Equity Risk Premium

See: Risk Premium.

Investing is about risk. And reward. Optimizing the marriage. That's what any boiler room meathead in a Hugo Boss suit will tell you. To be fair, you'll also hear it from business school professors and award-winning economists.

The equity risk premium (it's a number) is a semi-good way to put that old adage into numbers...to make relative calculations as to whether or not that million bucks you're paying to own 1 percent of the flying car company is a good risk-adjusted bet...or not. To start the calculations, you begin with the math of getting a certain return from virtually risk-free assets (like, say, U.S. government bonds). They pay, like...3%? 4%? 5%? Something like that in the modern era.

Then you have the stock market, which is a lot more speculative (or rather, more volatile) than government bonds. Stocks go up and down. Companies go bust. This week's hot biotech stock is next week's subject of an FDA investigation. Hi, Theranos. We're lookin' at you. That stock market risk is then way bigger than U.S. government bond risk. But if you're investing in private companies with no liquid market, then the risks are massively higher.

So how much more do you earn for taking the extra risk of buying private stocks? Or even public ones? That number is called the equity risk premium. It's the added expected return that you get from putting your hard-earned investment funds in more jeopardy by buying equities ("Equity" is another name for stocks or ownership, by the way).