This market risk premium template will show you how to compute the market risk premium using the expected rate of return and risk-free rate.
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The market risk premium is the additional return an investor will receive (or expects to receive) from holding a risky market portfolio instead of risk-free assets.
The market risk premium is part of the Capital Asset Pricing Model (CAPM) which analysts and investors use to calculate the acceptable rate of return. At the center of the CAPM is the concept of risk (volatility of returns) and reward (rate of returns). Investors always prefer to have the highest possible rate of return combined with the lowest possible volatility of returns.
The formula for Market Risk Premium is:
Market Risk Premium = Expected Rate of Return – Risk-Free Rate
Usually, a government bond yield is the instrument used to calculate risk-free assets as it has little to no risk.
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