The equity risk premium is a long-term prediction of how much the stock market will outperform risk-free debt instruments. In this article, we take a deeper look at the assumptions and validity of the risk premium by looking at the calculation process in action with actual data. Recall the three steps of calculating the risk premium: (1) estimate the expected return on stocks, (2) estimate the expected return on risk-free bonds and (3) subtract the difference to get the equity risk premium. (For background reading, see The Equity-Risk Premium: More Risk For Higher Returns.)


Source : Investopedia