Real growth + Dividend yield + Inflation - Risk-free rate.
The equity risk premium (ERP) can be thought of as both expected (ex ante) and achieved (ex post). The ex-ante ERP is not directly observable—it needs to be derived by making assumptions, in particular about investors’ expectations regarding future dividend growth.
There are a number of different approaches to estimating the ERP.
The three most common are:
An excessively high risk premium suggests that the market is sceptical of one of the following: the current level of interest rates, the outlook for inflation or the outlook for earnings.
See Damodaran on ERP.