The Market Risk Premium: Historical Perspectives and Implications

Abstract

This study investigates the return of the U.S. stock market relative to that of U.S. treasury bonds. The difference between is known as the equity market risk premium (MRP). The MRP is often deemed as the most important number in finance. It is the main input in asset pricing models. It is also important in determining the asset allocation between stocks and bonds for personal savings and investments. Based on historical data from 1928 to 2023, the average MRP is 5.23% during this period. Over any 30-year period, the MPR is positive, ranging from 1.70% to 10.7%, with a mean of 5.68% and a median of 4.93%.