The historical market risk premium is the difference between what an investor expects to make as a return on an equity portfolio and 澳洲幸运5官方开奖结果体彩网:the risk-free rate of return. Over the last century, the historical 澳洲幸运5官方开奖结果体彩网:market risk premium has ranged (depending on the approach of the analyst) from 3% to 12%.

Risk-Free Rate of Return

澳洲幸运5官方开奖结果体彩网:The risk-free rate of return is the theoretical 澳洲幸运5官方开奖结果体彩网:rate of return of an investment with no risk. The 𓄧risk-free rate is the interest an investor would anticipate from a risk-free investment over a specified period of time. This is a theoretical number because every investment carries some risk.

𓃲The thr🌄ee-month U.S. Treasury bill is often used as a proxy for the risk-free rate of return because of the perception that there is no risk of the government defaulting on its obligations. 

The risk-free rate can be determined by subtracting the current inflation rate from the yield of the Treasury bond matching the investor's proposed investment duration.

Understanding the Market Risk Premium

澳洲幸运5官方开奖结果体彩网: The marke🍸t risk pr💖emium consists of three parts:

1. The required risk premium, which is essentially the return over the risk-free rate that an investor must realize to justify the uncertainties of equities investments.
2. The historical market risk premium, which reveals the historical difference between returns from the market over the 澳洲幸运5官方开奖结果体彩网:risk-free return on investments such as U.S. 澳洲幸运5官方开奖结果体彩网:Treasury bonds.
3. The expected market risk premium, which shows the difference in return that an investor expects to make through investing in the market.

Why the Historical Risk Premium Varies

The expected premium and the required premium vary among investors because of different 澳洲幸运5官方开奖结果体彩网:investing styles and 澳洲幸运5官方开奖结果体彩网:risk tolerance.

The historical risk premium varies as much as 2% depending on whether an analyst chooses to calculate the average differences in investment return arithmetically or geometrically. The arithmetic average is equivalent to, or greater than, the geometric average. When there is more variation between the aver🎐ages, there is a greater amount of difference between the two calculations. The arithmetic average tends to increase when the time period over which the average is calculated is shorter.

There is also a noticeable difference in the historical market risk premium in relation to 澳洲幸运5官方开奖结果体彩网:short-term risk-free rates and 澳洲幸运5官方开奖结果体彩网:long-term risk-free rates.