1. What is Market Risk Premium?

The Market Risk Premium (MRP) represents the additional return investors expect for choosing to invest in the market portfolio over a risk-free asset. It's a key component in financial models like CAPM (Capital Asset Pricing Model).

2. How Does the Calculator Work?

The calculator uses the MRP formula:

Where:

• \( R_m \) — Expected market return (%)
• \( R_f \) — Risk-free rate (%)

Explanation: The formula calculates the difference between the expected return of the market and the risk-free rate, representing the compensation investors require for taking on additional risk.

3. Importance of MRP Calculation

Details: MRP is crucial for determining required rates of return, valuing companies, making investment decisions, and calculating cost of capital in corporate finance.

4. Using the Calculator

Tips: Enter both market return and risk-free rate as percentages. Typical values might be 8-10% for market return and 2-4% for risk-free rate (based on 10-year Treasury yields).

5. Frequently Asked Questions (FAQ)

Q1: What's a typical market risk premium?
A: Historically in the US, it's ranged between 4-6%, but varies by country and time period.

Q2: How to determine the market return (R_m)?
A: Usually based on historical returns of a broad market index like S&P 500, adjusted for current expectations.

Q3: What's used for the risk-free rate (R_f)?
A: Typically the yield on 10-year government bonds of the relevant country.

Q4: Does MRP change over time?
A: Yes, it fluctuates with market conditions, economic outlook, and risk-free rate changes.

Q5: How is MRP used in CAPM?
A: In CAPM, MRP is multiplied by the asset's beta to determine its risk premium: \( E(R_i) = R_f + \beta_i \times (R_m - R_f) \).