Dear All:
I am so confused about the term " Market Risk premium vs Equity Risk premium" , is it the same? in the CAPM , the (market rate - Risk rate) , Is it called the market risk premium or the Equity Risk primium?
Thank you so much for your time.
Regards
Best Answer - Chosen by Voters Market risk premium is a broad term used to show how there will be a higher return (in stocks, bonds, t-bills, real estate, any investment, etc…) for a greater amount of risk taken on by the investor. Equity risk premium is the same principle, but it only pertains to stock (equity). It’s “calculated” the same way, but it’s only a separate term because the creators believe it (stock) provides a better return than other forms of investment (bonds and t-bills)… so the equity risk premium of a stock is higher than the market risk premium of a bond. The investor is being compensated more for purchasing a stock and taking on the risk than for holding a bond with a fixed income. They are both calculated the same way… but it depends on the formula you use. By nature, these concepts are highly theoretical, not always practical, so the formulas used to calculate them are based on economist’s theories. The one I’m most familiar with is r = MRP + RFR(B) r = total return RP = Market Risk Premium RFR = Risk free rate (usually the 10 or 30 year t-bond) B = Beta coefficient (stock return regressed with market return) I hope this helps.** Source YAHOO:**