Module II· Cost of Equity & CAPMBasic
Question
What is the equity risk premium (ERP), and how large is it typically?
Answer
Definition
The excess return equities must deliver over bonds in the long run to compensate for equity risk.
Estimation methods
- Historical: average excess return over 50–100 years
- Implied: backed out from current market prices
Standard range
5.0–6.5%.
Damodaran's implied ERP for a developed market: typically around ~5.5% (5–6%).
Pitch tip
5.5–6.0% is the usual IB range — don't get 'creative', or it signals bias.