Market risk premium

The market risk premium is the extra return investors require for holding the overall market portfolio instead of a risk-free asset, equal to the expected market return minus the risk-free rate, and the slope of the security market line.

ByHoang TruongUpdated July 2, 2026

FrameworkCAPM

See it move

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If the risk-free rate is 3% and the market risk premium is 6%, together they equal the market's expected return of 9%. For an individual asset, the required return scales that premium by beta: an asset with β = 1.5 requires 3% + (1.5 × 6%) = 12%. The market risk premium is the slope of the security market line in CAPM.

Where it fits

TopicRisk, Return & the CAPMCoreTopicCost of Capital & WACCCoreSubjectCorporate FinanceCore

The formula

LaTeX

MRP = E(R_m) - R_f

Variables

$M R P$: Market risk premium: extra return demanded for holding the market portfolio instead of the risk-free asset
$E (R_{m})$: Expected return on the market portfolio
$R_{f}$: Risk-free rate

The MRP is the slope of the security market line. In CAPM, any asset's required excess return above the risk-free rate equals β × MRP.

Check yourself

PracticeCORE

The risk-free rate is 2% and the expected market return is 8%. Using the Capital Asset Pricing Model, what is the expected return on an asset with a beta of 1.25?

Select an answer to check your understanding.