The equity risk premium is:
A)the difference between the expected return on stocks and bonds
B)the difference between the expected return on high-grade stocks and low-grade stocks
C)the difference between the expected return on stocks and the risk-free rate
D)the difference between the expected return on a stock market index and the inflation rate

Question

Quizplus · Accepted Answer

The equity risk premium is the excess return that investors expect to receive from investing in stocks over the risk-free rate. Therefore, the correct choice is C, as it is the difference between the expected return on stocks and the risk-free rate. A is incorrect because it includes the expected return on bonds, which is not a factor in calculating the equity risk premium. B is incorrect because it compares the return between different types of stocks, rather than the difference between stocks and a risk-free rate. D is incorrect because it compares the return on a stock market index to the inflation rate, rather than to a risk-free rate.

The Equity Risk Premium Is