Equity risk premium
The additional return investors demand for holding the equity market over the risk-free rate. Currently approximately 4.5–5.5% for U.S. equities per Damodaran's implied-ERP series.
ERP = Expected market return − Risk-free rateThe equity risk premium is the additional return investors require for holding the broad equity market over the risk-free rate. It is the most consequential macro input in any CAPM-derived cost of equity: a 100-basis-point change in ERP shifts every Ke estimate by approximately the stock's beta times 100 basis points, which compounds through a DCF into 5–15% changes in fair value. Two ERP frameworks dominate. The historical method averages realized excess returns over long periods (a century or more) and produces estimates around 5–7% for the U.S. The implied method, popularized by Aswath Damodaran, infers the forward ERP from current market prices, expected dividends, and earnings growth — currently producing estimates closer to 4.5–5.5%. We use the implied-ERP framework because it adjusts for current valuation levels and is more responsive to interest-rate and risk-appetite regimes. The historical figure is a useful reasonableness check but should not be the primary input in a forward-looking valuation.