CAPM: Market Risk Premium or Equity Risk Premium?

The difference between market risk premium vs equity risk premium is a matter of scope:

• Market risk premium represents the additional expected return of the index, market or investment portfolio as a whole, above risk free rate.
• Equity risk premium represents the additional expected return of equity, or single stock, above risk free rate.

Capital Asset Pricing Model (CAPM) is a model for pricing an individual security or portfolio, with the formula:

E(R_i) = R_f + β_i (E(R_m) – R_f)

where E(R_i) is the expected return on capital asset and E(R_m) is the market risk premium.

It would depend on the question, but typically CAPM does not use the equity risk premium of a particular stock in place of market risk premium. The beta (β_i) is the one that conveys the sensitivity of the expected excess return of the valued asset in relation to the expected excess return of the market.

If you’ve seen a CAPM example that uses ‘equity risk premium’ instead of ‘market risk premium’, maybe they were using this interchangeably to mean ‘equity’ as in ‘equity market as a whole’, since the ‘market’ in market risk is usually an equity market. Or else I’d be interested to see their explanation.

Does that answer your question?

So using a market risk premium is only really theoretical measure of systematic risk, and you use required return ERP when valuing a particular stock?

Also slightly confused by the above statement. The CAPM model is a method of determining required return on equity E(R_i) using market risk premium E(R_m) and beta of the asset.

You are given the following information about corporate stock P and the market: Risk-free rate is 7

The expected return and volatility for corporate stock P is 7 and 33 respectively.

The Expected Return and Volatility for Market is 6 and 12 respectively.

The correlation between the returns of corporate stock P and the market is 18. Assume the Capital Asset Pricing Model holds. Calculate the required return for corporate stock P? Could somebody solve this question?

Thanks.