Equity Market Risk Premium

The equity market risk premium refers to the extra return investors demand above a risk-free rate to be compensated for the additional risk of investing in equity. This premium is an important component of a company's cost of equity.

The equity market risk premium can be determined using either a historical approach or an implied approach. The advantage of the implied approach is that current market expectations are used, so the equity market risk premium is based on current developments and expectations.

The Dutch Valuations team of Forvis Mazars recommends basing the equity market risk premium on the implied approach when determining a cost of equity as part of the discount rate in a discounted cash flow calculation.

Consult our implied equity market risk premium below.