Equity risk
Equity risk is the risk of losing money from owning stocks because their prices rise and fall. Stock prices move all the time based on supply and demand, so you can lose money if prices drop. A common way to measure this risk is the standard deviation of a security’s returns, which shows how much prices tend to swing around the average.
Another concept is the equity risk premium (ERP), which is the extra return that stocks are expected to provide over a risk-free rate (usually the rate on long-term government bonds). ERP = return on the market (or on a stock with market-level risk) minus the risk-free rate. A bigger ERP means more risk but also more potential reward, and it can push investors from bonds toward stocks.
ERP can be looked at two ways: historical (past average excess returns) or implied (a forward-looking estimate). For example, if a stock returns 17% and the risk-free rate is 9%, the ERP is 8%.
Why ERP matters: it helps with choosing assets and with evaluating investments. In models like CAPM, ERP helps estimate the expected return of a stock. If ERP drops, the discount rate used in pricing investments falls, which can push stock prices up. The ERP also reflects broader economic expectations, so watching ERP and stock prices can help gauge macro trends.
This page was last edited on 3 February 2026, at 16:50 (CET).