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Estimating Discount Rates🔵 Intermediate

How Much Extra Return Should Stocks Pay Over Safe Savings?

How Much Extra Return Do Stocks Demand?

The equity risk premium (ERP) is the extra return above risk-free that equity markets deliver. It is the most debated number in finance.

ERPMarket Risk PremiumImplied ERPHistorical

Live Result

$0.055

ƒ: implied_erpraw: 0.0550000

ƒ(x)

Use variable names from the panel above (e.g. FV, r, n) — or type numbers directly: 10000 / (1 + 0.08)^10

market_return% as decimal

Expected long-run equity market return

market_return = 0.10

rf% as decimal

Risk-free rate

rf = 0.04

implied_erp% as decimal

Market-implied ERP (from current valuations)

implied_erp = 0.055

index_earnings% as decimal

Expected market index earnings yield (E/P)

index_earnings = 0.05

💡 You can also enter values directly in the formula: 10000 / (1 + 0.08)^10

⬇ Export Calculation

Exports a plain .txt file with your expression, formula, all variable values, result, and educational notes — ready to paste into any report, Word doc, Notion, or Google Docs.

The exported file includes the formula in standard mathematical notation — you can paste it directly into Excel, Google Sheets, or back into FinanceSheep.

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Learn: How Much Extra Return Do Stocks Demand?

Estimating Discount Rates · Educational Guide

The Core Idea

Stocks are riskier than government bonds — we all know that. But HOW MUCH riskier? The equity risk premium (ERP) answers this: it's the extra annual return the stock market delivers above safe government bonds.

How It Works

ERP = expected equity return − risk-free rate. Historically in the US: ~6% above T-bills. The ERP is the compensation investors demand for the uncertainty of owning a portfolio of stocks. It rises during crises and falls during calm periods.

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Real-World Example: If the S&P 500 long-run return is ~10% and 10-year Treasuries yield 4%: Historical ERP = 10% − 4% = 6%. This is what you use in CAPM: cost of equity = rf + beta × ERP.

How Much Extra Return Should Stocks Pay Over Safe Savings?

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