones move the result most.
How the math works
Standard ERP formula.
Using this well
What this doesn't capture
Steady-rate math ignores real-world volatility. Actual returns are lumpy; sequence-of-returns risk matters most in drawdown; fees and taxes drag on compound growth; and behaviour changes in drawdowns can reduce outcomes below the projection. The number represents one scenario rather than a forecast.
Related calculations worth running
Plans get firmer when you triangulate. Alongside this one, the jensens alpha calculator, the angel investment risk return calculator, and the cash on cash return calculator tend to come up in the same conversations. Running two or three together exposes inconsistencies in any single assumption — which is usually where the useful insight lives.
Reading the Output
The equity risk premium is a relative figure, not a recommendation. A higher premium suggests stocks have historically rewarded investors more than safer government bonds, but historical patterns are descriptive — they do not predict future market behaviour. Comparing premiums across different time periods or markets often reveals more about the assumptions behind the calculation than about market reality itself.
Limitations to Keep in Mind
This calculator works with the inputs you provide. It does not adjust for inflation, currency movements, or differences in market structure between countries. For deeper analysis, running the same calculation across multiple time horizons can show how sensitive the premium is to the chosen start and end dates.
The equity risk premium of 5.00% represents the excess return of stocks over the 3 Treasury yield.
Inputs
This example uses typical values for illustration. Adjust the inputs above to match a specific situation and see how the result changes.
Sources & Methodology
Methodology
The calculator computes the equity risk premium by subtracting the treasury yield from the expected stock return. This spread represents the additional return that equities are assumed to deliver above the risk-free rate offered by government bonds. The model treats both inputs as fixed percentages and assumes they remain constant over the analysis period. It does not account for inflation, market volatility, changes in economic conditions, transaction costs, or taxes. The result models a simplified, static comparison and should not be interpreted as a forecast of actual returns.
References
Frequently Asked Questions
Historical range?
Forward-looking ERP?
Use for valuation?
ERP shrinking concern?
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