Sunday, January 2, 2011

Equity Risk Premium

The equity risk premium (ERP) is basically the difference between stock market returns and bond/cash returns, and is understood as being the compensation an investor receives for taking on the additional risk characteristics of equities relative to less risky investments such as government bonds or cash products. As a market and economic cycle evolves the equity risk premium rill contract and expand as investor risk appetites and valuations variate through the cycle. Asset allocators will alter their dynamic/tactical allocations based on where the ERP is relative to historical averages based on their view of the market outlook, as well as other considerations such as mean reversion.

Synonyms: ERP

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