The equity risk premium is broadly defined as the difference between the expected total return on an equity index and the return on a riskless asset.
The equity risk premium is broadly defined as the difference between the expected total return on an equity index and the return on a riskless asset. The magnitude of the equity risk premium, arguably the most important variable in financial economics, affects the asset allocation decisions of individual and institutional investors, and the premium is a critical factor in estimating companies’ costs of capital. This literature review explores research by academics and practitioners on this topic during the past three decades.