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The extra return investors expect from stocks over a 'safe' asset like Treasury bonds, to compensate for stocks' higher risk. A bigger premium means investors demand more reward to own stocks instead of bonds.
Why It Matters
The equity risk premium is the tug-of-war at the heart of 'stocks vs bonds.' When bond yields rise, stocks have to offer more to stay attractive, which can pressure prices. But if investors are optimistic about growth, they accept a smaller premium and keep buying stocks even at high rates — a key reason the 'rates up, stocks down' rule isn't automatic. A very thin premium alongside high bond yields is a classic bear warning.
Key Points
- Extra expected return for owning stocks versus safe bonds.
- Shrinks when investors are confident; widens when they're fearful.
- A thin premium with high bond yields is a classic caution sign.
Related Terms
Common Questions
The extra return investors expect from stocks over a 'safe' asset like Treasury bonds, to compensate for stocks' higher risk. A bigger premium means investors demand more reward to own stocks instead of bonds. The equity risk premium is the tug-of-war at the heart of 'stocks vs bonds.' When bond yields rise, stocks have to offer more to stay attractive, which can pressure prices.
The equity risk premium is the tug-of-war at the heart of 'stocks vs bonds.' When bond yields rise, stocks have to offer more to stay attractive, which can pressure prices. But if investors are optimistic about growth, they accept a smaller premium and keep buying stocks even at high rates — a key reason the 'rates up, stocks down' rule isn't automatic. A very thin premium alongside high bond yields is a classic bear warning.
Extra expected return for owning stocks versus safe bonds.
Shrinks when investors are confident; widens when they're fearful.
A thin premium with high bond yields is a classic caution sign.