From the course: Finance Foundations
Join today to access over 22,600 courses taught by industry experts or purchase this course individually.
Equity risk premium
- Another important element of the capital asset pricing model is something called the equity risk premium. Now, in this context, equity means an investment in the ownership shares of a company. Equity stock investments are what we're talking about, and the simple insight is this. An investment in the shares of a company is more risky, say, than an investment in a bank account, so there should be a higher rate of return. If you invest in a bank account, there is almost no risk at all, so the return that you're going to earn is low. But if you're investing in stocks, then there's much more risk, so you will expect a higher return. In the United States, for example, over the 50, 60, 70 years, an investment in stocks has averaged a return of about 10 to 11% per year. The equity risk premium is the extra amount you expect to earn on your investment because you are investing in risky assets. Now, recall that the number we are remembering for the risk-free rate is, that's right, 5%. 5% is…
Practice while you learn with exercise files
Download the files the instructor uses to teach the course. Follow along and learn by watching, listening and practicing.
Download courses and learn on the go
Watch courses on your mobile device without an internet connection. Download courses using your iOS or Android LinkedIn Learning app.