Equity risk premium

The extra return investors demand for holding equities rather than government bonds. It is the largest single driver of any cost of equity and the hardest to pin down.

Three approaches compete. Historical averages of realised excess returns, which are backward-looking and heavily dependent on the period chosen. Surveys of investors and academics, which measure opinion. And implied premiums, which solve for the premium that makes today's index price consistent with expected cash flows, and which respond to market conditions in real time.

The estimates disagree. For a mature market the working range is roughly 4% to 6%, and for India practitioners typically add a country premium on top of a mature-market base rather than measuring the Indian series directly, because the local history is short and dominated by a few regime changes.

Pick one method, document it, and apply it consistently across every company you value. Consistency matters more than being right about the level, because a valuation is a comparison.