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Market Risk Premium
Definition
The excess return investors expect from the market portfolio over the risk-free rate.
How It Works
MRP = E(Rm) - Rf. Historically around 5-7% for U.S. equities. It compensates investors for bearing systematic risk.
Example
If E(Rm) = 10% and Rf = 3%, the market risk premium is 7%.
Common Misconceptions
- ✗It is a fixed number
- ✗You can measure it precisely (it must be estimated)
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Common questions about Market Risk Premium
Use whatever your textbook or professor specifies. Common values are 5-7%.
Different estimation methods (historical average, survey-based, implied from prices) produce different results. Historical lookback periods also matter since US equity markets have returned more in some decades than others.
More Glossary Terms
📉 Discount Rate🧮 Net Present Value (NPV)🎯 Internal Rate of Return (IRR)⚖️ Weighted Average Cost of Capital (WACC)📈 Beta (β)📊 Capital Asset Pricing Model (CAPM)🛡️ Risk-Free Rate💹 Market Risk Premium💲 Cost of Equity🏦 Cost of Debt♾️ Terminal Value💸 Free Cash Flow🏢 Enterprise Value🚧 Hurdle Rate🔁 Annuity♾️ Perpetuity💵 Yield to Maturity (YTM)✂️ Coupon Rate📅 Amortization🔍 Sensitivity Analysis