Bayt.com

Start networking and exchanging professional insights

Register now or log in to join your professional community.

Follow

Can you explain the term market risk premium?

Accounting Financial Reporting Risk Control Financial Management
user-image
Question added by Frank Mwansa , ACCOUNTING LECTURER , FREELANCER
Date Posted: 2016/04/06
Upvote (0) Views (4) Followers (3) Answers (3) Report Question
Write an Answer
Register now or log in to answer.
Shazia Anees
by Shazia Anees , Assistant Manager Finance , Arham Trading Company

agree with the answer given by shahbaz hayder.

Shahbaz Hayder
by Shahbaz Hayder , Group Head of Finance , Sharif Group of Companies

Market risk premium is also known as equity risk premium. It represents the additional compensation, on average, for taking the risk of equities rather than buying treasury bills.

 

It can be calculated by using the following formula:

 

Market Risk Premium = Expected Return of the Market – Risk Free Rate of Return

 

For example, if the interest rate on Treasury bonds is4% and the Stocks return is9%, the equity risk premium will be5%.

 

The equity risk premium is used in the capital asset pricing model (CAPM) to establish the valuation of invested shares in a diversified portfolio.

 

Basil AlJabri
by Basil AlJabri , IT risk management senior team leader , Saudi Tadawul Group

Not relevant to my specialties.

Write Your Answer
More Questions Like This

Do you need help in adding the right keywords to your CV? Let our CV writing experts help you.

Get Help