1. What is Market Risk Premium?

The Market Risk Premium (MRP) represents the additional return investors expect for choosing a risky 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 Market Risk Premium formula:

Where:

• \( Asset\ Return \) — Expected return of the asset or market portfolio (%)
• \( Risk\ Free\ Rate \) — Return of risk-free assets like Treasury bills (%)
• \( Beta \) — Measure of systematic risk (decimal)

Explanation: The formula adjusts the excess return (over risk-free rate) by the asset's beta to determine the market risk premium.

3. Importance of MRP Calculation

Details: MRP is crucial for investment decisions, portfolio management, and corporate finance applications like capital budgeting and valuation.

4. Using the Calculator

Tips: Enter asset return and risk-free rate as percentages (e.g., 8.5 for 8.5%). Beta should be a positive decimal (e.g., 1.2 for a stock that's 20% more volatile than the market).

5. Frequently Asked Questions (FAQ)

Q1: What's a typical market risk premium?
A: Historically, MRP ranges between 4-6% in developed markets, but varies by country and time period.

Q2: How to choose the risk-free rate?
A: Use short-term government securities (like 3-month T-bills) for short horizons, long-term bonds for longer periods.

Q3: What if beta is negative?
A: Negative beta assets are rare but indicate inverse market correlation. The calculator requires positive beta.

Q4: How often should MRP be recalculated?
A: MRP should be updated regularly as market conditions, risk-free rates, and asset betas change.

Q5: What are limitations of this calculation?
A: Assumes constant beta and linear relationship between risk and return, which may not hold in all market conditions.