ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Key Takeaways An equity risk premium is an excess return earned by an investor when they invest in the stock market over a risk-free rate. This return compensates investors for taking on the higher risk of equity investing.

Detailed explanation-2: -Definition of the market risk premium The „market risk premium“ is the difference between the expected return on the risky market portfolio and the risk-free interest rate. It is an essential part of the CAPM where it characterizes the relationship between the beta factor of a risky assets and ist expected return.

Detailed explanation-3: -The risk premium formula is very simple: Simply subtract the expected return on a given asset from the risk-free rate, which is just the current interest rate paid on risk-free investments, like government bonds and Treasuries.

Detailed explanation-4: -The market risk premium is the difference between the expected return on a market portfolio and the risk-free rate. It provides a quantitative measure of the extra return demanded by market participants for an increased risk.