What does the equity market risk premium represent?

The equity market risk premium represents the additional returns an investor expects to earn from investing in the equity market over a risk-free rate, typically associated with government bonds. This premium reflects the compensation investors demand for taking on the higher risk associated with equity investments compared to safer, risk-free assets.

Investors require this premium because equities are subject to market volatility and greater uncertainty regarding future cash flows. The idea is that the higher potential returns from equity investments justify the additional risks incurred, thus making option A the correct interpretation of what the equity market risk premium entails.

The other options do not accurately capture the essence of the equity market risk premium. While option B mentions returns from speculative trading, it doesn’t consider the fundamental concept of risk compensation. Option C refers to compensation for illiquid securities, which is distinct from the risk premium connected to equities specifically. Lastly, option D describes interest earned on risk-free investments rather than the additional return sought from the equity market, which contradicts the nature of the risk premium as it's framed in contrast to risk-free returns.