Market Risk Premium Template

Market Risk Premium Template

This market risk premium template will show you how to compute the market risk premium using the expected rate of return and the 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)Capital Asset Pricing Model (CAPM)The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between expected return and risk of a security. CAPM formula shows the return of a security is equal to the risk-free return plus a risk premium, based on the beta of that security, which analysts and investors use to calculate the acceptable rate of returnRate of ReturnThe Rate of Return (ROR) is the gain or loss of an investment over a period of time copmared to the initial cost of the investment expressed as a percentage. This guide teaches the most common formulas.  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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