Unpacking Equity Market Risk Premium for Investors

February 22, 20247 min read
Unpacking Equity Market Risk Premium for Investors
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways

  • Market risk premium is the extra return over the risk-free rate that investors expect from investing in the stock market.
  • The metric is the investor’s compensation for assuming a higher risk level and investing in equity instead of risk-free securities.
  • A negative equity risk premium occurs when the returns anticipated from stock market investments are under the risk-free rate. 

It is essential that investors understand equity risk premium (ERP), as it can help them optimize financial returns and effectively manage financial risks. In fact, the metric is a key consideration, as it is the difference between the expected return on market holdings and the risk-free rate. Here are the fundamentals of equity risk premium.

What is the Equity Risk Premium?

Market risk premium is the extra return over the risk-free rate that investors expect from investing in the stock market. It is the investor’s compensation for assuming a higher risk level and investing in equity instead of risk-free securities.

Simply put, risk premium is the price of risk for putting capital in equities as a class. The expected return on stocks is the return rate equities investors demand for such investments. It includes an equity risk premium that should go up with perceived risks.

Note that the premium is the difference between the return rate received from riskier equity investments — the S&P 500, for example — and the return of risk-free securities. The risk-free rate is a risk-free investment’s implied yield, with the 10-year U.S. Treasury note the standard proxy.

Example of Equity Risk

Equity risk is a market risk pertaining to investing in shares. It is the financial risk of holding equity in a certain investment. Depending on supply and demand, stocks’ market prices constantly fluctuate. Thus, equity risk is the risk of losing money due to a drop in the market price of shares.

The measure of risk employed in equity markets is usually a security’s price deviation over several periods.

In an example, say John, has constructed a portfolio laden with technology stocks, which have undergone substantial growth in recent years. He is optimistic about future prospects. In fact, he is so sanguine that he overlooks prospective risks of such concentration.

However, concerns about sector regulations and tech companies’ valuation escalate. This renders John’s portfolio susceptible to market risk as well as challenges specific to the industry.

Calculation of the Equity Risk Premium

The equity risk premium calculation is equal to the difference between the expected market return and risk-free rate. 


Equity Risk Premium = Expected Market Return – Risk Free Rate


Expected Market Return —> Market Rate of Return (S&P 500)

Risk-Free Rate = 10-Year Treasury Note Yield

Note that the market return rate can be considered as the return on the index of a particular stock exchange, such as the Dow Jones Industrial Average. The risk-free rate is typically the current rate on long-term government securities.

Low and Negative Equity Risk Premium Explained

Equity risk premium is driven not just based on the overall economy, but also by market momentum and sentiments. And mood shifts can alter equity risk premiums, which can become too low if investors are overly optimistic about the future, and too high if investors are overly pessimistic. Therefore, such premiums can translate to market hope or fear.

A negative equity risk premium occurs when the returns anticipated from stock market investments are under the risk-free rate. Here, an investor would be better off with a risk-free asset than they would by taking positions in the stock market.

Determining the Risk Premium

There are multiple ways to evaluate the risk premium, considering varying investment horizons and market conditions. Such assessment is crucial, as it affects decisions in portfolio management and asset allocation. Approaches include:

Historical Risk Premium. Investors cannot expressly glean what investors are demanding as equity risk premiums. However, they can determine what stocks, Treasury bonds, and Treasury bills have yielded historically, as that data goes back to the 1920s. This approach assumes that returns revert to historic norms over time, and that market and economic structure has not markedly changed over the estimation period.

Historical Returns-Based Forecasts. This strategy uses the same data as above, but adds a search for time series patterns in historical returns. In other words, it includes the correlation across time in returns, which can lead to more actionable predictions. Investors who use this approach are typically bearish in today’s market. 

The Fed Model: Earnings Yield and ERP. This is a more forward-looking approach, if the investor is open to making assumptions regarding future earnings growth and cash flows. 

Overall, the earnings to price ratio is basically the earnings that can be expected as a return on stocks. That is, if the investor assumes no earnings growth or that companies produce no excess returns. It is the basis for the popular Fed model, wherein the earnings yield is sized up against the Treasury bond rate, and the equity risk premium is the difference between them.

Implied ERP. This strategy determines expected stock returns by evaluating the market prices of futures and options contracts, and compares expected returns to the risk-free rate. Thus, the implied ERP is the difference between the risk-free rate and expected returns.

Impact on Retirement Planning

A change in the equity risk premium can alter retirement savings strategies, as older investors are generally more averse to risk and can favor different asset classes than younger investors. 

Thus, retirees and those for whom retirement looms should carefully consider how their risk tolerance and legacy desires affect the risk premium as a strategy to fund retirement goals. 

Retirement risks include the retiree’s unknown longevity and planning horizon, market volatility, and unexpected expenses. While bonds ultimately provide a fixed return rate, and stocks can offer a greater return than bonds, such risk premium is not guaranteed.

Funding Retirement Outside the Stock Market 

For those who seek a diversified investment portfolio with less volatility than the stock market, Yieldstreet’s IRA program is an option.

One of the  leading alternative investment platforms, Yieldstreet provides the retirement account as a way to optimize potential for improved returns. That way is through the addition to their tax-favored account of private-market investments.

From real estate to art, Yieldstreet has more alternative asset classes for individual retirement accounts than anyone, with ample opportunities and easy startup. In fact, some 85% of the platform’s asset classes are available to retirement accounts.

Individuals may easily shift all or a part of a traditional, Roth, SIMPLE, or SEP IRA, or contribute new funding. Further, multiple IRAs and 401(k)s may be rolled over as well. 

Overall, tax-favored retirement accounts line up well with alternatives, with their prospects for private-market income and growth. Increasingly, those who seek to minimize risk are turning to the private market, which also could improve returns.

Yieldstreet IRA

Strengthen your future with a private market IRA.

Alternative Investments and Portfolio Diversification

Alternatives can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.


The equity risk premium is essential for assessing fundamental returns against risks, as it can guide investment decisions and require a change in savings approaches. It is a central component of market timing and stock picking. For better outcomes, it is wise to monitor this metric on an ongoing basis.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022


No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Plaid, Orum.io and Footprint and none of such entities is affiliated with Yieldstreet. By using the services offered by any of these entities you acknowledge and accept their respective disclosures and agreements, as applicable.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure