The market risk premium (MRP) that is computed using historical data available for a past period. It is the observed market rate of return over a specific period of time (in the past) minus the applicable risk-free rate (RFR), such as yield on government bonds, over the same period. For example, if the observed market rate of return for a given market sector is 8% and the risk-free rate in the broader economy is 2%, for the period 1980-2020, then:
Historical market risk premium = 8% – 2%
That is, 6%. This is with everything else held constant (for example, dividend imputation/ tax credit on corporate profits/ equity returns is zero).
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