Market Risk Premium Formula
The market risk premium is the extra return investors expect for holding the whole stock market instead of a risk-free asset. It is the gap between what the market is expected to return and what a safe government bond returns.
The formula
The market risk premium feeds directly into the broader required-return calculation a lender or investor uses. The total return demanded is the risk-free baseline plus a premium scaled to the specific investment's risk:
What each variable means
- Rm — Expected market return. The return a broad market index (e.g. the S&P 500) is expected to deliver.
- Rf — Risk-free rate. The return on a benchmark safe asset, typically long-duration government debt such as the 10-year US Treasury.
- Rp — Risk premium. The extra return demanded for a specific investment's risk. For the market as a whole, this is the market risk premium (Rm − Rf).
- iT — Total required return. The full rate of return an investor or lender demands, baseline plus premium.
Worked example (2025 figures)
Take a high-risk venture priced against 2025 benchmarks:
| Baseline (10-year US Treasury, 2025 average) | ≈ 4.3% |
| Risk premium (high-risk venture) | 8 – 16% |
| Total required return | 12 – 20% |
For the market risk premium specifically: if the expected return on a broad index is 9.3% and the risk-free rate is 4.3%, then MRP = 9.3% − 4.3% = 5.0% — the reward for taking on market-level risk over a safe bond.
Calculate the required return
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Register / Sign in →The "risk-free" label no longer holds without qualification, but Treasuries remain the closest available market instrument.