What is Market Risk Premium?
Market Risk Premium refers to the additional return that investors demand for taking on the increased risk of investing in the stock market over a risk-free asset. It is a critical measure in finance, used in models like the Capital Asset Pricing Model (CAPM), to assess the attractiveness of investments.
The formula to calculate Market Risk Premium is:
Market Risk Premium = Expected Market Return - Risk-Free Rate.
This value helps investors understand if the potential reward justifies the risk.
How to Use the Market Risk Premium Calculator
Follow these steps to calculate the Market Risk Premium:
- Step 1: Enter the Expected Market Return (in percentage) into the first field. This value represents the anticipated return from the stock market.
- Step 2: Input the Risk-Free Rate (in percentage) into the second field. This is typically the return of government bonds or other risk-free investments.
- Step 3: Click the "Calculate" button. The tool will compute the Market Risk Premium by subtracting the Risk-Free Rate from the Expected Market Return.
- Step 4: Review the result displayed. The output includes the premium value and an explanation of the calculation.