In some cases, brokerage firms provide an expected market rate of return based on an investor's portfolio composition, risk tolerance and investing style. Depending on the factors accounted for in the calculation, individual estimates of the expected market return rate can vary widely.
For those who do not use a portfolio manager, the annual return rates of the major indexes provide a reasonable estimate of future market performance. For most calculations, the expected market return rate is based on the historic return rate of an index such as the S&P 500, the Dow Jones Industrial Average, or DJIA, or the Nasdaq.
Market Risk Premium
The expected market return is an important concept in risk management, because it is used to determine the market risk premium. The market risk premium, in turn, is part of the capital asset pricing model, (CAPM) formula. This formula is used by investors, brokers and financial managers to estimate the reasonable expected rate of return on a given investment.
The market risk premium represents the percentage of total returns attributable to the volatility of the stock market, and is calculated by taking the difference between the expected market return and the riskfree rate. The riskfree rate is the current rate of return on governmentissued Treasury bills (Tbills). Though no investment is truly riskfree, government bonds and bills are considered almost failproof since they are backed by the U.S. government, which is unlikely to default on financial obligations.
For example, if the S&P 500 generated a 7% return rate last year, this rate can be used as the expected rate of return for any investments made in companies represented in that index. If the current return rate for shortterm Tbills is 5%, the market risk premium is 7% to 5%, or 2%. However, the returns on individuals stocks may be considerably higher or lower depending on their volatility relative to the market.

Is market risk premium the same for all investors and investments?
Learn about how market risk premiums are determined, how they are calculated, why some assets require higher premiums and ... Read Answer >> 
What is the correlation between equity risk premium and risk?
Learn about the relationship between the riskfree rate of return and the equity risk premium, and understand how the riskfree ... Read Answer >> 
How is the riskfree rate determined when calculating market risk premium?
Learn how the riskfree rate is used in the calculation of the market risk premium, and understand why Tbills provide the ... Read Answer >> 
How does market risk affect the cost of capital?
Find out how market risk directly affects the total cost of capital, including how to use the capital asset pricing model ... Read Answer >> 
How do I calculate the cost of equity using Excel?
Learn how to calculate the cost of equity in Microsoft Excel using the capital asset pricing model, or CAPM, including brief ... Read Answer >> 
Calculate your portfolio's investment returns
Learn the basic principles underlying the data and calculations used to perform personal rates of return on investment portfolios. Read Answer >>

Investing
What Investors Should Know About Interest Rates
Understanding interest rates helps you answer the fundamental question of where to put your money. Learn about the relationship between rates and stocks. 
Investing
How to Calculate Required Rate of Return
The required rate of return is used by investors and corporatefinance professionals to evaluate investments. In this article, we explore the various ways it can be calculated and put to use. ... 
Investing
Calculating The Equity Risk Premium
See the model in action with real data and evaluate whether its assumptions are valid. Here is how to calculate the equity risk premium. 
Investing
The EquityRisk 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. 
Financial Advisor
Measure Your Portfolio's Performance
Measuring the success of your investment solely on the portfolio return may leave you blindsided to risk. Learn how to evaluate your investment return. 
Investing
S&P 500 Index: A Performance Analysis of LongTerm Returns
Discover how to gain insight into the returns generated by the S&P 500 Index over the long term and how this can assist your investment goals. 
Investing
Understanding The Sharpe Ratio
The Sharpe ratio describes how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset. 
Investing
Tactical Tips For Bond Investors
Profit from longterm market trends by buying bonds when other investors shy away.

Risk Premium
The return in excess of the riskfree rate of return that an ... 
Expected Return
Expected return is the amount of profit or loss an investor would ... 
Abnormal Return
A term used to describe the returns generated by a given security ... 
Cost Of Equity
The cost of equity is the rate of return required on an investment ... 
Annual Return
Annual return is the compound average rate of return for a stock, ... 
Return
A return, in finance, is the profit or loss derived from investing ...