Some historical market risk premium?


The historical market risk premium-the difference between what an investor expects to receive as profit from the stock portfolio and the risk-free rate of return. Over the last century, the historic market risk premium on average from 3.5% to 5.5%.

The market risk premium consists of three parts:

  • The required risk premium, which essentially is the return on the risk-free rate, the investor must realize to justify the uncertainty of investment in shares.
  • The historical market risk premium, which reveals the historical difference between the returns of the market over the risk-free return on investments, such as U.S. Treasury bonds.
  • The expected market risk premium, which shows the difference in what the investor expects that by investing in the market.
  • The expected premium and mandatory insurance premiums differ among investors because of the different investment styles and risk tolerance. The historical risk premium varies as much as 2% depending on whether the analyst chooses to calculate the average differences in the investment Declaration arithmetically or geometrically. The arithmetic mean is equivalent to or exceeds the geometric mean. When there are more differences between the average, there is a big difference between the two calculations. The arithmetic mean tends to increase when the period of time over which the average is calculated is shorter.

    There is also a noticeable difference in the historic market risk premium relative to short-term risk-free rate and long-term risk-free rates. There tend to be higher market risk premium of about 1% compared to the short-term risk-free rate.

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