US Market Risk Premium
US Market Risk Premium | Definition
The risk premium of an investment is the rate of return that can be expected or demanded by investors over and above the risk-free rate. Three factors determine the risk premium: (a) the systematic risk of the investment; (b) the average expected return for the market relative to an index (such as the S&P 500 or the Russell 3000®); and (c) the return expected from a risk-free investment (such as a T-bill).
Risk premium is calculated by subtracting the risk-free rate from the market rate and then multiplying the difference by the investment's beta coefficient. The total expected return on an investment is equal to the risk-free rate plus the investment's risk premium.
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