1. What is Market Risk Premium?

The Market Risk Premium (MRP) is the additional return investors expect for choosing to invest in the market portfolio over a risk-free asset. It represents the compensation investors require for taking on the higher risk of the equity market.

2. How Does the Calculator Work?

The calculator uses the MRP formula:

Where:

• Expected Market Return — The anticipated return of the market portfolio (%)
• Risk Free Rate — The return of a risk-free asset, typically government bonds (%)

Explanation: The MRP measures the excess return that investing in the stock market provides over a risk-free rate.

3. Importance of MRP Calculation

Details: MRP is a key component in financial models like CAPM (Capital Asset Pricing Model). It's used to determine required rates of return for investments and to evaluate investment opportunities.

4. Using the Calculator

Tips: Enter the expected market return and risk-free rate as percentages. Both values should be for the same time period (e.g., annual).

5. Frequently Asked Questions (FAQ)

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

Q2: How to estimate expected market return?
A: Often based on historical averages or analyst forecasts. Common proxies include long-term stock market returns.

Q3: What's used for risk-free rate?
A: Typically the yield on government bonds (e.g., 10-year Treasury notes for US calculations).

Q4: Does MRP change over time?
A: Yes, MRP varies with economic conditions, market volatility, and investor risk appetite.

Q5: Why is MRP important for investors?
A: It helps determine whether potential investments offer adequate compensation for their risk.