Market Risk Premium
The market risk premium is the expected market return above a matching risk-free rate. Learn its formula, estimation methods, CAPM use, and limitations.
Compare the risk-free rate and market risk premium used in CAPM, required-return estimates, cost of equity, and valuation.
Risk-free rates and market risk premia are the two market-level inputs in the capital asset pricing model. This section explains how to define, source, match, and test them before they enter a cost-of-equity or valuation model.
| Guide | Use it for |
|---|---|
| Risk-Free Rate | Selecting a baseline rate by currency, term, valuation date, inflation basis, and use case. |
| Market Risk Premium | Comparing historical, implied, survey, and policy estimates of expected market compensation above the risk-free rate. |
| Capital Asset Pricing Model | Combining the risk-free rate, beta, and market risk premium into a model-based required or expected return. |
The Equity Risk Premium guide covers the broader equity-over-safer-asset concept. It often supplies the same practical input as market risk premium when a broad equity index represents the market portfolio, but the benchmark and method still need to match.
Before using these inputs, document:
These estimates are uncertain. A precise figure is not necessarily a reliable figure, and a model-implied return is not a promised return or personalized investment recommendation.
Choose a subsection first. Deeper term pages live inside each subsection, which keeps large topic hubs readable.
The market risk premium is the expected market return above a matching risk-free rate. Learn its formula, estimation methods, CAPM use, and limitations.
The risk-free rate is the theoretical return on a default-free investment and a baseline input for valuation, asset pricing, and risk premiums.