How can the equity premium risk premium be calculated?

The equity risk premium represents the excess return that investing in the stock market provides over a risk-free rate, such as that of government bonds. To accurately calculate the equity risk premium, one effective method is to utilize Ibbotson's published data combined with historical market returns. Ibbotson's data provides long-term historical averages of stock market returns and can serve as a benchmark when you assess how much more investors can expect to earn from equities compared to risk-free assets.

This approach leverages historical performance as a predictor of future returns, thus providing a more empirical basis for estimating the equity risk premium than methods that involve averaging all company returns or assessing only developed country's equities. It also helps account for variations in market conditions over time, leading to a more reliable and informed estimation of the risk premium that investors should expect when investing in equities.