Market Risk Premium

Market Risk Premium
The difference between the expected return on a market portfolio and the risk-free rate. Market risk premium is equal to the slope of the security market line (SML), a capital asset pricing model. Three distinct concepts are part of market risk premium:

1) Required market risk premium: the return of a portfolio over the risk-free rate (such as that of treasury bonds) required by an investor;

2) Historical market risk premium: the historical differential return of the market over treasury bonds; and

3) Expected market risk premium: the expected differential return of the market over treasury bonds.

Also called equity premium, market premium and risk premium.

The historical market risk premium will be the same for all investors since the value is based on what actually happened. The required and expected market premiums, however, will differ from investor to investor based on risk tolerance and investing styles. The market risk premium can be calculated as follows:

Market Risk Premium = Expected Return of the Market – Risk-Free Rate

The expected return of the market can be based on the S&P 500, for example, while the risk-free rate is often based on the current returns of treasury bonds.

Investment dictionary. . 2012.

Игры ⚽ Поможем решить контрольную работу

Look at other dictionaries:

  • market risk premium — UK US noun [C] (also market premium) FINANCE ► the extra amount of money an investor can make by investing in financial products that have more risk: »The market risk premium is only worth it for most investors if you ve got a lot to invest and… …   Financial and business terms

  • market-risk premium — See: risk premium …   Accounting dictionary

  • risk premium — market risk premium 1) The difference between the expected rate of return on an investment and the risk free rate of return over the same period. If there is any risk element at all, the rate of return should be higher than if no risk were… …   Big dictionary of business and management

  • risk premium — market risk premium The difference between the expected rate of return on an investment and the risk free rate of return (e.g. on a government stock) over the same period. If there is any risk element at all, the rate of return should be higher… …   Accounting dictionary

  • Risk premium — A risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk free asset, in order to induce an individual to hold the risky asset rather than the risk free asset. Thus it is… …   Wikipedia

  • Risk premium — The reward for holding the risky market portfolio rather than the risk free asset. The spread between Treasury and non Treasury bonds of comparable maturity. The New York Times Financial Glossary * * *    The extra reward required from an… …   Financial and business terms

  • risk premium — The reward for holding the risky market portfolio rather than the risk free asset. The spread between Treasury and non Treasury bonds of comparable maturity. Bloomberg Financial Dictionary The expected additional return for making a risky… …   Financial and business terms

  • Equity Risk Premium — The excess return that an individual stock or the overall stock market provides over a risk free rate. This excess return compensates investors for taking on the relatively higher risk of the equity market. The size of the premium will vary as… …   Investment dictionary

  • Equity Risk Premium —    The extra return that the overall stock market or a particular stock must provide over the rate on Treasury bills to compensate for market risk. Treasury bills are regarded as risk free because they are guaranteed by the government …   Financial and business terms

  • Country Risk Premium - CRP — The additional risk associated with investing in an international company rather than the domestic market. Macroeconomic factors such as political instability, volatile exchange rates and economic turmoil causes investors to be wary of overseas… …   Investment dictionary

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”