Equity Risk Premium in CAPM

This problem tests your understanding of a core CAPM input used in intrinsic valuation, the premium investors demand for holding equities instead of risk free assets. In interviews, candidates are expected to know what each component of CAPM means, how the equity risk premium fits into required return calculations, and why it matters when estimating discount rates for valuation models.

Interviewers ask this because the equity risk premium connects market risk, investor expectations, and the cost of equity. A strong answer shows that you can explain the intuition behind the formula, not just recite it, and that you understand how changes in this assumption affect valuation outcomes.