Equity Risk Premium

The Equity Risk Premium (ERP) represents the extra return investors expect to earn from investing in stocks compared to safer investments, like government bonds. It compensates investors for taking on the higher risk associated with the stock market. Essentially, since stocks can be volatile and may lose value, the ERP is the incentive to choose stocks over more secure options. It reflects the belief that, over the long term, stocks should yield higher profits, making them an attractive investment despite the associated risks.