1. What is Market Risk Premium?

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

2. How Does the Calculator Work?

The calculator uses the Market Risk Premium formula:

Where:

• Stock Expected Return — Expected return from the stock market (%)
• Risk Free Rate — Return from risk-free assets like Treasury bonds (%)

Explanation: The difference between these two rates shows the premium investors demand for bearing stock market risk.

3. Importance of MRP Calculation

Details: MRP is crucial for capital budgeting, portfolio management, and valuation models like CAPM. It helps determine appropriate discount rates and expected returns.

4. Using the Calculator

Tips: Enter expected stock 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 4-8% in developed markets, but varies by country and time period.

Q2: What's used as the risk-free rate?
A: Typically the yield on long-term government bonds (e.g., 10-year Treasury notes in the US).

Q3: How to estimate expected stock return?
A: Can use historical averages, analyst forecasts, or implied returns from valuation models.

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 assess whether stock market returns adequately compensate for the risks taken.