Risk Premium Calculator
Calculate market risk premium, equity risk premium, and asset-specific risk premiums
Calculation Type
Market Risk Premium (Equity Risk Premium)
Expected annual return of the stock market (e.g., S&P 500)
Yield on government bonds (T-bills, Treasury bonds)
Market Risk Premium Results
Above average premium. Market compensating well for risk.
💡 Attractive entry point for equity investments.
Formula: Market Risk Premium = Expected Market Return - Risk-Free Rate
Calculation: 7.00% = 10.00% - 3.00%
Example Calculations
Market Risk Premium
S&P 500 Expected Return: 10%
10-Year Treasury Yield: 3%
Market Risk Premium: 10% - 3% = 7%
Historical average: 6-8% per year
Tech Stock Example
Stock Expected Return: 15%
Beta: 1.5
CAPM Expected: 3% + 1.5(7%) = 13.5%
Alpha = 15% - 13.5% = +1.5%
Risk Premium Types
Market Risk Premium
Expected return above risk-free rate for investing in market
Asset Risk Premium
Return above risk-free rate based on asset's systematic risk (beta)
Country Risk Premium
Additional return for investing in emerging markets
Credit Spread
Extra yield on corporate bonds vs. government bonds
Investment Insights
Higher risk premium = better compensation for taking risk
Historical market risk premium averages 6-8% annually
Positive alpha indicates outperformance potential
Country risk premium higher in emerging markets
Lower credit ratings require higher yields
Historical Averages (US)
Understanding Risk Premium
What is Risk Premium?
Risk premium is the return in excess of the risk-free rate that an investment is expected to yield. It represents the compensation investors require for taking on additional risk compared to risk-free assets like government bonds.
Key Components
- •Expected Return: Anticipated return from the investment
- •Risk-Free Rate: Return on government bonds or T-bills
- •Beta: Measure of systematic risk relative to market
- •Market Risk: Risk inherent to the entire market
Key Formulas
Market Risk Premium
MRP = E(Rm) - Rf
Expected market return minus risk-free rate
CAPM Expected Return
E(Ri) = Rf + βi × [E(Rm) - Rf]
Asset return based on systematic risk
Country Risk Premium
CRP = DS × (σe / σb)
Default spread × volatility ratio
Credit Spread
CS = Yield(Corp) - Yield(Gov)
Corporate bond yield minus government bond yield
Practical Applications
Portfolio Management
Assess if investments are adequately compensating for risk
Valuation
Determine appropriate discount rates for DCF models
Performance Evaluation
Calculate alpha to measure manager skill