Investopedia

Continue to Site »

Market Risk Premium

Filed Under » , ,
Dictionary Says

Definition of '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.
Investopedia Says

Investopedia explains 'Market 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.

Articles Of Interest

  1.

    The Advantages Of Bonds

    Bonds contribute an element of stability to almost any portfolio and offer a safe and conservative investment.

  2. The Capital Asset Pricing Model: An Overview

    CAPM helps you determine what return you deserve for putting your money at risk.

  3. The Equity-Risk Premium: More Risk For Higher Returns

    Learn how the expected extra return on stocks is measured and why academic studies usually estimate a low premium.

  4. Financial Concepts

    Diversification? Optimal portfolio theory? Read this tutorial and these and other financial concepts will be made clear.

  5. Investing In REITs Instead Of Property

    Learn why this one particular REIT is a better investment than holding physical property in your retirement portfolio.

  6. Multi-Asset Funds Or Your Own Mix?

    The underlying concept of mixed funds is very appealing. Discover if you're better off with professional management or creating a mixed fund of your own.

  7. How To Adjust Your Portfolio In A Bear Or Bull Market

    While investors shouldn’t feel compelled to change their portfolios radically overnight in reaction to the market's daily moves, small adjustments in the face of a bull or bear market could be ...

  8. Why You Should Invest In Municipal Bond ETFs

    These versatile instruments have become popular with investors in higher tax brackets and fill a specific niche in the wide selection of fixed-income offerings.

  9. The Truth Behind Tactical ETF Investing

    Are tactical ETFs reasonable and effective investment strategies or just plain speculative behavior?

  10. 6 Popular ETF Types For Your Portfolio

    Exchange traded funds are an extremely popular diversification tool that can protect your portfolio during troubled periods.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Cost-Push Inflation

    A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.

  2. Happiness Economics

    The formal academic study of the relationship between individual satisfaction and economic issues, such as employment and wealth.

  3. Affluenza

    A social condition arising from the desire to be more wealthy, successful or to "keep up with the Joneses." Affluenza is symptomatic of a culture that holds up financial success as one of the highest achievements.

  4. Icarus Factor

    The term Icarus factor describes a situation where managers or executives initiate an overly ambitious project which then fails. Fueled by excitement for the project, the executives are unable to reign in their misguided enthusiasm before it is too late to avoid the failure.

  5. Angelina Jolie Stock Index

    An index made up of a selection of stocks from companies associated with actress Angela Jolie.

  6. Consequential Loss

    The amount of loss incurred as a result of being unable to use business property or equipment.
Trading Center