Equity Risk Premium

The excess return a stock or an index generates compared to the risk-free rate. Since equities are perceived to be more risky than bonds, they theoretically offer an extra return due the extra risk that shareholders undertake. Stocks that are higher risk offering a higher risk premium due to their additional risk.

However, the equity risk premium, especially for stocks with poor fundamentals (little revenue or no income) exists for a reason. The higher risk does not guarantee an additional return, rather, it only warrants the potential of a higher return. Which means that the higher return may never materialize and the company may go out of business. As usual, investor caveat.

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