Equity Risk Premium Calculator

8% expected stock return, 3% risk-free rate: 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%, risk-free rate 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

Both inputs carry equal and opposite weight. Because the premium is a straight subtraction, raising Expected Stock Return by one point raises the premium by exactly one point, and raising the Risk-Free Rate by one point lowers it by exactly one point. Neither input dominates — the result simply tracks the gap between the two.

How the math works

The premium is the expected stock return minus the risk-free rate: ERP = Expected Return − Risk-Free Rate. A wider gap means equities are priced to compensate more for their extra risk; a narrower gap means that compensation is thinner.

What this doesn't capture

This is a simplified model that holds its assumptions constant. Real outcomes vary with market conditions, costs, taxes, and timing, so the figure is best read as 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.